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Brazil: M&A Deals Heat Up


Recently, the world was surprised when Rio de Janeiro was picked to host the 2016 Olympics, beating out Chicago, Madrid, and Tokyo. Following Brazil's selection as the venue for soccer's 2014 World Cup, one might easily conclude that Brazil is simply an ideal locale for global sporting events. But these selections, although made by international sporting authorities, are more reflective of Brazil's growing economic muscle than its considerable athletic prowess.

Brazil's economic promise is of much greater long-term, global significance than its selection to host a few international sporting events. Indeed, Brazil is a potential economic powerhouse. The country's growth, strong capital markets and recent cross-border M&A activity all attest to it. While Brazil's economic potential has been widely recognized in business circles for decades, many have questioned whether that potential would ever be realized.

To be sure, Brazil has been on shaky ground in the past. The country faced economic collapse as recently as 2002, when it had to borrow $30 billion from the International Monetary Fund (IMF) just to avoid default on its sovereign debt.

Dominant World Economies But for all the short-term woes, its long-term potential was never in question. Serious recognition of Brazil's economic prospects came in 2001 when Goldman Sachs global economist Jim O'Neill coined the term BRIC (Brazil, Russia, India and China) for countries he identified as emerging markets likely to be among the world's dominant economies by 2050. While China and India generally receive greater attention and have sustained higher rates of economic growth this decade, Brazil is an economic force to be reckoned with. Since it is the only BRIC in the Americas, Brazil deserves our close attention.

Brazil is clearly starting to take its rightful place on the global economic stage. Its sovereign debt, so close to default earlier in the decade, has been rated investment grade by Standard & Poor's, Fitch, and Moody's. Indeed, Brazil's recent commitment to purchase $10 billion in IMF bonds is an amazing accomplishment for a nation which had to be bailed out by the IMF less than a decade ago. Brazil's commitment to help fund the IMF is a clear sign that it has the financial firepower—and the willingness to use it.

Indications of Brazilian economic prowess are plentiful. For example, the largest initial public offering so far in 2009 has been the $8 billion IPO of Banco Santander Brasil (BSBR), the Brazilian subsidiary of Spain's Banco Santander (STD), confirming the strength and potential of the Brazil's capital and financial markets. While the nation's selection as host of the 2016 Olympics is significant, developments such as this should be drawing even greater attention.

Brazil has tremendous opportunities to continue to grow its economy and increase the standard of living of its people. The country is already self-sufficient in energy, and huge petroleum reserves have recently been discovered offshore—dwarfing other recent discoveries elsewhere in the world. The latest Brazilian offshore field could ultimately yield up to 50,000 barrels of oil per day. And Brazil has the potential to feed much of the world's growing population since it has so much of its land devoted to agriculture. Agriculture in Brazil means more than simply growing food for consumption. Increasingly, Brazilian agricultural production is being devoted to ethanol, the world's leading bio-fuel.

Highly Regulated Banks Although growth in Brazil has, along with the rest of the world, slowed over the past year because of the global credit crunch and the consequent collapse in commodity prices, Brazil's economy has been somewhat buffered. Its banking sector largely escaped the worst of the credit crunch because its banks are highly regulated, especially with respect to the extent to which they can become leveraged. The transparency of the Brazilian financial system, the country's solid democratic base, its environmental power potential, and framework of social policies add to the equation, creating a scenario for consistent growth even in the midst of a global crisis.

Of course there are still many challenges which confront Brazil, including those underscored by violence in its major cities. In addition, there is still a great amount of investment needed in the infrastructure and social development fronts. Nevertheless, knowledgeable observers believe that Brazil has what it takes to succeed.

Participation in the global M&A marketplace is just another clear indication of the importance of Brazil on the global economic stage. For decades, Brazilian M&A has been a euphemism for North American or European companies acquiring assets in Brazil. Not anymore. Growing financial confidence and business savvy have allowed Brazilian companies to turn to the international M&A markets in order to become truly international and exploit opportunities for growth.

Brazilian companies now regularly consider acquisitions outside of Brazil and Latin America. As Brazilian businesses have become truly global, the size and number of M&A transactions involving Brazilian companies has been on the rise. Clear evidence that Brazil has moved beyond being merely an emerging market, is the broad nature of the acquisitions its companies have made in recent years.

Big Deals The Brazilian multinational company has truly come of age and recent global acquisitions affirm it. Two huge unsolicited transactions are prime examples. InBev (BUD), a combination of Brazil's Ambev and Interbrew, acquired Anheuser-Busch. And Brazilian miner Vale (VALE) acquired Canada's Inco, besting North American rivals Falconbridge and Phelps Dodge. Deals such as these attest to the business savvy among Brazilian management teams and the financial firepower existing today at the companies which they lead.

The sale by UBS of Brazil's Banco Pactual back to one of its original Brazilian owners, as well as AIG's sale of its stake in Unibanco AIG Seguros to its Brazilian partner Unibanco, are indicative of the relative strength of Brazil's financial institutions.

Of a smaller size, but equally important from a strategic standpoint, is the recently announced sale of Marfrig Frigoríficos e Comercio de Alimentos, Cargil's Brazilian meat business, to Seara Alimentos.

The message is clear: Brazilian companies are leading acquirers both inside and outside of Brazil. With stronger balance sheets and liquidity positions, Brazilian acquirers will likely find further acquisition opportunities in stressed international markets.

As Brazilian President Luiz Inácio Lula da Silva recently proclaimed to the International Olympic Committee, "Our time has arrived. It's arrived!" The economic evidence certainly appears to support Lula's boast.
Frank_aquila
Aquila is a partner in the Mergers & Acquisitions Group of Sullivan & Cromwell LLP.

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