Bloomberg News

M&A Falls to 5-Year Low Amid Approval Anxiety: Corporate Brazil

August 27, 2012

Takeovers in Brazil fell 42 percent so far this year and are on track to reach a five-year low, as an antitrust law causes companies to delay acquisitions and the economy slows.

The dollar amount of deals declined from a year earlier to $42.5 billion, while dealmaking worldwide fell 18 percent, data compiled by Bloomberg show. Companies have announced 129 mergers or acquisitions in Brazil valued at $8.18 billion, down 53 percent from the same period a year earlier, after the June 1 implementation of a law requiring buyers to seek antitrust approval before closing transactions.

The drop will cut into fee revenue and boost competition among investment banks and advisers, said Henrique Machado Barros, innovation and strategy professor at Sao Paulo business school Insper. While the law won’t affect acquisitions announced in the first half of 2012, including Cosan SA Industria & Comercio’s $1.8 billion purchase of a stake in Cia. de Gas de Sao Paulo, it will hinder dealmaking through the end of the year, said Otavio Guazzelli, head of investment banking at BR Partners.

“Deal announcements will slow down through the rest of the year, as people will wait to see how the antitrust authority will judge the new cases,” said Marco Goncalves, head of M&A of BTG Pactual SA, which ranks fourth among M&A financial advisers in Brazil, according to data compiled by Bloomberg. “Companies will go forward with a deal only if they have 100 percent certainty,” he said at Bloomberg Link’s Brazil Economic Summit on Aug. 14.

The average size of transactions announced decreased this year to $200 million compared with $300 million a year earlier, while the number of deals increased by 10 percent.

330-Day Reviews

Under the legislation, the antitrust authority known as Cade has said it will take no more than 330 days to review a proposed merger. Previously, companies filed requests to review a deal after an accord had already been closed, allowing operations to be integrated before approval from Cade, which took as long as two years in some cases.

“The kickoff of the new antitrust law was an important catalyst for deals in the first half,” Jean Marc Etlin, Banco Itau BBA SA’s investment banking chief executive officer, said in an interview at the bank’s headquarters in Sao Paulo. Itau, Brazil’s top M&A financial adviser, worked on 11 of the 87 deals announced in May that totaled $8.88 billion, data compiled by Bloomberg show.

The merger law, which Brazilian President Dilma Rousseff signed late last year, eases concern among companies and investors because deals have “a stamp of approval” before being completed, Cade President Vinicius Carvalho said.

Blocking Nestle

In 2004, Cade blocked Nestle SA’s 2002 acquisition of Garoto, Latin America’s biggest chocolate maker, based in Feira de Santana, Brazil. Eight years later, Nestle is still fighting to overturn the ruling, which would require it to separate the already-merged operations. Nestle’s press office in Sao Paulo declined to comment.

Companies rushed to complete deals before the law took effect, which concentrated deals in the first half, Carvalho said.

“In the last 15 days before the new law took effect, we had the average of about three months’ worth of cases being submitted to Cade for review,” he said in an interview from Brasilia. “It was expected that we would see a reduction of merger cases being announced afterward.”

Slowing growth in the world’s largest emerging market after China has also weighed on M&A activity. Rousseff’s administration has cut the benchmark Selic rate to a record low 8 percent, pressured commercial banks to increase lending and reduced taxes to revive growth.

Brazil’s economy will expand 1.9 percent in 2012, down from 2.76 percent last year and less than Japan, U.S., China, India and Russia, according to Bloomberg surveys.

Infrastructure Investments

“Brazil is very much in need of capital to sustain the growth of certain sectors like infrastructure,” Daniel Wainstein, chairman of investment banking in Brazil for Goldman Sachs Group Inc., said in an interview in Sao Paulo. “M&A transactions that make sense will happen in any regulatory environment.”

Transactions involving foreign companies represented more than half of Brazil’s M&A volume so far this year. Abu Dhabi’s Mubadala Development Co. agreed in March to buy a $2 billion stake in EBX Group Co., the Rio de Janeiro-based company that controls Brazilian billionaire Eike Batista’s energy and commodity companies. Sao Paulo-based Camargo Correa SA offered that same month to buy the rest of Cimpor Cimentos de Portugal SGPS SA that it didn’t already own for 4 billion euros.

‘Emerging-Markets Strategy’

The trend may accelerate as “the lengthening of the European debt crisis is forcing companies to review their emerging-markets strategy,” Itau’s Etlin said. BTG’s Goncalves sees opportunities for Brazilian companies to buy subsidiaries of European companies.

Paris-based Vivendi SA, Europe’s biggest media and telecommunications company, hired Rothschild and Deutsche Bank AG to study strategic options for its Brazilian phone operator GVT, people familiar with the matter said, according to an Aug. 16 Bloomberg News story.

ThyssenKrupp AG, Germany’s biggest steelmaker, said May 15 a sale of its Brazilian and U.S. plants is among “strategic options” for its unprofitable Americas unit.

The June 1 law brings Brazil in line with antitrust standards in the U.S. and Europe, said Luis Riesgo, head of Latin America practice at law firm Jones Day, based in Sao Paulo. He expects deals to slow for about six months as companies get used to the regulations before picking up again in 2013.

“When the macroeconomic environment improves -- if it improves -- we’ll see transactions coming,” Guazzelli at BR Partners, a financial adviser based in Sao Paulo, said at the Bloomberg Link event. “This is a time of wait and see.”

To contact the reporters on this story: Serena Saitto in New York at ssaitto@bloomberg.net; Cristiane Lucchesi in Sao Paulo at clucchesi5@bloomberg.net

To contact the editors responsible for this story: Jessica Brice at jbrice1@bloomberg.net; Jeffrey McCracken at jmccracken3@bloomberg.net


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