Brazil - Mergers and acquisitions 2010
Fallout from the economic downturn has been slower in Brazil in comparison to larger foreign markets. However, like the surge in IPOs before it, Brazilian M&A activity has been tempered in the wake of the credit crisis. "It was supposed to be a record-breaking year, until October, when almost every single deal came to a halt. People just didn't know what was going to happen," recalls one partner.
Strategic acquisitions spurred by distressed scenarios have dominated the market ever since. But signs of life in the capital markets and the growing presence of private equity, offer domestic firms hope that the hurdles of valuation and uncertainty have passed.
The trend of purely domestic transactions was rooted in the consolidation of several industries as the financial downturn concentrated capital-intensive industries left overgrown from the boom years. Mid-market banks have been a favourite example of lawyers who predicted a flurry of M&A work in the sector for some time. Fuelled by IPOs in 2006-2007, the financial sector swelled, particularly in the mid-market. Now, one financial crisis later, the first mergers have begun to appear. "They thought the good days would never end. It's shopping season, basically," comments one partner.
The merger of Banco Itaú and Unibanco is the most prominent to occur in the wake of the credit crisis. Following 15 months of negotiations that began before the full effects of the recession became evident, the all-stock transaction resulted in what is now the largest financial institution based in Latin America. The Itaú-Unibanco merger, while symptomatic of difficult market conditions, reveals a shift still underway in Brazil, one that consolidates influence in a market quickly growing more sophisticated in the absence of foreign competitors.
Brazil's government has also urged several other mergers in the financial sector as a result of worsening conditions for mid-sized banks. Banco do Brasil, the country's state-owned bank, had its investments authority expanded at the height of the financial crisis, leading to it acquiring a minority stake in Banco Votorantim and a controlling stake in Nossa Caixa in early 2009.
Similarly, beef and ethanol companies have undergone significant consolidation in the past year as well. A depreciating Brazilian real has left beef companies with billions in US-denominated debt and suspended acquisitions announced during the purgatory of boom and bust cycles.
The melancholy permeating the worldwide financial markets, however, has not penetrated as deeply in Brazil as in other jurisdictions. "Even in the streets the mood is much better than in Europe and the US. Much better," says one partner. The traditionally slow months of January and February have yielded a more settled market. Private-equity funds, once almost exclusively concerned with real-estate transactions, are beginning to broaden their portfolios and seek opportunities in sectors like ethanol. Lawyers here see it as only the beginning of a growing private-equity presence in the country, one aided by a lack of sophisticated domestic funds. "Brazil is clearly their priority right now. They definitely see Brazil as having great potential compared to other Bric countries," says a partner.
A full firm-by-firm analysis of the Brazilian M&A market can be found here.