Reuters: Regulatory News: Brazil M&A hits five-year low on turmoil, state intervention

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Brazil M&A hits five-year low on turmoil, state intervention Oct 2nd 2012, 15:24 Tue Oct 2, 2012 11:24am EDT * Credit Suisse, BTG top rankings in value, number of deals * Bankers see private equity jump-starting M&A deals By Guillermo Parra-Bernal SAO PAULO, Oct 2 (Reuters) - Concerns about growing state intervention, a slowing economy and new antitrust rules have driven merger and acquisition activity in Brazil to a five-year low so far in 2012, but bankers are confident a recovery is just around the corner. Companies announced $53.99 billion worth of deals in Brazil between January and September, down 10 percent from a year earlier, according to a quarterly Thomson Reuters report on M&A activity. That's the lowest total since $35 billion in M&A deals were announced in the same period of 2007. The downturn in M&A activity is worldwide. Europe's debt crisis and an economic slowdown in China have investors and dealmakers retrenching around the globe. In Brazil, a growing government presence in the economy has clouded the outlook even further. In recent months, President Dilma Rousseff has steadily put pressure on banks, telecommunications companies and power utilities to lower rates for consumers, creating uncertainty about potential financial returns in those industries. "Greater market volatility and a more active government stance in some sectors have made it harder for bids and offers to converge," said Renato Ejnisman, managing director for investment banking at Bradesco BBI, the investment banking arm of Brazil's No. 2 private sector bank, Banco Bradesco . The situation underscores some of the policy risks in Latin America's largest country as Rousseff uses regulatory powers in a bid to strong-arm companies to invest more. Capital spending as a percentage of gross domestic product has fallen this year to the lowest level in almost two years, a trend the Rousseff administration is scrambling to reverse. The introduction of changes to antitrust laws in June probably made companies and banks more cautious in the third quarter, Ejnisman said. Still, concerns about an increasingly activist government are unlikely to stop foreign companies from investing in Brazil altogether, bankers said. Under the new rules, antitrust agency Cade has no more than 330 days to review a proposed merger. Companies and advisers may be trying to gauge how quickly Cade will act, but so far the agency is approving deals faster than expected. Concern that Cade will drag its feet "is simply overdone," said Daniel Wainstein, chairman of Goldman Sachs Group's Brazilian investment bank. "We have witnessed a rather good pace of approval so far since the implementation of the new rules." RECOVERY UNDER WAY While the value of M&A activity in Brazil is down this year, the number of deals actually rose by 38 to 596 in the January-September period, the Thomson Reuters report showed. That, bankers say, suggests a recovery is under way. Foreign and local banks are betting on M&A advisory work as a stable revenue source in Brazil regardless of how fees behave, said José Olympio Pereira, chief executive of Credit Suisse Group's Brazilian unit. Fees in Brazil will likely amount to less than the estimated $800 million in fee income last year, bankers say. Staff and capital levels are widely seen as adequate, meaning that any recovery is unlikely to lead firms to hire massively or deploy additional resources or money into operations, bankers added. "There is a lot of competition, but there's also a lot of work to do," said Pereira, whose bank tops the M&A rankings in Brazil this year. Deals handled by Credit Suisse include Lenovo Group's takeover of Brazilian electronics maker CCE. During the third quarter, Credit Suisse overtook Itau BBA, the investment banking unit of banking giant Itau Unibanco Holding, as Brazil's top M&A advisory firm. Credit Suisse advised on $19.31 billion worth of M&A transactions through September, followed by Itau BBA's $19.11 billion, the Thomson Reuters rankings showed. BTG Pactual, the Brazilian investment bank owned by billionaire financier André Esteves, topped the ranking in number of deals advised with 64, followed by Itau BBA's 51. Unlike counterparts in other emerging markets such as China, Brazilian banks have consistently bested their foreign rivals over the past two years at funding deals, forging stronger client ties and setting up distribution networks similar to those of global banks. Four local banks were among the Top 10 rankings for the fifth straight quarter, the report showed. One of them, BR Partners, which ranked 10th, is an advisory-only shop. INFRASTRUCTURE COMES TO THE RESCUE Still, foreign banks such as JPMorgan Chase & Co and Citigroup Inc gained ground in the rankings, mainly because of their role advising private equity and sovereign wealth funds on Brazilian deals. JPMorgan, for instance, ranked fifth with $11.79 billion in advisory work in Brazil, compared with a ranking of 17 at this time last year. Wainstein, of Goldman Sachs, expects M&A activity to recover as buyout firms - which last year raised $6.3 billion for their Brazil investments - resume purchases in the retail, infrastructure and consumer goods sectors. Bidders may take advantage of lower valuations caused by a year-long economic downturn to step up acquisitions, bankers said. Media reports say local steelmaker CSN is considering a bid for ThyssenKrupp's money-losing SteelAmericas unit. And Vivendi, Europe's largest media company, may sell its Brazilian unit GVT to raise cash, sources told Reuters recently. According to Marco Gonçalves, head of M&A at BTG Pactual, a $33 billion government plan to boost infrastructure investment in roads and ports will create "massive opportunities for our clients for the coming months." More private equity firms from the United States and sovereign wealth funds from Asia and the Middle East are also eyeing Brazilian companies now that the local currency, the real , has lost some ground against the U.S. dollar, both Pactual's Gonçalves and Goldman's Wainstein said. Strategic buyers, especially deep-pocketed local players in the mining, banking and consumer goods industries, are on the lookout for takeover targets in a country where more than 40 million citizens joined the middle class in the past decade, Credit Suisse's Pereira noted. With interest rates expected to remain near all-time lows well into 2013, M&A deals will become more appealing for buyout firms. "The level of activity in this segment is good, and looks even better for the coming months as the cost of capital declines," Wainstein said. The following is a table with year-to-date rankings: ================================================================ FINANCIAL ADVISER VALUE RANK NUMBER OF MARKET OF DEALS 2012 2011 2012 DEALS SHARE ================================================================ Credit Suisse $19.31 bln 1 4 30 35.8 pct Itau BBA $19.11 bln 2 1 51 35.4 pct Citigroup GB&M $16.27 bln 3 11 8 30.1 pct BTG Pactual $14.48 bln 4 2 64 26.8 pct JPMorgan Chase $11.79 bln 5 17 11 21.8 pct Goldman Sachs $10.77 bln 6 3 8 20.0 pct Bradesco BBI $10.30 bln 7 6 25 19.1 pct Rothschild & Co $10.20 bln 8 9 14 18.9 pct Bank of America $9.71 bln 9 8 8 18.0 pct BR Partners $7.15 bln 10 19 9 13.3 pct ================================================================ INDUSTRY TOTAL $53.989 bln 596 ================================================================ Link this Share this Digg this Email Reprints

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