Reuters: Regulatory News: Brazil M&A slumps to 3-year low but bankers expect revival

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Brazil M&A slumps to 3-year low but bankers expect revival Jan 3rd 2013, 10:59 Thu Jan 3, 2013 5:59am EST * Credit Suisse, BTG top rankings in value, number of deals * Buyout funds seen spurring merger transactions in 2013 * Bankers expect limited impact of state meddling on M&A By Guillermo Parra-Bernal and Aluísio Alves SAO PAULO, Jan 3 (Reuters) - Concerns about a flagging economy and a state cap on investment returns in certain sectors dragged merger and acquisition activity in Brazil down to a three-year low last year, but bankers have expressed confidence that a revival is brewing. Companies announced $71.036 billion worth of deals in the country last year, down 11.9 percent from 2011, according to Thomson Reuters' annual deal-making report. The number is the lowest since $68.40 billion in M&A deals were announced in 2009 -- when financial markets were reeling from the worst crisis in eight decades. The downturn in M&A activity is global: the number of deals worldwide slumped 9.8 percent last year, according to Thomson Reuters data. Europe's debt crisis, a sluggish economic recovery in the United States and a slowdown in China have investors and dealmakers retrenching around the globe. For most of last year, President Dilma Rousseff put pressure on banks, telecommunications companies and power utilities to lower rates for consumers, sparking fears that she was imposing caps on financial returns in those sectors. Those worries should fade as economic growth gains momentum this year, bankers say. Buyout firms' appetite for targets in the consumer sector and the need for scale in a vastly fragmented market will encourage Brazilian corporate takeovers this year, said José Olympio Pereira, chief executive of Credit Suisse Group's Brazilian unit. In 2012 Credit Suisse topped Thomson Reuters' Brazil M&A rankings for the first time in three years. "Part of the reason why we saw all this pressure was because the economy looked stagnated, but once growth takes off, all that regulatory noise will hopefully be reversed," he said. "It's hard to gauge to what extent all this noise impacted long-term M&A plans -- we hope it didn't." The situation highlights the risks of strong policy activism in Latin America's largest country as Rousseff uses regulatory powers to pressure companies to invest more. Capital spending as a percentage of gross domestic product fell in 2012 to the lowest level in almost three years, a trend the government is struggling to reverse. Economists do not expect a robust recovery. According to a weekly central bank survey released on Monday, gross domestic product should expand 3.3 percent this year. That is down from estimates a couple of months ago that the economy would grow as much as 4.5 percent. As the value of M&A activity in Brazil fell last year, the number of deals fell slightly to 809, the Thomson Reuters report showed. Some bankers saw that as the prelude to a recovery. "How do I read all this? That there is long-term commitment from investors ... which should ensure that M&A in Brazil continues to do well next year and for the years to come," said Patricia Moraes, head of investment banking for JPMorgan Chase & Co's Brazilian unit. Moraes, a 17-year JPMorgan veteran, said UnitedHealth Group Inc's $4.9 billion acquisition of Amil Participações SA proves "the world is seeing opportunities in Brazil with special attention." JPMorgan advised UnitedHealth in what Moraes called a "complex one-shop type of transaction" -- the largest purchase of a Brazilian company by a U.S. rival. Another sign of potential recovery: for the first time ever, Brazil's 10 biggest M&A deals this year were "multibillion-dollar deals -- that puts our market at a different level and acts as a precedent for what we expect will be a strong pipeline of deals in 2013," said Hans Lin, co-head of investment banking at Bank of America Merrill Lynch. INFRASTRUCTURE, CONSUMER SECTORS ATTRACTIVE Activity will gain steam, with infrastructure and consumer-related sectors luring much of the attention from potential buyers, said Jean-Marc Etlin, managing director for investment banking at Itau BBA, wholesale banking unit of local giant Itau Unibanco Holding SA. "I see three pillars acting in the market: the strategic rationale leading to consolidation in some key sectors; the role of private equity funds that are cash-rich right now; and cross-border activity, with more Brazilian companies looking out for potential targets abroad," Etlin said. With interest rates expected to remain near all-time lows well into 2013, M&A deals will become more appealing for buyout firms, bankers noted. Foreign and local banks are betting on financial advisory as a stable source of revenue in Brazil even if fees go a little south, Etlin added. Some bankers said fees in Brazil probably fell last year from the estimated $800 million reported in 2011. For the first time in three years, Brazilian banks failed to best their foreign rivals at funding deals. In 2012, Credit Suisse overtook BTG Pactual Group as Brazil's top M&A advisory firm in terms of value. Three local banks were among the Top 10 M&A advisory firms in Brazil, down from four at the end of 2011, the report showed. Credit Suisse advised on $ 28.41 billion worth of M&A transactions through Dec. 31, followed by Itau BBA's $21.08 billion, the Thomson Reuters rankings showed. Other foreign banks such as Rothschild & Co, JPMorgan and Citigroup Inc rose in the rankings, mainly because of their role advising private equity and sovereign wealth funds on cross-border Brazilian deals. Credit Suisse advised Bunge Ltd on the $750 million sale of a fertilizer unit to Yara International ASA earlier this month and, jointly with Goldman Sachs, prepared Amil for its sale to UnitedHealth Group. BTG Pactual, the Brazilian investment bank owned by billionaire financier André Esteves, topped the ranking in number of deals advised with 72, followed by Itau BBA's 70. Bank of America's Lin and his colleague Roberto Barbutti, the area's other co-head, expect M&A activity to recover as buyout firms, which raised $6.3 billion last year for Brazilian investments, resume purchases in the retail, telecom, heavy and civil construction and consumer goods sectors. Buyout firms have "helped unlock situations where there was no price convergence" between bidders and targets, Lin said, adding that a "trend in which private equity firms continue to look for deals in unregulated sectors" is poised to continue. Media reports say local steelmaker CSN is considering a bid for ThyssenKrupp's money-losing SteelAmericas unit. Vivendi, Europe's largest media company, may sell its Brazilian unit GVT to raise cash, sources told Reuters recently. 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 people joined the middle class in the past decade, Itau BBA's Etlin 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 $28.41 bln 1 3 45 40.0 pct Itau BBA $21.08 bln 2 2 70 29.7 pct Rothschild & Co $17.47 bln 3 9 20 24.6 pct JPMorgan Chase $16.92 bln 4 13 13 23.8 pct BTG Pactual $16.54 bln 5 1 72 23.3 pct Citigroup GB&M $16.12 bln 6 11 9 22.7 pct Bank of America $15.09 bln 7 5 12 21.2 pct Goldman Sachs $14.56 bln 8 4 12 20.5 pct Bradesco BBI $13.64 bln 9 6 36 19.2 pct BR Partners $7.33 bln 10 10 13 10.3 pct ================================================================ TOTAL W ADVISOR $60.03 bln 278 84.5 pct INDUSTRY TOTAL $71.04 bln 809 ================================================================ Link this Share this Digg this Email Reprints

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