Jan. 7 (Bloomberg) -- Grupo BTG Pactual, Brazil’s biggest merger adviser, said the 2014 presidential election will weigh on confidence and keep acquisitions from expanding beyond last year’s level of $78.8 billion.
“Players are usually very cautious about doing investments during election years given the amount of uncertainty,” Marco Goncalves, head of mergers and acquisitions at the Sao Paulo-based bank, said in a phone interview. Goncalves predicted infrastructure, consumer and service-sector companies would generate the most deals in 2014.
The vote on Oct. 5, when President Dilma Rousseff is likely to face Aecio Neves and Eduardo Campos, will add to concerns curtailing merger volume, including speculation the country’s credit rating will be cut because of a growing budget deficit, Goncalves said.
Brazilian companies announced 592 acquisitions last year, 14 percent fewer than in 2012, according to data compiled by Bloomberg, as economic growth of 2.3 percent in the 12 months through September fell short of analysts’ estimates, the government intervened in the oil and electricity markets, and speculation grew that the U.S. Federal Reserve would taper its stimulus efforts. Fed policy makers decided last month to cut the $85 billion they were pumping into the financial system each month through bond purchases to $75 billion starting this month.
Last year’s M&A market was dominated by “huge deals,” Goncalves said. The 10 biggest acquisitions accounted for more than 50 percent of the total announced in 2013, according to data compiled by Bloomberg. In 2012, the 10 biggest transactions accounted for 44 percent of the $65 billion announced.
The average deal size increased to $255.9 million last year from $183.7 million in 2012.
Oi SA’s acquisition of Portugal Telecom SGPS SA, a $14.3 billion deal announced in October, was the biggest of 2013, followed by the $8.31 billion concession to develop and maintain Galeao airport at Rio de Janeiro city, won by a consortium led by Odebrecht SA and Changi Airport Group Singapore Pte Ltd.
BTG handled 55 deals totaling $33 billion in 2013, according to data compiled by Bloomberg.
This year’s tally will include a 32.4 billion reais ($13.6 billion) transaction from Madrid-based Telefonica SA, which is being forced to reduce its holdings in the Brazilian mobile-phone industry after the nation’s antitrust agency, known as Cade, said it couldn’t control two companies with a dominant market share.
Cade told Telefonica last month that it must either find a partner for its Brazilian mobile-phone company, Vivo Participacoes SA, or sell its stake in the Brazilian mobile unit of Telecom Italia SpA, Tim Participacoes SA. Telefonica said in September that it had reached an agreement that would give it control of Telecom Italia. Tim has a market value of 32.4 billion reais.
Telefonica is close to setting up a financial vehicle to split Tim Participacoes SA and sell it to its Vivo unit and to rivals Oi and Carlos Slim’s Claro SA, Il Sole 24 Ore reported on Jan. 3 without saying where it got the information.
Vivo declined to comment. Telefonica said in a statement yesterday that it hasn’t formed such a vehicle, adding that it won’t comment on speculation. Telecom Italia said in a statement on Friday that “it is unaware of any ‘offer’ for Tim Brasil and, once again, states that the Brazilian company is a strategic asset.”
Rogerio Tostes, Tim Participacoes’s director of investor relations, referred to Telecom Italia’s Friday statement and declined to comment further.
Fleury SA, the Brazilian medical-diagnostics company, is planning another major deal for this year’s pipeline. The Sao Paulo-based firm said Nov. 14 that its controlling shareholder, Core Participacoes, hired JPMorgan Chase & Co. to “assess strategic alternatives related to its stake in the company, including a potential entry of new investors in Core,” according to a regulatory filing. Fleury, with a market value of 2.9 billion reais, declined to comment further on a potential sale.
Carlyle Group LP, KKR & Co., Apax Partners LLP and JPMorgan’s Gavea Investimentos Ltda. are among the private-equity funds that have looked at Fleury, according to four people familiar with the matter.
Officials at Gavea, Apax, KKR and Carlyle declined to comment on a potential purchase of Fleury.
“A lot of movement is coming from private-equity investors,” said Rodrigo Figueiredo Nascimento, a partner at Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga Advogados, a law firm that handled 41 deals in Brazil last year, more than any other legal adviser, according to data compiled by Bloomberg.
Wealthy clients from private banking and family offices are also increasing their interest in private-equity investments given lower real interest rates, he said. Brazil’s benchmark Selic rate is 10 percent, while inflation measured by IPCA, Brazil’s official price index, reached 5.77 percent through Nov. 30.
Industries including infrastructure, oil, gas and energy are “still attracting a lot of interest from international players,” said Joao Ricardo de Azevedo Ribeiro, also a partner at Mattos Filho. He said the firm’s M&A revenue increased 10 percent in 2013 compared with 2012.
Acquisition volume won’t decline because “a lot of companies simply can’t be out of Brazil given the size of the country’s internal market,” said Ribeiro, adding that he’s seeing more multinational companies investing in Brazil, the largest economy in Latin America.
Ribeiro cited the Libra field, the country’s largest oil discovery, as an example. The Rousseff administration in October awarded Libra development rights to a group including state-run Petroleo Brasileiro SA, Royal Dutch Shell Plc, Total SA, and two Chinese state-owned companies, the China National Petroleum Corp. and the China National Offshore Oil Corp. The bid involved a 15 billion-reais signing fee. Libra will require spending of about 400 billion reais over 35 years, according to regulator ANP. The Libra auction isn’t included in Bloomberg M&A data.
Merger activity in Brazil will also pick up in the retail sector, including health care, pharmacy, housing, English-language schools and universities, Ribeiro said. He cited Pearson Plc’s acquisition of Grupo Multi, the owner of English schools including Wizard, Yazigi, Microlins and Skill, for $505 million plus 250 million reais in debt, a deal that was announced on Dec. 3.
“Concerns over the economy in general and over regulated sectors are reducing activity in the merger-and-acquisition markets in Brazil,” said Paulo Aragao, a partner at Barbosa Mussnich & Aragao, the second-biggest 2013 M&A legal adviser by deal volume, according to data compiled by Bloomberg.
“Brazil is no longer the darling of international investors,” he said.
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