Brazilian mergers plunged 44 percent this year to the lowest since 2005 as threats of impeachment, devaluation and recession stymie deal talks.
Companies in South America’s largest economy announced $29 billion of acquisitions this year through Aug. 11, compared with $52 billion for the same period of 2014, data compiled by Bloomberg show. The slide runs counter to the global market, where mergers are set to pass $3 trillion for the first time since 2007.
The merger business is shrinking in Brazil as President Dilma Rousseff bats away attempts to remove her from office, putting at risk her policies to address the worst economic contraction in a quarter century. The nation’s currency, the real, is this year’s worst performer among emerging-market economies, tumbling 24 percent, amid a corruption scandal that fueled a credit squeeze for some of Brazil’s biggest firms.
“Price agreements between parties are harder to reach because of the real’s volatility and the perception of asset-value volatility,” Daniel Wainstein, who heads merger-advisory firm Greenhill & Co.’s Sao Paulo office, said in an interview.
The number of deals this year slid 24 percent to 269, the fewest since 2009, the data show.
Companies asking for legal protection from their creditors reached a monthly record of 135 in July, a 29 percent increase from June, according to credit-data provider Serasa Experian. New lending to businesses fell 2.3 percent in the 12 months through June, as interest rates climbed to 27.5 percent from 23.6 percent in June of 2014, central bank data show.
“There are a lot of negotiations going on, but economic and political instability is delaying decisions,” said Joao Ricardo de Azevedo Ribeiro, a senior partner at Sao Paulo law firm Mattos Filho, Veiga Filho, Marrey Jr. & Quiroga Advogados, this year’s third-biggest legal adviser for mergers in Brazil.
Adding to the instability is China, Brazil’s biggest trading partner, which roiled global markets this week by letting its currency weaken the most since 1994.
One of the biggest drivers of the deals that are coming to market this year is the state-controlled oil company, Petroleo Brasileiro SA, known as Petrobras. The Rio de Janeiro-based firm has put almost $60 billion in assets up for sale through 2018 amid a corruption scandal.
Petrobras invited a group of international companies to bid for stakes in some oil-field concessions, including some of the so-called pre-salt offshore exploration blocks. It’s weighing the sale of a 49 percent stake in its gas-pipeline unit, Gaspetro, as well as assets of its Transpetro business, people with knowledge of the plans said earlier this year.
The plan calls for $15 billion in divestments by the end of 2016 and an additional $42.6 billion by 2018, as the company tries to preserve its investment-grade credit rating. Brazil’s rating dropped to the cusp of junk on Tuesday, when Moody’s Investors Service lowered its assessment to Baa3.
“The pipeline is still robust, but motivations to sell a company are different nowadays,” said Rodrigo Mello, a managing director at Greenhill, which opened its first South American branch last year. Greenhill expects to announce three M&A deals soon, according to Mello.
Wainstein explained that some entrepreneurs have become less bullish about growth prospects in Brazil and are more willing to divest and diversify country risk.
“Others need to reduce debt or simply need to sell a portion or all of the company to avoid financial distress,” he said.
Such asset sales will follow by less than two years another crisis that pointed to waning fortunes in Brazil: the dissolution of the empire built by Eike Batista, the former billionaire whose companies filled for bankruptcy protection in October 2013, putting $3.6 billion in dollar bonds into default.
Some well-capitalized Brazilian companies are finding opportunities as foreigners retreat. Banco Bradesco SA agreed to buy HSBC Holdings Plc’s money-losing Brazil unit for $5.2 billion in cash earlier this month, its biggest acquisition ever.
The retreating market has brought some valuations back to levels that some foreign companies and investors are finding attractive.
A Goldman Sachs Group Inc. fund called Josephina agreed to acquire 33 percent of medical-care provider Oncoclinicas do Brasil Servicos Medicos SA in a transaction approved by Brazil’s antitrust regulator in April.
“Foreign investors are buying companies in the health-care sector, now that a new law opened the way for foreign ownership of hospitals,” Mattos Filho’s Ribeiro said. “International funds are also very active in buying real estate properties in Brazilian cities and in the countryside.”
Such deals include Blackstone Group LP’s purchase of 1.07 billion reais ($308 million) in real estate from BR Properties SA, disclosed in an Aug. 4 filing. Brookfield Asset Management Inc. bought 2.08 billion reais in properties from the same company in a transaction announced Aug. 11.
“Some foreign private-equity funds that bought companies with the real at a higher level are avoiding sales now,” Ribeiro said. “But on the other side, those firms are buying a lot because they have money to be invested from funds they raised recently.”