M&A Falls to Six-Year Low as Companies Delay Transactions

Brazilian takeovers are tumbling this year to the lowest level since 2007 as the outlook for economic growth worsens and price disputes prompt companies to postpone deals.

Mergers and acquisitions involving Brazilian firms totaled $26 billion this year, 37 percent less than the $41.1 billion in the same period of 2012, data compiled by Bloomberg show. Companies have announced 282 deals this year, down from 433.

“The usual due diligence on acquisitions is taking longer than normal because the risk perception of the country and of the global environment has worsened,” Fernando Iunes, Banco Itau BBA SA’s global head of investment banking, said in a telephone interview from Sao Paulo. “Buyers want to adjust the price according to the new reality in the Brazilian capital markets, and sellers don’t want to sell below a given price.”

Companies that don’t need to divest assets quickly are delaying deals after the benchmark stock index fell 27 percent this year through yesterday in dollar terms and the economy expanded less than economists forecast, said Marco Goncalves, partner and head of M&A at Grupo BTG Pactual. Brazil’s gross domestic product for 2013 will probably expand 2.3 percent, according to a Bloomberg survey of analysts July 19-24. That’s down from an average estimate of 3.4 percent in January.

On Hold

“Slower economic-growth prospects and volatility in the currency market have affected foreigners’ valuations for Brazilian companies,” Goncalves said, adding that the number of deals for all of 2013 is unlikely to reach the 676 announced last year. “A lot of entrepreneurs put their selling plans on hold.”

BTG is the top M&A adviser so far this year, with $8.55 billion in transactions announced, while Itau BBA ranks first based on the number of deals, with 23, data compiled by Bloomberg show. Both banks are based in Sao Paulo.

Competition is intensifying among investment banks fighting for the smaller pool of revenue. M&A fees tumbled 54 percent to $119 million in the first half, according to the London-based research firm Dealogic. The figure is the lowest for the period since 2007.

“We are living in the aftermath of the boom years, with more distressed situations in the market,” said Luiz Muniz, global partner and head of Rothschild’s Latin America business, which advised on $998 million in Brazil transactions this year. There’s more business from companies that need to “refocus their portfolios after overly aggressive acquisition or organic-growth strategies,” Muniz said from Sao Paulo.

Consolidation Opportunity

“The local companies that are well-capitalized and with strong balance sheets are taking advantage of this scenario to acquire competitors and consolidate,” said Alessandro Decio Farkuh, head of M&A at Banco Bradesco BBI SA, which rose to fourth on the advisory rankings this year from sixth in the same period last year.

Bradesco BBI and Banco Santander SA advised JBS SA, the world’s largest beef producer, in the biggest Brazil deal this year, announced on June 10, when the Sao Paulo-based company said it would purchase meat-processing plants from Marfrig Alimentos SA for $2.73 billion.

The second-largest transaction was Belo Horizonte-based Kroton Educacional SA’s acquisition of Anhanguera Educacional SA for $2.21 billion. The all-stock deal created the world’s biggest for-profit education company. Itau BBA advised Anhanguera and a team including BTG, Credit Suisse Group AG and Morgan Stanley advised Kroton.

Rebound Seen

Lazard Ltd., the world’s biggest independent merger adviser and No. 14 among all advisers in Brazil this year, sees the slowdown as temporary.

“Fundamentally it’s a pretty healthy balance sheet as a country,” Kenneth Jacobs, Lazard’s chief executive officer, said in an interview.

“My guess is they weather this,” Jacobs said. “It comes back to this confidence thing -- you have a period that’s a little uncertain, you needless to say are going to see a little slowdown of people making big bets.”

The fall in the year-to-date total would be smaller if not for the 18 percent drop in the real against the dollar since the start of 2012, BTG’s Goncalves said. The decline decreases the value of deals in dollar terms, he said.

The weaker real is already attracting strategic investors to Brazil, said Luiz Felipe Costa, a partner at Sao Paulo-based law firm Stocche, Forbes, Padis, Filizzola, Clapis Advogados. He sees health and real estate among the most-active industries.

Private Equity

“The private-equity funds have already raised capital to use in Brazil and, as they need to invest, they are very active,” Costa said.

Another potential source of transactions could be companies controlled by Eike Batista, whose empire of commodity businesses collapsed this year after missing production goals. Divestiture plans already announced by Petroleo Brasileiro SA and Vale SA may provide additional deals.

Itau’s Iunes said prospects are brighter for the second half, which could bring volume for 2013 close to last year’s total of $63.7 billion.

“Brazil is a big and important market,” Iunes said. “The strategic investor will keep acquiring companies here and is only postponing decisions a bit.”