Tumbling Real Lures Acquirers Seeking Bargains: Corporate BrazilJonathan Levin and Cristiane Lucchesi
The Brazilian real’s three-year slide and a stock market that trades at a discount to regional peers are making the Latin American nation a buyers’ market, especially for buyers from overseas.
Takeovers involving Brazilian companies rose 70 percent to $29.5 billion in 2014 through yesterday from the same period last year, the fastest pace in Latin America, data compiled by Bloomberg show. Foreigners drove the increase, with deals up 168 percent to almost $18 billion, making this the best first half for inbound acquisitions since 2010, the data show.
Buyers including International Paper Co. and Michelin & Cie. are taking advantage of the currency’s weakness to snap up assets, betting that the millions of consumers who joined the middle class in the past decade will help Brazil’s economy pull out of a slump. While the Ibovespa has rebounded in the past three months, it still trades at just 1.4 times book value, less than half the valuation in Mexico and still below the stock benchmark’s average over the past five years.
“The combination of the valuations and the currency means you’re writing a smaller check for an acquisition,” said Marco Goncalves, head of M&A for Sao Paulo-based Grupo BTG Pactual, last year’s top deal adviser and in fifth place so far this year, in a June 20 interview. Foreign companies are “looking at growth opportunities to get into Brazil.”
The largest deal this year was Madrid-based Banco Santander SA’s agreement to pay as much as $6.5 billion for shares of its Brazilian unit, which is trading at a discount to the parent. International Paper also bought the rest of its local business, paying $145 million for the 25 percent it didn’t already own.
Tire-maker Michelin struck a $718 million deal for Sascar Tecnologia e Seguranca Automotiva SA, the Brazilian firm that specializes in technology to recover stolen cars.
A falling real means that for these foreign acquirers, the deals are relatively cheaper than they would’ve been just a few years ago, when Brazil was one of the world’s most sought after investment destinations. In dollar terms, International Paper’s purchase would’ve been about 45 percent more expensive when the real was at its five-year high on July 26, 2011.
“The strategic investor is looking at the longer term,” Fernando Iunes, head of investment banking at Banco Itau BBA SA, said in an interview. “Brazil is a country with positive fundamentals. It is a country of continental dimensions with a single language and large masses of consumers.”
Itau ranked second in merger advising in Brazil this year through yesterday, data compiled by Bloomberg show. Itau Unibanco Holding SA fell 0.3 percent today in Sao Paulo to 32.23 reais. It has climbed 13 percent this year.
Investors in Brazil-tied exchange traded funds in the U.S. have withdrawn $528 million this year, or about 10 percent of market capitalization, according to data compiled by Bloomberg. By comparison, Mexico-dedicated funds have registered $232 million in inflows, or about 8.7 percent of market value.
The outflows have come as Brazil’s economic growth slowed in the first quarter, hurt by faster inflation and a slower U.S. recovery. Also weighing on investor sentiment is the possibility that President Dilma Rousseff, who has controlled industry prices from electricity to gasoline, will win another term. The Ibovespa fell the most among the world’s biggest stock markets on June 19 after a poll showed Rousseff has maintained her advantage over other candidates.
As with stock investors, the uncertainty is keeping some would-be acquirers away, said Flavio Valadao, head of M&A at No. 1-ranked adviser Santander.
“This year everyone is waiting to see what’s going to happen since this is an election year, with the distraction of the World Cup,” he said in an interview.
Brazil is hosting the World Cup, soccer’s premier international tournament, this month and next. Government spending ahead of the event prompted street protests that sometimes snarled traffic.
Some dealmaking is actually a result of companies’ more recent woes -- characterized by reorganizations and even debt restructurings, in which companies sell assets to pay creditors, said Luiz Muniz, head of Latin America for Rothschild, which is ranked third among M&A advisers so far this year.
Oleo e Gas Participacoes SA, the startup that once made Eike Batista the world’s eighth-richest person, is selling assets as it restructures its liabilities, for example.
The market should expect “less plain vanilla M&A and more company reorganizations, debt restructurings, spinoffs,” Muniz said from the Rothschild office in Sao Paulo.
A pipeline of deals already under way could hold volumes up for the rest of the year. BRF SA has lured interest in its dairy unit from Mexico’s Grupo Lala SAB, and France’s Danone and Groupe Lactalis SA, people with knowledge of the matter said earlier this week.
“The valuations now are at a mid-point, an equilibrium, not too low for sellers and not too pricey for buyers,” said Fernando Meira, who works with Itau’s Iunes as head of M&A. “Brazil was very expensive and it got cheaper.”