Brazil M&A Rebounds as Petrobras Divestments Begin in Earnest

  • Improvement in sentiment and more stable currency help deals
  • Petrobras asset sales accounted for about a third of 3Q volume

Dealmaking in Brazil is finally mounting a revival.

Mergers and acquisitions in the country increased 35 percent to $16.6 billion in the third-quarter, compared with the same period last year, led by a spate of energy deals involving state-controlled Petroleo Brasileiro SA.

Even more striking were the $11.1 billion in inbound transactions, according to data compiled by Bloomberg, in which foreign companies bought Brazilian assets. By that measure, activity nearly quadrupled from the year-earlier period, the best showing since the last three months of 2013.

If the recent improvement is to continue, Petrobras needs to deliver on its divestment program. The energy giant, which has been trying to reduce the oil industry’s biggest debt load, accounted for more than a third of total activity with its asset sales in the past three months.

Although the company unveiled the plan more than a year ago, until recently it had executed only a smattering of transactions. It plans to raise another $19.5 billion through divestitures in 2017 and 2018.

“M&A is all about confidence,” said Hans Lin, Bank of America Corp.’s Sao Paulo-based head of Brazil investment banking. “Nobody wants to catch a falling knife. When things stabilize a bit, that’s when people start to make decisions.”

In some ways, the third-quarter was a chronicle of an M&A rebound foretold. The argument for a bounce had been in place for months: Brazilian companies battered by recession and weak commodity prices were desperate to sell assets, made relatively inexpensive for dollar-funded foreigners by the Brazilian real’s collapse.

Still, even as investment firms including Advent International Corp. and Brookfield Asset Management Inc. touted opportunities in Brazil, many would-be acquirers held off, seemingly uncertain about just how much further the currency and economy would fall.

Now, an uptick in sentiment and a leveling off of the real have changed the dynamic, as have the country’s politics. Michel Temer, who formally became president after the impeachment of Dilma Rousseff last month, has convinced many on Wall Street he can end congressional gridlock and muster support for necessary spending cuts.

Brazil is still in a recession, but economists in a central bank survey project the economy will expand 1.3 percent next year.

The real has surged 22 percent in 2016, after weakening last year in its fifth annual drop. The currency’s one-month implied volatility, a gauge of uncertainty, has plummeted to below several regional peers. In 2015, the real was the worst performer among 16 major currencies, with a 33 percent decline.

For a QuickTake on Brazil’s highs and lows, click here.

“The fact that we had a change in government is helping,” said Corrado Varoli, a partner at investment banking boutique G5 Evercore in Sao Paulo.

Brazilian M&A is still a long way from pre-crisis levels. In the five years through 2014, Brazil averaged $24.1 billion in M&A per quarter, or 45 percent more than the third quarter total. The number of deals from July through September -- 94 -- was paltry for a country that used to average 162 per quarter.

Petrobras is doing its part. A group led by Brookfield agreed this month to pay $5.2 billion for 90 percent of Nova Transportadora do Sudeste, one of the state-owned company’s natural-gas distribution networks.

Petrobras also sold a 66 percent operating interest in its BM-S-8 offshore oil license to Statoil ASA for $2.5 billion, although the second of two $1.25 billion payments was conditioned on certain milestones. At the time of the transactions, crude was steady at about $40 a barrel, preserving some recent gains.

“They said we wouldn’t be able to execute on any of it,” Petrobras Chief Financial Officer Ivan Monteiro said in a Sept. 23 interview. He then went on to list deals announced recently and said “there are other processes under way.”

Other highlights from the quarter included State Grid Corp. of China’s acquisition of a $1.8 billion stake in Brazilian power distributor CPFL Energia SA and Kroton Educacional SA’s deal to buy for-profit education competitor Estacio Participacoes SA for about $1.7 billion.

For all the optimism, long forgotten are the days when Brazilian multinationals, flush with a strong currency, roamed the planet making acquisitions of their own. Even for relatively healthy local businesses, the real’s collapse meant their money just didn’t go as far abroad. At home, Brazilian acquirers have remained cautious.

Varoli, the G5 Evercore partner, said that, too, may change when interest rates come back down. The highest central bank benchmark rate since 2006 -- together with a deluge of corporate defaults -- have made credit markets prohibitively expensive for most Brazilian companies.

Nonetheless, companies and private equity firms are actively inquiring about deals, Varoli said, and the pipeline looks a lot more robust than it did a year ago.

Francisco Mussnich, a partner at Barbosa, Mussnich & Aragao, one of Brazil’s top M&A legal firms, said much depends on the new government and whether it can make good on promised spending cuts.

Since September 2015, all three major credit rating companies have cut Brazil’s sovereign rating to junk. Policymakers are trying to restore confidence by pushing ahead with measures to limit expenditures and rein in runaway obligations of the nation’s massive pension system.

“There are some deals that, depending on the speed at which things come together in Brazil, could be ready for the fourth quarter,” Mussnich said by phone. “From a political standpoint, there needs to be a very clear signal that Brazil wants to advance with the reforms.”

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