Brazilian MA Outlook

8/4/2019 Brazilian MA Outlook

1/20

BrazaM&A

Oook


2/20

Contents

Foreword 3

Methodology 3

M&A Market Outlook 4

Financing 7

Brazil on the Global Stage 9

Economic Indicators 12

About Merrill Corporation 16

About mergermarket 19


3/20

PAG

3

www.mergermarket.com

Mrrll Datast plad t prt th Brazla M&A outlk, publhd acat thmrgrmarkt. Bad a r trv th vr 150 crprat xcutv, prvat qutypracttr, lgal advr ad acal advr th rct M&A xprc Brazl, th rprtprvd cr-brdr, dutry ad cmc xpctat r th xt 12 mth.

In recent years, Brazils economy has soared as its GDP, overall employmentand middle class population hit record levels. As its markets mature, M&Aactivity has steadily increased, and results from this survey indicateno signs of cooling down.

In 2010, Brazil saw increases of 37% in deal volume and over 50% in deal valuecompared to the previous year. Majorities of 81% and 63% of respondentsexpect the increases in volume and value, respectively, to continue. Additionally,Brazils role in the global market is set to expand as 62% of respondents believecross-border M&A transactions involving Brazilian buyers will increase.

Respondents agree that foreign investment will be the primary driver behindthe uptick in M&A. Industry consolidation follows closely behind, whichhighlights the race for Brazilian territory heating up. Indeed, large multinationalcompanies are looking to capitalize on Brazils fast-paced growth38% ofrespondents expect to earn greater than 15% returns on investment in Brazilwhich is fueling the smaller domestic firms to consolidate in order to compete.

The infrastructure sector will see the most significant growth, accordingto 48% of respondents. Demand has grown rapidly for major infrastructureprojects, which are essential in supporting the regions urbanization as well

as the large influx of tourism the 2016 Olympics and 2014 World Cup willattract. Brazils strength in oil, gas and ethanol, especially behind state-owned Petrobras and its new oil discoveries, will maintain solid growth forthe energy sector, ranked second by 35% of respondents

Brazils quick rise to economic prominence has caused speculators to worrof a looming bust. While the majority remains optimistic, a few respondentsexpress some concerns. Many insist that inflation and currency valuation,two primary issues surrounding the country, will not improve. Fifteen perceof respondents go on to say that Brazilian credit markets will worsen over tnext 12 months.

Respondents emphasize that these concerns will not curb global M&A activinvolving Brazil. Over the next 12 months, deal flow is set to increase acrossthe board in every category measured. In the following pages, respondentsshow where they are most optimistic and in which regions they expect tobe most involved. They also share their expectations regarding economicindicators and potential regulatory changes. We hope you find this reportvaluable and informative, and as always, we welcome your feedback.

ForeworD

MetHoDoLoGYDuring the second quarter of 2011, Merrill DataSite commissionedmergermarket to interview over 150 corporate executives, private equitypractitioners, financial advisors and legal advisors with recent M&Aexperience in Brazil to gain insight into their expectations, current trendsand primary drivers in the region for the next 12 months. All responseswere anonymous and are presented in aggregate.


4/20

PAGE M&A Market Outlook

4


M&A MArket outLook

ovr th xt 12 mth, hat d yu xpct ll

happ t th vlum Brazla M&A dalf?

ovr th xt 12 mth, hat d yu xpct

ll happ th M&A dal valu Brazl?

4%

81%

15%

An 81% majority of respondents expect M&A volume to increase in Brazilover the next 12 months, which would continue the strong upward trendthe country has experienced in recent years. The number of deals involvingBrazilian targets has already increased by 37% in 2010 over the previous year,according to mergermarket data. Respondents note several reasons for this

apparent optimism including private equitys interest and growing presencein the country, improving economic conditions, and Brazilian acquirersincreased activity, both domestically and internationally.

A handful of respondents are more cautious and believe the Brazilian marketnearly reached its peak. One respondent sums up this groups hesitance:Though the situation is improving and the interest in Brazil for M&A ishigh, looking at international conditions and last years volume, I predictthe volumes would remain the same for this year.

IncreaseStay the sameDecrease

7%

63%

30%

Total deal values in 2010 saw an increase of over 50%, with average valueup 11% over the previous year, according to mergermarket data. Coincidingexpectations for deal volume, the majority of respondents (63%) predictthis trend to continue going into 2012. Echoing sentiment regarding dealvolume, respondents feel the economy and the M&A deal market are

booming. A few respondents mention that concerns surrounding inflationhave been alleviated: Deals will continue to flow in companies of all sizesand in different sectors. A lot of IPOs and private equity buyouts will be seenpreparing companies for growth.



5/20

PAG

5


4%

38%

35%

23%

what th t rtur yu xpct t ar thrugh

xtg yur vtmt Brazl?

The overall positive outlook extends to respondents expectations of returnson investments as the largest proportion (38%) look to earn over 15% whenexiting Brazilian companies. Thirty-five percent of respondents are slightlymore modest with 10% to 15%. One respondent explains: It depends on thesector, but the basic rate is 12% annually and nothing below that amount is

good. For private equity funds, especially, the net return is usually between20% and 50%. Another respondent similarly boasts of his firms own portfoliocompanies growing at greater than 35% annually.

With the highest interest rates of any major economy and increased taxeson foreign lending the cost of capital in Brazil is reaching record highs. Butinvestment in the country is not expected to slow. Brazil has become a veryattractive play, especially for the cash-rich private equity firms with drypowder held onto through the recession.

whch ctr ll th gratt lvl M&A

grth vr th xt 12 mth?

0%

10%

20%

30%

40%

50%

60%

Other

Industrials

Financialservices

Pharma,biotechnology

andhealthcare

Technology/

media/telecom

Realestate

Agri-business

Consumer

Construction

Energy

Infrastructure

48.1%

35.1%

31.2%

26.6%

23.4%

20.1%18.8% 18.8%

13.6% 13.0%

5.2

The addition of large projects in the 2016 Olympics and 2014 FIFA WorldCup to the countrys rapid urbanization led many respondents to predictthe infrastructure sector leading M&A growth over the next year. The quicklygrowing middle-class is also strengthening demand for airports, highwaysand other infrastructure facilities faster than they are being built.

The energy sector remains near the top with 35.1% of respondents expectinsignificant levels of M&A growth over the next 12 months. Partnerships witstate-owned Petrobras are primary goals of global oil firms, which are onlypermitted to those operating in Brazil for at least one year, creating a highlycompetitive market for existing companies in the Brazilian energy sector.

Greater than 15%10% to 15%

5% to 10%Less than 5%

Percentage

ofrespondents


6/20

PAGE M&A Market Outlook

6


whch ctr ll grat th hght valu

prmum vr th xt 12 mth?

Illustrating the strength of the overall economy, respondents are split overwhich sector will generate the highest premiums. The energy sector edges outthe others with 16% of respondents. Indeed, many of the largest transactionsin Brazil are within the energy sector, such as Sinopecs US$7.1bn deal withRepsol Brazil late last year. The previously mentioned requirements to work

with Petrobras have also placed a premium on energy firms.

The growing middle class appears to have contributed to increased demandfor other sectors. While energy is typically dominant in Brazil, sectors likeconstruction, consumer and real estate have closed the gap for premium deals.

16%

15%

14%

12%

10%

10%

7%

6%

5%

5%

what ll b th prmary drvr M&A Brazl

vr th xt 12 mth?

M&A growth in Brazil will be driven by foreign investors according torespondents. Outside investors are already in competition for oil companies,and the previously mentioned high returns have put Brazil at the top ofattractive emerging markets. One respondent comments on the relativelynew security investors have found in Brazil: With the balanced economy, the

financial situation is fantastic for foreign companies to invest in. Since 201six of the top 10 deals have included a foreign bidder.

Many respondents believe industry consolidation will also be a primary drivWith a large number of Brazilian companies being family-owned, respondentsee the next step will be to consolidate in order to compete with the bigmultinational firms. One respondent explains: The Brazilian market includeless-sophisticated players, but as the demand grows, more experiencedplayers will be attracted and industry consolidation will be a key factor forsmall businesses to compete.

0%

10%

20%

30%

40%

50%

60%

DistressedM&A

Other

Government

initiatives

Industry

consolidation

Foreign

investment

53.2%

46.1%

20.8%

6.5%

1.9%

EnergyConstructionInfrastructureConsumerReal estatePharma, biotechnologyand healthcare

Technology/media/telecomAgri-businessFinancial servicesIndustrials

Percentage

ofrespondents


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PAG

7


FinAnCinG

what ll happ t th crdt markt Brazl

vr th xt 12 mth?

H d yu xpct Brazla acqurr t ac

M&A actvty 2011?

Nearly half of respondents predict credit markets will improve in the comingyear. Brazils efforts to curb consumer lending is freeing up credit for acquirers,respondents say. Other respondents point to competition from foreign lendersas a driver for improved credit markets.

For the remaining half of respondents, the credit markets in Brazil havereached a peak. Inflation concerns are strong, which will likely be addressedthrough limiting credit expansion, according to respondents. Further, all ofthe 15% of respondents who say credit will worsen over the next 12 monthsmake references to inflation.

IPOs in Brazil highlight an interesting split among respondents. While it is ttop financing vehicle according to just under half of respondents, the remainihalf often mention a weak IPO market as their reason for selecting other,non-IPO options. One respondent offers a sector-specific view: Industrialsand construction have a strong capability to finance through IPOs.

Among the respondents bullish on IPOs, conflicting rationales exist. Accessto credit is becoming poor enough to make a public offering more attractiveA booming economy and improving market conditions over last year alsopoint to IPO optimism, according to other IPO proponents.

47%

38%

15%

0%

10%

20%

30%

40%

50%

60%

Other

Asset-based

Bankdebt

Newequity

IPO

49.4% 48.7%

26.0%

12.3%

7.8%

ImproveStay the sameWorsen

Percentage

ofrespondents


8/20

PAGE Financing

8


whch xt typ d yu xpct ll b mt cmmly

ud r vtmt Brazl vr th xt 12 mth?

On the sell-side IPOs are not quite as popular, gaining only 39% of therespondent pool. A larger 45% of respondents believe selling to a strategicbuyer will be a more common exit type. The consensus among those favoringstrategic sales say the method will likely be more profitable, and onerespondent comments that it is not typical for IPOs to be used as an exit

strategy in Brazil. Regulation and the complexity of a Brazilian IPO appear tomake a strategic sale more desirable.

Of the 12 exits of Brazilian portfolio companies since 2010, eight have sold tostrategic bidders while the remaining four went to private equity, according tomergermarket data. (Note: This does not include IPOs).

45%

39%

16%

what d yu xpct ll happ t th Brazla iPo

markt vr th xt 12 mth?

The majority of respondents predict IPOs will hit their targets consideringthe overall growth of the Brazilian economy and the increasing level of foreiginvestment. Supporters say the IPO market is improving, and one mentionsThe foreign investors that come to Brazil are eager to invest in Braziliancompanies through IPOs.

On the other hand, close to a quarter of respondents predict IPOs will fallshort of their targets. These respondents expect that the large number ofcompanies preparing to go public will dilute the market. Also, investorsare still hesitant in the wake of the recent crash, and several less thanspectacular IPOs in 2010.

59%

24%

17%

Sale to strategic buyerIPOSecondary buyout

IPOs will hit their targetsIPOs will fall short of theirtargets

IPOs will surpass theirtargets


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PAG

9


BrAziL on tHe GLoBAL stAGe

what d yu xpct ll happ t th lvl

utbud cr-brdr M&A rm Brazla bddr?


bud cr-brdr M&A rm -Brazla

bddr?

After the fast-paced consolidation and growth that many Brazilian companieshave experienced in recent years, Brazil is poised to be a major cross-borderacquirer. According to mergermarket data, cross-border transactions in 2010with a Brazilian bidder increased in volume by 40% over the previous year.Respondents show an overall optimism, with a majority of 62% expecting

more deals to continue the upward trend.

Current economic conditions have provided large companies in Brazil with afavorable leveraging position as well. One respondent explains: The Braziliancurrency is overvalued, and activity in the Brazilian market is very strongwhile the economy is very weak in other areas around the world. The result,as another respondent says, is excellent for us at the moment.

Despite external concerns of inflation, the value of the real and an overheatinmarket, a large majority of respondents (70%) predict that foreign investors wcontinue to flock to Brazil. The charge is likely to be led by the energy sectowhere foreign investors have accounted for six of the 15 deals in 2011 throuJune 15, according to mergermarket data. Brazil continues to offer some of

the best opportunities on the global stage.

62%

36%

2%

70%

27%

3%

IncreaseRemain the sameDecrease

IncreaseRemain the sameDecrease


10/20

PAGE Brazil on the Global Stage

10


whch cutr/rg d yu xpct ll b

th mt acqutv Brazl?

China, the worlds other major emerging market, is expected to be mostacquisitive in Brazil, say 64.3% of respondents. In a similar situation to Brazil,Chinas growing middle class has fueled many resource-driven acquisitions.One respondent explains Chinas interest in Brazil: They already have manydeals here [in Brazil], and they have such high technical education added to

the low opportunity cost. Many others comment that China has been veryaggressive and has not shown any signs of slowing down.

Not to be ignored are the 32.5% of respondents who expect to see a lot ofactivity coming from Europe. Providing insight into personal experience ofdealing with Europe, one corporate executive in Brazil explains: Europeancompanies have taken a traditionally more long-term approach, which iswhy Brazilian companies have been attractive to them historically. The UShas been shyer because they have a comparatively short-term approach. Inaddition to that, US companies are still very crippled at the moment becauseof the crisis aftershock. Telefonica, the Spanish telecommunications giant,provided a prime example when they acquired a 50% stake in Brasilcel forUS$9.8bn, the largest Brazilian deal of last year.

i hch cutr/rg d yu xpct Brazla

bddr ll b mt acqutv?

Respondents anticipate Brazilian companies to expand their reach intothe rest of Latin America, and into the worlds biggest economies in NorthAmerica and China. As Chinas currency remains relatively low and the dollhaving seen better days, Brazilian companies will be in a good position to utheir appreciated real to acquire assets in both the developed and emergin

markets. Commodities will attract many Brazilians to China and Brazilianbanks are eager to enter the financial markets in the US, respondents adde

The results on Europe have flipped when the question turned to outboundM&A. While France, Germany the Netherlands and other countries in Europewill look to Brazil for acquisitions, the reverse is far less likely. Due to theEurozone crises, explains a Brazilian corporate executive, Europe does notoffer much to us.

0%

10%

20%

30%

40%

50%

60%

70%

Japan

OtherAsia-Pacific

LatinAmerica

excludingBrazil

Europe

NorthAmerica

China

64.3%

39.0%

32.5%

14.3%

11.0%

6.5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Japan

OtherAsia-Pacific

Europe

China

NorthAmerica

LatinAmerica

excludingBrazil

42.8%

37.5%

34.9%

15.8%

9.2%

2.0%

Percentage

ofrespondents

Percentage

ofrespondents


11/20

PAG

11


D yu xpct vtmt rtur Brazl t b gratr

tha hat typcally ud dvlpd markt?

D yu xpct vtmt rtur Brazl t b grat

tha hat typcally ud thr mrgg markt

With 74% of respondents agreeing that Brazilian companies will providegreater returns than earned in the developed world, many investors havelooked passed the once-perceived high risk associated with the region.Considering historically high interest rates, investors not only expect greaterreturns but also for those returns to continue to increase. A Brazil-based

financial advisor sums up his feelings: And next year will be even better.

While Brazil is expected to far exceed developed markets returns, thecountrys relative prominence is slightly tapered in comparison to otheremerging markets. The emerging markets conversation revolves around twoother booming economies in India and China. In the light of Chinas recentplacement as the worlds second largest economy and its numerous large-

scale acquisitions around the world, the 47% of respondents who expectinvestments in Brazil to exceed these markets speaks volumes about Brazilsplace in the global economy.

74%

21%

5%

47%

42%

11%

YesAbout the sameNo

YesAbout the sameNo


12/20

PAGE Economic Indicators

12


eConoMiC inDiCAtors

what d yu xpct ll happ t th lvl fat

Brazl vr th xt 12 mth?

Inflation in Brazil has been a concern for anyone, both domestic or foreign,with a stake in the country. Many analysts are speculating wildly, althoughonly 9% of respondents expect a significant increase. Among the 62%of respondents expecting inflation to increase moderately, the commonrationale is that inflation will occur but cannot go much higher.

A significant proportion of respondents maintain that Brazils policy measuresand economic conditions are doing well to keep inflation under control. ACFO from Brazil, who predicts a moderate decrease, provides his analysis:Todays inflation is benign - it is due to the fact that the economy is growingso quickly that offer cant keep up with demand. That said, both the IPCA andthe IGP-M [two price indices, similar to CPI and a measure for price variation,respectively] have been falling slowly but steadily over the first half of 2011.


vrall mplymt Brazl?

The majority of respondents (58%) believe employment will increase overthe next year, consistent with the overall positive forecast for Brazil. WhileM&A transactions do not always translate to increased employment, theopportunities in Brazil that revolve around growth are plentiful. Specialmegaprojects linked to the 2016 Olympics and 2014 FIFA World Cup, along

with the supporting infrastructure, will help. All of the industries aregrowing, especially construction, infrastructure, energy and retail, whichrequire a lot of manpower, a law firm partner in Brazil explains. The highincrease in manpower will increase employment across Brazil in all sectors

Some respondents are hesitant and express concern as the employmentlevel reaches or surpasses the structural level as the unemployment rate hfallen to a reported 6.4% (April 2011) after reaching nine percent during therecession years. To keep up growth and avoid heavy fluctuations, Brazil willhave to ensure the focus is on educating a skilled workforce. A Brazil-basefinancial advisor adds: Education will play a part, and is an objective of maplayers. Workers will certainly need training.

62%

16%

1%

12%9%

58%

37%

5%

Significantly increaseModerately increaseRemain the same

Significantly decreaseModerately decrease



13/20

PAG

13


what d yu xpct ll happ t th valu

th ral vr th xt 12 mth?

what d yu xpct ll happ t trt rat

Brazl vr th xt 12 mth?

Efforts by the Brazilian Central Bank to control inflation and capital marketshave brought in substantial levels of foreign capital. The result has beenan overvalued real, and respondents are unsure about which direction thecurrency will go.

The 40% of respondents who feel the real will retain its current value oftencomment that the real simply cannot go much higher; others trust that thegovernment has the situation under control. Respondents expecting a moderateappreciation blame the influx of foreign investment and a weak dollar.

Interest rates in Brazil have been on the rise, and a 60% majority expectsthe trend to continue. Rate hikes have been put into place to counter inflationrisk, and consequently have attracted more foreign capital despite taxmeasures to deter outside lenders. As a result, a few respondents feel thecentral bank cannot raise interest rates any higher or may need to lower

them. The consensus among all respondents, however, is that controllinginflation is essential.

37%

40%

17%

5%1%

60%

12%

24%

4%

Significantly appreciateModerately appreciateRemain the same

Moderately depreciateSignificantly depreciate

Significantly increaseModerately increaseRemain the same

Moderately decreaseSignificantly decrease


14/20

PAGE Economic Indicators

14


40%

28%

13%

4%

15%

whch pttal plcy chag Brazl ll mpact

yur M&A traact th rg th mt?

Together, record growth in emerging markets and financial instability in thedeveloped world have created an interesting point in the global economywhere speculators are running wild through multiple scenarios. RegardingM&A transactions, 40% of respondents feel hikes in the Brazilian interest ratewill change the way they do business most.

Policy outside of Brazil, the primary concern for 28% of respondents, willhighlight how dependent the country is on foreign investment. One respondentmentions his concern with the ending of the Feds quantitative easing programand the possible reduction in liquidity causing capital inflow from the US to slow.

Interest rate hikesPolicy outside of BrazilContractionary monetarypolicy

OtherReserve requirementincrease


15/20

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Fepe chaRegional Director, Brazil

+55 11 3568 2429

W BrowRegional Director, CanadaTel: +1 514 877 5177

Hak greorySVP, Western Canada & USTel: + 604 603 4360

Rya MaMaRegional Director, CanadaTel: +1 416 214 2448

Mhae KeedyRegional Director, BostonTel: +1 207 829 4369

Ro WhakerRegional Director, New EnglandTel: +1 617 266 0189

Forre R. DoaeRegional Director, New YorkTel: +1 917 934 7341

Adam KrzkyRegional Director, New YorkTel: +1 917 934 7340

shee MarRegional Director, New York

Tel: +1 212 229 6613

Joh MEroeRegional Director, New YorkTel: +1 212 229 6656

Mahew MezzaeoRegional Director, New YorkTel: +1 917 934 7346

see PoeVice President, New YorkTel: +1 212 229 6883

Wam PoeeRegional Director, New YorkTel: +1 212 229 6612

Pa KekafRegional Director, SoutheastTel: +1 404 602 3251

so HaeRegional Director, MinnesotaTel: +1 651 632 4375

Ahoy crobyRegional Director, ChicagoTel: +1 312 674 6511

Mark PaehRegional Director, ChicagoTel: +1 312 674 6527

Key WeefeRegional Director, ChicagoTel: +1 312 674 6508

Bra gbreahRegional Director, OmahaTel: +1 404 934 8085

nhoa ReerRegional Director, DallasTel: +1 214 754 2100

Mark tyRegional Director, San Francisco

Tel: +1 415 357 1400

Adrew BooroRegional Director, Palo AltoTel: +1 650 493 1400

Erk sadeRegional Director, Palo AltoTel: +1 650 493 1400

Da PheaRegional Director, Los AngelesTel: +1 213 253 2139

Jay loyoaRegional Director, IrvineTel: +1 949 622 0663

Dad YearyVice President, DataSite LifeSciences+1 415 307 4414

Jame sazaDirector, Life Sciences+1 651 632 4585

MerriLL DAtAsite ContACts


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ABout MerGerMArket

mergermarket is an unparalleled, independent mergers & acquisitions(M&A) proprietary intelligence tool. Unlike any other service of its kind.mergermarket provides a complete overview of the M&A market by offeringboth a forward-looking intelligence database and a historical deals database,achieving real revenues for mergermarket clients.

For more information please contact:

Erik WickmanManaging Director, RemarkThe Mergermarket Group

Tel: +1 212 686 3329Email: [email protected]

Remark, the events and publications arm of The Mergermarket Group,offers a range of publishing, research and events services that enable clientsto enhance their own profile, and to develop new business opportunities withtheir target audience.


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This publication contains general information and is not intended to be comprehensive nor to provide financial, investment,legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services,and it should not be acted on or relied upon or used as a basis for any investment or other decision or action that may affectyou or your business. Before taking any such decision, you should consult a suitability qualified professional adviser. Whilstreasonable effort has been made to ensure the accuracy of the information contained in this publication, this cannot beguaranteed and neither mergermarket nor any of its subsidiaries or any affiliate thereof or other related entity shall haveany liability to any person or entity which relies on the information contained in this publication, including incidental orconsequential damages arising from errors or omissions. Any such reliance is solely at the users risk.

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Brazilian MA Outlook

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Transcript of Brazilian MA Outlook