Overview of the M&A market in Brazil and trends for 2014

May 2014 | PROFESSIONAL INSIGHT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

Despite Brazil’s economic slowdown, M&A activity continued at a reasonable pace in 2013. The number of mergers and acquisitions remained high, in line with activity over the past three years. According to a report from PwC, 811 transactions were announced during the year, which represented an increase of 5.2 percent in comparison with 2012, when there were 771 transactions.

Analysts believe the Brazilian M&A market was negatively affected in 2013 by expectations of slow economic growth and by greater investor caution due to political and economic uncertainties. However, the number of transactions remained steady during the year due to the favourable outlook for growth on the domestic market which was supported by a low unemployment rate and increasing income among the less-privileged parts of the population. Additionally, from a global perspective, emerging market countries such as Brazil remained attractive to investors because of the continuing effects of the economic crisis in Europe and the slow economic recovery in the US.

Data released by PwC indicates the predominant participation of Brazilian investors in M&A transactions: 56 percent of equity interest acquisitions in Brazil last year were conducted by Brazilian investors (410 transactions), while foreign investors were responsible for 44 percent of the transactions announced (323 transactions). The total share of announced transactions by private equity funds was 47 percent (380 transactions) over the same period.

Most transactions involved the acquisition of a majority interest in the target company, with 54.6 percent of transactions being of this type (443 transactions). The acquisition of a minority interest, which was the second-most common type, was responsible for 35.7 percent of transactions. Joint ventures trailed far behind, with just 4.2 percent of transactions.

The most important sectors for M&A transactions in Brazil were services (education, consulting, marketing and advertising, management and general advising), IT and internet, retail (food and beverage), energy (including oil and gas), transportation and logistics, construction and real estate, and finance.

Data from 2013 shows broad diversity in the origin of foreign investors who acquired Brazilian assets or companies. According to a survey by KPMG, the US continues to be the most important country of origin for investors interested in M&A transactions in Brazil – US investors participated in approximately 35 percent of cross-border transactions. European countries such as France (7.2 percent), Spain (5.8 percent), Germany (5.8 percent) and the United Kingdom (5.8 percent) also had significant participation rates in total cross-border transactions. Additionally, foreign investors from a broad range of countries, including Japan, Australia, Canada, Holland, Switzerland, Argentina, Mexico, India, Italy, China and Singapore, have sought Brazilian assets or companies.

2013 regulatory developments

Three regulatory topics related to M&A transactions were particularly important in 2013.

The first was the enactment of Law 12,846 (the Anticorruption Act) in August 2013. This law makes legal entities (such as companies, regardless of their corporate or legal form) administratively and civilly liable for acts committed against Brazilian or foreign governments and makes it possible to punish companies for corrupt practices.

The Anticorruption Act establishes strict liability (responsabilidade objetiva) for companies. This means that the law requires only that it be proven that the harmful act was caused by any of the company’s agents or employees with the intention of benefiting from such entity, without the need to prove that the company’s management or shareholders had actual knowledge or approved the act. The law also introduces harsh punishments to discourage corrupt practices and certain harmful acts in the context of public bids and government contracts. These include fines of up to 20 percent of the company’s gross revenue or R$60m when gross revenue cannot be calculated, restitution of benefits received, seizure of assets, suspension or partial interdiction of the company’s activities and can even include its compulsory dissolution.

The Anticorruption Act provides that companies that establish and effectively apply compliance mechanisms and procedures, including codes of ethics and conduct and internal auditing, might be subject to lighter punishments in case of acts of corruption practiced by their employees or agents.

Another event that deserves to be mentioned is the formal operating start in August 2013 of the merger and acquisitions committee – Comitê de Aquisições e Fusões (CAF) – which is largely inspired by the British Takeover Panel. The CAF is a private, self-regulation body with voluntary membership. Its purpose is to apply the Merger and Acquisition Self-regulation Code, which establishes rules in addition to those provided for by law and the rules of the Securities Commission – Comissão de Valores Mobiliários (CVM) – to fill in any gaps that might exist in the regulation of tender offers and corporate restructuring transactions involving publicly-traded companies.

Finally, although many analysts had worried that changes to antitrust laws would negatively affect the M&A market, this did not happen.

Brazil changed the way it oversees business combinations in 2012. When Law 12,529 went into effect in May 2012, it became mandatory to submit business combinations for analysis by Brazilian antitrust authorities – the Conselho Administrativo de Defesa Econômica (CADE) – before the transaction is carried out. Previously, the transaction could be submitted after the binding document was signed. Under the new law, business combinations cannot be consummated before they are approved by CADE or they will be void and subject to a fine. The maximum period the new law allows CADE to analyse a transaction is 330 days, with simpler cases being decided within 30 days.

The new CADE has proved itself rapid and efficient in analysing transactions under the new rules in 2012 and 2013 – transactions were approved much more quickly than companies had expected.

Trends for 2014

The Brazilian M&A market is expected to remain active in 2014. The emerging middle class, propelled by increased income in recent years and the availability of credit, should continue to consume various products and services. Additionally, government incentives for infrastructure projects and projects related to the 2014 World Cup and 2016 Olympics should continue to positively affect the Brazilian economy.

Another factor to note is that, with the weakening of the Brazilian currency (the Real), prices for Brazilian assets and companies tend to become more attractive to foreign investors.

However, uncertainties related to general elections that are scheduled for the middle of the second half of the year, together with a forecast for modest economic growth (GDP growth of around 2 percent), could dampen investor enthusiasm.

Finally, it is worth mentioning that economic advisers predict that hot industries for both Brazilian and foreign M&A investors in 2014 will be the consumer sector, general services, IT and internet, healthcare, education and infrastructure (energy and transportation).

André de Godoy Fernandes is a partner at Barretto Ferreira e Brancher – Sociedade de Advogados. He can be contacted on + 55 11 96338 3411 or by email: fernandes@bkbg.com.br.

André de Godoy Fernandes

Barretto Ferreira e Brancher