M&A: Brazil’s new hurdle
New regulation of M&A in Brazil will add uncertainty to an already weakening merger market.
The Brazilian government has always said it is in favour of capital inflows from abroad. It has just wanted what it regarded as the right kind. Rather than speculative money flows, attracted to the yield offered by what is still the world’s highest real interest rate, which it believes brings an appreciated currency and adds steam to overheating areas of the economy, it has always welcomed foreign direct investment. In general terms, Brasilia views FDI as a stable, long-term investment that brings jobs and growth.
Recent economic slowdown (globally and locally), a falling Selic (the central bank’s overnight rate) and a lower exchange rate have removed the heat from the debate about speculative flows. And FDI has been relatively consistent, although a large source of FDI – M&A – is falling. M&A was $21.9 billion in the first quarter of 2012, down 14% on the same period in 2011, according to data from Dealogic. Meanwhile inbound cross-border M&A fell dramatically: down 46%.
Bankers say that the pipeline is strong but the hit-rate is low because of valuations volatility. Bovespa’s strong start to the year had owners expecting strong valuations. The recent sell-off has buyers expecting lower multiples. Volatility creates seesawing expectations between the two sides and securing agreement has been tough.
However, a new threat has appeared. On May 29, new competition legislation came into force that ushers in a new antitrust regime. The key change is that in future deals including companies with operations in Brazil (one party must have Brazilian revenues of more than R$400 million – $202 million – and the other more than R$30 million) must get approval from the authorities before closing M&A. Previously deals could close and then would be subject to regulatory clearance only in special circumstances.
The previous three regulatory authorities are also being merged into one new body called the Conselho Administrativo de Defesa Econômica (CADE). The new body will have up to 240 days to make a decision, and this can be extended in various circumstances. There will also be no automatic clearance should the time period expire without a decision from CADE.
The new rules will not affect FDI for companies entering Brazil for the first time but will affect those already operating in the country, even on a modest scale.
The worry for M&A bankers in Brazil, already operating in a tough environment, must also be that with cross-border volumes falling, local consolidation-driven M&A will stall under this new regulatory system.
The new rules are also coming into force when protectionism is becoming an increasing concern. Karel De Gucht, the EU trade commissioner, openly linked Argentina’s expropriation of 51% of YPF from Spanish oil company Repsol as part of what he sees as "a growing tendency towards protectionism", also citing the decision of the Bolivian government to nationalize a Spanish-owned electric utility.