Brazil guide: Local firms change the balance of M&A
M&A activity is changing character, with the number of cross-border deals falling as Brazilian companies consolidate.
The current volatility in the currency and capital markets has put a temporary brake on Brazilian M&A activity but the transformation of the sector means that growth is certain to resume once the instability passes. Data from Dealogic shows that Brazil-targeted M&A has grown from $11.4 billion in 2005 to $153.5 billion last year. Much of that growth began through cross-border, inward investment but, as Brazilian companies have grown rapidly in line with their domestic economy, an increasingly large part of M&A has been internal consolidation. Of the 20 largest deals in the year to date, 12 of the acquiring companies were Brazilian. Of the eight cross-border deals, five had Asian acquiring companies (three Japanese, two Chinese), with two from Russia and one from Switzerland. Itaú BBA has taken advantage of this local consolidation to jump six places to number one in the rankings in terms of volumes. The Brazilian bank reported deal volume of almost $20 billion so far this year, which equates to a 25.5% market share. Last year Itaú had reported more deals at this stage (39 compared to 29 this year) and so the domestic trend to bigger deals is clear. An example of this is the tie-up between Brazilian pharmacies Droga Raia and Drogasil, which was valued at $1.2 billion.
Goldman Sachs has had a very good year in Brazil, being ranked second in terms of M&A volume, advising on 16 deals worth $15.2 billion or a 19.5% market share. Last year the US bank was ranked 18th, advising 12 deals worth $7.7 billion or a 4.7% market share. Goldman Sachs’s notable deals include advising HRT on Anglo-Russian TNK-BP’s recent acquisition of a 45% stake of its oil exploration concession in the Solimoes basin. The deal is an example of the continuing importance of the oil and gas sector in Brazilian M&A, with TNK-BP paying HRT $1 billion over two years plus an additional $0.73 for every barrel of proven and probable reserves above the level of 500 million barrels that has been estimated for the project. This could generate an extra $5 billion for HRT. Also, HRT has agreed to give TNK-BP an option to buy a further 10% of HRT’s concession rights at a future date.
Bank of America Merrill Lynch is also enjoying a strong 2011, with a third place ranking on the back of an 18.3% market share (13 deals valued at $14.3 billion), up five league table places from eight last year when it recorded a 12.3% market share (11 deals worth $20.1 billion). In a falling market, recording consistent results from the previous year is enough to climb the league table. The notable loser in this year’s table is Credit Suisse, which falls three places to sixth, with 20 deals worth $11.9 billion this year (a market share of 15.3%) compared to last year when the bank advised on 26 deals worth a combined $34.8 million (or 20.7% market share).
Cross-border M&A gives the international banks a theoretical edge over their domestic deals and can offer lucrative fees. If the bank can identify the target and take the proposal directly to a potential acquirer the deal is usually not open to a competitive tender process and therefore the margins are higher. In Brazil, where fees for both debt and equity capital markets are becoming tighter, private dealmaking is a highly desirable activity.
The oil and gas industries dominate this type of cross-border deal. However, there are notable examples in other industries. One was Japanese brewer Kirin Holdings’s acquisition of Nova Schin beer. Citigroup advised Kirin, sourcing the availability of the target through its Brazilian business and taking it to Kirin. "The team was ecstatic because this is an example of the kind of deal I want to be doing and that showcases our global connectivity," Eduardo Cruz told Euromoney as the deal closed. "We found out that Nova Schin was for sale; we thought it would fit with a Japanese brewer and Kirin in particular so we took it to them." Citi also advised the consortium of 10 sovereign wealth funds and families that bought 10% of BTG Pactual.
Outward M&A is also picking up and with the appreciation of the real (its recent falls notwithstanding). Bankers believe that the coming years will see Brazilian corporates looking to establish themselves as regional players. M&A bankers predict the acquisition of companies around the region will add a new level of growth to a sector that is already almost unrecognisable from seven years ago.