BRAZIL: An Introduction to Corporate/M&A: The Elite
A Forecast of Economic Growth
After demonstrating 2.9% growth in 2022, Brazil’s Gross Domestic Product (“GDP) is projected to increase by around 3.3% in 2023, driven by agro and he import and export sector.
Despite higher global interest rates, the Brazilian Real has appreciated slightly this year, attenuating inflationary pressures. Additionally, the Central Bank of Brazil has successfully implemented measures aimed at holding back inflation, which is projected to decline to a rate around 4.65% and 3.87%. In addition, monetary policy remains under control with the current policy rate (SELIC) of 11.75%.
Expected growth for 2024 is 2.3%. This projected increase of the GDP in 2024 is based on the recovery of the industry and services sector, from the perspective of supply, and the increase in domestic demand for such products and services. Both the industrial and services sectors should benefit from improvements in the business environment. Meanwhile, the resolution of uncertainties that arose from the approval of fiscal and tax reforms in Brazil should establish a favorable landscape to attract investments in the country.
M&A: Level of Activity
Looking back at the M&A landscape over the past few years can set expectations for the future, based on current macroeconomic indicators and key domestic factors.
From 2019 to 2021, the volume of M&A transactions increased by 8.98%, while involved amounts increased by 22.83% (CAGR 2019-2021), thus breaking significant records in Brazil, driven by the rise in the current policy rate (SELIC), in parallel with low interest and exchange rates devalued in relation to the dollar. Much of this activity in the M&A landscape resulted from good capital indicators for strategic transactions by entrepreneurs and shareholders, and from a more mature economic market for M&A, with companies quickly seeking new paths in the face of innovations, thus stimulating the business value chain.
Despite the positive results of previous years, 2022 sustained negative impacts due to economic volatility, the war between Russia and Ukraine, high inflation, and political instability resulting from the uncertainty of presidential elections which all reflect the decline in the capital markets activity.
As investors adopted a risk-free approach, seeking lower but steady returns through high official interest rates, the decline in M&A activity was noticed across the board across all industry sectors, from private equity and strategic, to cross-border and local deals.
As a result, the first half of 2023 reflected the negative economic results of the previous year, registering a low volume of M&A transactions.
Despite a brief drop in the transaction values, the soft landing of the new government, with the implementation of beneficial measures (such as the tax reform, growth acceleration program, decrease of interest rates and inflation control), ensured that the M&A market in Brazil remained robust, as reflected in the activity chart below.
Similarly, to past years, certain industries in Brazil continued to lead M&A league tables, such as the sectors of technology, energy, financial services, industrial goods and consumer products and services.
Most notably, however, other sectors maintained a relatively strong pace, stimulated by the recent global commodities boom (oil and gas, food and agriculture, forestry, pulp and paper, mining, among others), or by local demand, such as education and health services.
Finally, infrastructure continued to play an important role with the Brazilian Government stimulating private investments in heavy infrastructure (energy, airports, toll roads, ports, telecommunications, and sanitation), as well as smart city projects (public lighting, public transportation, technology infrastructure).
Prospects, Challenges and Opportunities
In a macro-economic landscape of volatility and uncertainty, Brazil is still one of the few developing and growing economies that have remained stable and offer an investor-friendly environment with regulatory safety that continues to attract foreign direct investment.
The government successfully addressed inflation, much faster than other countries, largely because Brazil is more experienced in navigating inflationary issues. Therefore, inflation declined much quicker than in any G20 countries.
These are favourable conditions for M&A activity in 2024. Towards the end of the first semester of 2023, international parties re-engaged analysis of Brazilian, establishing a strong operations pipeline set to mature within months and conclude in 2024. Finally, there is expectation for the resumption of IPOs given that interest rates are now lower (and expected to be further reduced). This can potentially provide new public companies with funds to be used in new acquisitions.
Additionally, the new government has put forward a much more environmentally friendly agenda, leading, for instance, the energy transition movement, which is expected to continue to stimulate a greater percentage of foreign investment in Brazil.
Among the sectors that should continue to be notable in 2024 are health, financial services, technology, agribusiness, and education. However, after learning from the pitfalls of the liquidity boom in previous years, investors have become more selective of their investments and, as such, investments are not expected to be uniformly distributed across these sectors, but rather to be allocated to companies that demonstrate a competitive edge, distinctive technology, and a comprehensive consumer market.