BRAZIL: An Introduction to Corporate/M&A
Brazilian Macroeconomics Outlook
Brazilian GDP for 2024 is has maintained a general upward trend, being forecast to grow at 3% by the Central Bank of Brazil. The Central Bank has succeeded in controlling inflation with a current projected rate of 3.98% for the IGP-M (Brazil’s wholesale price index). The SELIC rate (the Bank’s policy rate) is currently projected at 11.75% for 2024, and it is projected to decrease to 10.75% in 2025, 9.50% in 2026 and 9% in 2027. These projected falling rates could be a great incentive to M&A activity. Foreign investors can also currently take advantage of the relatively weak Brazilian real, which could lead to discounted prices are being factored in the equation. Further to this, reform of Brazilian tax policy and its implementation is a matter of time and is expected to bring along a more business-friendly environment.
Brazil’s M&A Scene
Macroeconomics might suggest a stronger comeback for M&A activity projected for 2025, with Brazil’s 2024 M&A activity generally down in terms of aggregate value (approximately 12%) and number of transactions (approximately 25%) when compared to the same period in 2023 (TTR M&A Report – August 2024). Currently high interest rates attract risk-averse investors to Brazilian treasury bonds, reportedly helping to slow down M&A activity.
Despite this, a granular review of the available data, available at TTR Data and Fusões e Aquisições, shows several interesting features. Subsectors bouncing back include energy, real estate, oil and gas, technology and the internet. Foreign acquisition is up by circa 9% YTD compared with 2023. Deals involving amounts greater than BRL500 million (approximately USD90 million) increased 32.9% in number YTD compared with same period in 2023. Private equity investment in i) banking and investment and ii) distribution and retail is up 100% relative to the same period in 2023. Venture capital investment in healthcare information and technology systems is up 20% YTD compared with same period in 2023. Asset acquisitions in renewable energy are up 133% YTD compared to same period in 2023, and up 17% in oil and gas. Additional subsectors at the top of league tables with the most deals are food and beverages, other financial services, and infrastructure. Domestic players account for 67% of the deals, followed by 20% of inbound acquisitions. Both strategic and financial investors are doing fewer deals but with higher amounts involved, and with less participation from foreign investors.
The projected decrease in the SELIC rate means there are a number of Brazilian companies getting prepared for IPOs, so that 2025/2026 seem rather promising following the drought in 2024 YTD. IPOs always serve as an important source of funding for M&A activity and as a driver of market consolidation. Moreover, the aggregate value of follow-ons may reach similar levels to 2023, eventually.
The Way Forward: Opportunities and Challenges
The Brazilian economy is showing positive signs despite restrictive monetary policy, with recovering business investment and a tighter labour market. Domestic demand continues to be strong while inflation is under control, although fiscal dominance remains a concern. Political stability (no near-term Presidential elections) along with clear government policies and a strong rule of law puts Brazil in a privileged position.
Projected cuts to the SELIC rate for 2025, 2026 and 2027 are expected to direct more liquidity to the economy and increase M&A funding via debt, thus optimising value creation for deal makers. Corporations and strategic investors will need to resort to inorganic growth through M&A given the current macroeconomic scenario, as organic revenue growth is typically insufficient in such circumstances.
Valuation gaps between buyers and sellers are still significant in some sectors and can even derail the entire process, with creative arrangements for contingent pricing playing an important role.
Brazil also presents great opportunities for both financial and strategic investors in restructuring and distressed M&A (eg, debtor-in-possession financing and acquisition with no succession liabilities), not only because high interest rates drive debt reprofiling but also thanks to improvements in restructuring and bankruptcy laws and an evolving legal practice in the sector.
Federal public bodies and regulatory agencies have generally either undergone or are in the process of becoming digital, improving the quality of services and in some cases reducing timeframes materially for reviewing and approving transactions requiring authorisation. Merger control performed by the Administrative Council for Economic Defence (CADE) has consistently been completed within shorter timeframes in fast-track procedures.
Moreover, touching on a related subject in doing deals, arbitration is widely used to settle disputes within M&A deals, with Brazilian law allowing election of foreign arbitration chambers and generally enabling quicker enforcement of money judgments with Brazilian courts if the seat of the arbitration is in Brazil. The lack of a centralised information systems with regards to state courts typically require additional work for due diligence on companies with nationwide presence.
Current leading sectors in M&A are expected to remain hot topics for some time, thus we expect to see continued intensive M&A activity in energy, infrastructure, technology, real estate, financial services and institutions, and retail, as well as strong returns for health and education in the short term.