Financial expenses reached R$306bn in 2023, while capital allocation totaled R$298bn; delay in fiscal target worsens the scenario


André Freitas de Moura — Foto: Rogerio Vieira/Valor

André Freitas de Moura — Foto: Rogerio Vieira/Valor

Brazilian companies spent more on financial expenses—mainly made up of interest payments—than on investment in 2023, according to a survey carried out for Valor encompassing all domestic publicly traded companies.

They set aside R$306.8 billion for these expenses last year, 8.2% more than in 2022. In the same period, the amount allocated to investment totaled R$298.7 billion, practically unchanged.

Although the economic environment started to worsen in 2021 with the rise in Brazil’s policy interest rate Selic, this situation was not seen in 2022. That year, investments totaled R$299.2 billion, while expenses with interest rates and charges were R$283.6 billion.

Data from financial statements by 386 non-financial publicly traded companies were collected by André Freitas de Moura, a professor and consultant at FGV/EAESP who holds a PhD in accounting and finance from the University of Birmingham.

Although the Central Bank’s move to reduce the Selic after 2023 could mitigate such an impact this year, the government’s decision to postpone the fiscal target achievement has led to a consensus in the market that interest rates will fall slower. The worsening of the global scenario due to the aggravation of the geopolitical environment in 2024 also weighs on companies’ results.

This situation directly impacts investment plans as companies tend to protect their cash reserves. “The same thing we saw in 2022 and 2023 will likely recur in 2024, with still relevant interest rates pressure and persistent net interest rate spread,” said Pedro Magalhães, who served for over two decades as a financial executive at large corporations in Brazil.

According to him, around 70% of banks’ cost in a debt operation with small and medium-sized companies comes from net interest rate spread, which has not been falling. “That affects the cost of capital, and, as a result, investments,” he points out. According to the Central Bank, there was a 0.5 points increase in the spread rate for companies in 2024 (to 9.2% per year). In 2023, it rose 0.2 points.

The net interest rate spread is the difference between interest rates charged by banks on companies and those they pay to raise funds.

A more gradual decline in interest rates could delay a stronger reduction of expenses for companies with debt linked to the Selic. Banks estimate that the stock of corporate debt in the country is currently around R$600 billion considering both publicly traded and privately held companies.

Experts point out that investment movements vary according to each sector. Companies from the consumer segment tend to hold back spending, while those from areas such as telecommunications and paper manufacturers have announced larger investments. That was the situation before the fiscal risk increased a few days ago.

“Companies that were planning to make larger investments are already considering a change in the route. Also, we have seen complaints among entrepreneurs at dinners and private conversations since last week. Higher public debt creates more inflation and affects confidence,” said a businessman in the capital goods sector who has worked in this segment since 1972.

The survey carried out by the FGV professor also reveals that the ratio between expenses and investment cash has worsened.

This indicator increased to 0.84 in 2023 from 0.80 in 2022, which means that for each R$100 that companies allocated in investments, interest expenses to finance growth went from R$80 to R$84.

To avoid distortions, the broad indicator was based on an average of that ratio in all companies surveyed.

Mr. Moura’s study does not consider financial institutions and includes Petrobras and Vale. However, when excluding the two giant companies, there were R$272.3 billion in financial expenses and R$227.8 billion in investments in 2023.

According to Eliseu Martins, a professor emeritus at FEA/USP and a guest member of the Accounting Procedures Committee (CPC), the rise in interest rates weighed on expenses. He points out that the impact could have been even worse but, to avoid the rise, companies reorganized their debts and sought fixed-rate financing, including inflation-indexed instruments.

“When the Selic was at 2% per year in 2020, companies aware that this would not be sustainable tried to avoid the rate,” Mr. Martins said.

“However, there is still a lot of foreign-currency-denominated debt, and, with the exchange rate on the rise, that becomes a concern again due to the scenario of global uncertainty.”

Foreign exchange has an accounting impact on companies, not on their cash, and it is experienced by those with no currency hedging. The exchange rate is up 3.67% against the real in April and 7.13% in 2024.

Although the Selic started to fall after August 2023, the companies considered in their financial statements the peak rate, at 13.75%, in 2022 and much of last year.

The positive effect of the interest rate reduction was not seen until the fourth quarter of 2023. The Selic policy rate is currently at 10.75% per year.

Based on the data collected, Mr. Moura found that the weight of investments in the corporations’ total revenue between 2022 and 2023 fell, while the share of expenses on revenue remained unchanged.

“Publicly traded companies spent a larger amount on interest rates than on investments in 2023, and that was caused rather by the decrease in investment than by an increase in interest expense and charges, which were already high,” Mr. Moura said.

Expenses include interest rates, taxes, and spending on contracting loan facilities. Investments include payment for acquisitions, financial investments, and funds generated by business divestment, among others.

Another survey, carried out by Valor Data with publicly traded companies, reveals the effect of the increase in net financial expenses on these companies’ bottom lines.

According to the numbers, excluding Petrobras, Vale, and companies under court-supervised reorganization, these expenses rose 25% last year, while net earnings fell 12%—to R$186 billion from R$213 billion.

There was a decline in final results despite operating expenses (which also affect profits) rising slightly, around 5%, close to the inflation rate in the same time frame. Only in the fourth quarter, some relief was seen in interest expenses, which fell compared to a year earlier.

Bank analysts expect that the hypothesis of a slower decline in the Selic rate and the appreciation of the dollar against the real will return to the discussion in the first-quarter earnings season, which began last week.

That will be a barometer of how companies are dealing with the two topics. The issue has already been mentioned in the first earnings report by a publicly traded company, released on Thursday (18) by machine maker Romi.

Asked about the change in the interest rates and dollar scenario after the postponement of the fiscal target, CEO Luiz Cassiano Rosolen said the increase in the Selic would have a direct impact on Romi’s customer’s mood.

The executive also pointed out that, in a scenario of timid investments in the sector, the company’s machine rental business is growing. The operation was launched after the pandemic, in 2020. “When our customers are not comfortable investing in acquiring machines, they have the option of renting,” he said. Machine rental orders rose 129% from January to March, compared to 2023. Last year, the increase was 34%.

This debate is expected to gain ground among analysts and companies in segments that are mostly dependent on credit and sensitive to variations in confidence—such as consumer industries and electronics and technology retailers.

*Por Adriana Mattos — São Paulo

Source: Valor International
ANVISA has about R$6bn in new drugs waiting for analysis and another R$11bn under consideration


Ricardo Cappelli — Foto: Gesival Nogueira Kebec/Valor

Ricardo Cappelli — Foto: Gesival Nogueira Kebec/Valor

The pharmaceutical industry has nearly R$6 billion in potential investments pending analysis by the National Health Surveillance Agency (ANVISA). Another R$11 billion is being analyzed, but there has been no response so far.

The survey was carried out by Grupo FarmaBrasil, the trade association representing companies in the sector. The calculation took into account two factors: requests for approval of medications under review or halted, and the average market value for each category of products.

By categories, R$9.4 billion of the drugs under analysis or awaiting analysis are biological, R$4.1 billion are new and innovative, R$4 billion are generics, R$205 million are non-synthetic, and R$31 million are herbal medicines.

Brazilian Development Bank President Aloizio Mercadante was the first to draw public attention to the issue in February. At the time, he suggested hiring reviewers to speed up the evaluation process. “There are R$17 billion in investments in ANVISA,” he said at the inauguration ceremony of the president of the Brazilian Agency for Industrial Development (ABDI), Ricardo Cappelli. At the time, Mr. Cappelli also advocated greater “efficiency” of regulatory agencies “to leverage private investments in Brazil.”

Measures such as expanding the number of ANVISA employees are necessary to “generate a workflow and regular approval” of medicines in order to offer “predictability” to the industry, said Adriana Diaféria, vice president of FarmaBrasil. She said the federal government “is committed to strengthening research, technological development, and innovation in the country.” She also sees the public test announced to hire 50 specialists in health regulation and surveillance by ANVISA as positive. “But it’s not enough to meet all demands,” she said.

In a note, ANVISA also attributes the sluggishness to the lack of employees. “The long queue periods to which drug candidates are submitted in the country are not the result of inertia of the agency’s managers and employees, but of the number of workers incompatible with the size of the Brazilian drug market,” the regulator said, highlighting “the drug development and manufacturing capacity of the companies operating in the country.”

ANVISA said that between 2007 and 2023, the number of employees fell to 1,491 from 2,360. Of this group, only 187 work to approve or not drugs. The U.S. Food and Drug Administration (FDA) has 6,815 “employees with regulatory and authorization skills,” according to ANVISA. Thus, the average time for drug approval is 776 days in Brazil, compared to 245 days in the U.S. The Brazilian queue is also longer than in Japan and Canada (301 days) and Australia (350 days).

Despite the insufficient number of servers, ANVISA “has been adopting mechanisms” to accelerate approvals, “maintaining the international standard of quality, effectiveness, and safety verification.” Among the measures, it highlights the use of agency evaluations “with standards and regulatory practices equivalent” to those of ANVISA; joint evaluation with foreign agencies; and implementation of the company’s pre-qualification program, a model similar to that of the Federal Revenue’s Authorized Economic Operator.

In a statement, the Ministry of Management and Innovation in Public Services highlighted that the government will hire 50 specialists in health regulation and surveillance. In addition, at the end of last year, the ministry started a debate with “the workers of the regulatory agencies, including ANVISA, as part of the negotiation process to handle specific demands of the category.”

*Por Estevão Taiar — Brasília

Source: Valor International
Federation of banks survey shows growing adoption to enhance efficiency in more than half of institutions


Sergio Biagini — Foto: Divulgação

Sergio Biagini — Foto: Divulgação

The Febraban 2024 Banking Technology Survey, conducted by consulting firm Deloitte at the request of the Brazilian Federation of Banks, shows that 96% of banks have artificial intelligence technologies, and 54% say they already use generative AI (GenIA). According to the study, GenIA is highly adaptable and customizable to the specific business needs of each institution.

While traditional AI only copies, imitates, or reproduces something that already exists or has been done, GenIA can create new and original content based on what it has learned.

“This technology has the potential to drive innovation and productivity, as well as promote efficiency. The research indicated that for banks that have already implemented AI, the efficiency of banking processes has increased at an average rate of 11%,” said Sergio Biagini, Deloitte’s lead partner for the financial services industry.

Among the AI applications used by banks are facial biometrics (75%), chatbots (71%), robotic process automation (67%), GenIA (54%), and cognitive intelligence (25%).

“With the need to seek an increasingly relevant position towards differentiation, banks can use the Open Finance movement to expand data and knowledge about their customers. With the use of technologies such as AI and GenIA, information can be explored more efficiently and accurately to personalize customer relationships,” said Mr. Biagini.

The study points out that, like any other type of technology, GenIA has some limitations, which can be considered challenging, such as hallucination (creating responses with full conviction but not based on its training data); biases (inherited from its training data); lack of logical reasoning (based on statistical characteristics, which does not allow human logical reasoning); and contextual limitation (composed of a finite combination of words and contexts, which limits the generated results).

“Banks are leading adopters of generative AI, especially in customer service processes and developer support, which has allowed an improvement in the efficiency of banking processes,” the research points out. The efficiency increase brought by AI is estimated at 11%. In the back office, this index is even higher, at 17%.

Concerning expectations of the adoption of the Open Finance initiative, banks continue to work to offer new products and services related to the ecosystem and aim to achieve a 6% to 20% adherence rate from their active base by the end of 2024.

*Por Álvaro Campos — São Paulo

Source: Valor International
State-run Agricultural Research Corporation EMBRAPA will launch algorithms that help create sustainable management projects


Data collection in the field: with EMBRAPA’s help, the cost of a typical survey has dropped from R$140 to as low as R$4 per hectare — Foto: Felipe Sá/Divulgação

Data collection in the field: with EMBRAPA’s help, the cost of a typical survey has dropped from R$140 to as low as R$4 per hectare — Foto: Felipe Sá/Divulgação

An artificial intelligence tool is aiding in the identification of commercially valuable trees and pinpointing their exact location in the forest. Species such as Brazil nut, cumaru-ferro, açaí, and cedar are recognized with an accuracy rate of 95%, reducing production costs and promoting more sustainable forest management practices in the Amazon.

Netflora, a methodology developed by the state-run Agricultural Research Corporation (EMBRAPA), encompasses a set of algorithms trained with artificial intelligence to recognize forest species based on botanical characteristics available in a database. The methodology is targeted towards companies in the forestry sector, academic professionals, agro-extractivist associations, and environmental agencies.

Evandro Orfanó, an EMBRAPA researcher who co-heads these studies, Netflora automates forest activity planning and enhances the precision and efficiency of management plans. “Once trained and specialized, the algorithm also provides metrics such as diameter and canopy area, which enable the estimation of each tree’s wood volume through allometric equations (which relate to shapes and sizes),” he said.

EMBRAPA’s research to enable the use of AI in the forestry sector began in 2015 and covers several aspects of the activity. In the current phase, studies are conducted under the Geoflora project, implemented in the states of Acre, Rondônia, Roraima, Amapá, Pará, and Amazonas, in collaboration with the JBS Fund for the Amazon.

The adoption of these technologies requires investments in computers, drones, batteries, and suitable office infrastructure. According to Mr. Orfanó, the drastic reduction in production costs, especially in the forest inventory stage, offsets these expenses.

The cost of a traditional species survey with field teams ranges between R$100 and R$140 per hectare of mapped forest. In the Netflora methodology, the expense is between R$4 and R$6 per hectare.

This significant difference is due to the agility in obtaining and processing information. “A forestry company using traditional management can map up to 10,000 hectares of forest per year. With the use of AI, operational capacity can increase to up to 1 million hectares in the same period,” Mr. Orfanó added.

To build the algorithm’s “training” database, drones mapped over 40,000 hectares of forest in 37 areas of Acre, Rondônia, and the southern Amazon. Over two years of study, researchers conducted around a thousand flight plans, each generating about 300 aerial images. These images underwent processing and were transformed into orthophotos (georeferenced and high-resolution images). The information from orthophotos was used to train nine algorithms, each with different purposes and performance levels.

“We have algorithms that recognize a single forest species, while others can identify different groups or the main timber and non-timber trees of Acre and other locations in the Amazon. Some algorithms have already achieved high performance, but this learning will be continuous,” said Mr. Orfanó. EMBRAPA aims to map 80,000 hectares and include new areas of commercial interest in the Amazon to expand the database.

The state-run company will launch the first two algorithms that have undergone the refinement phase next Wednesday. One of them can recognize “açaí solteiro” palms in productive (with clusters) and non-productive phases in Acre. The other, in addition to single-stem açaí, can recognize nine other palm species from the Amazon (paxiúba, buriti, jaci, ouricuri, murmuru, tucumã, inajá, patauá, and bacaba).

The launch of the other seven algorithms is expected to take place by February 2025. The list includes algorithms that identify timber and non-timber species in different Amazonian locations, as well as versions intended for environmental monitoring and species recognition in agroforestry systems.

Forest Engineer Mauro Alessandro Karasinski, a doctoral student at the Federal University of Paraná (UFPR) and a member of the Netflora creation team, said that the algorithm learns tree canopy patterns and organizes this information to recognize features in images of newly mapped areas. “As a result of learning, a ‘shapefile’ [file with identification and location of each species and indication of certainty level] allows for the preparation of the forest inventory, providing information on the number of existing trees, divided by class or genus, and other data on the species and the mapped area,” he said.

*Por Marcelo Beledeli — Porto Alegre

Source: Valor International
After integrating the DPA operation, the group will invest in higher value-added lines


Emmanuel Besnier — Foto: Gilson de Souza/IDT

Emmanuel Besnier — Foto: Gilson de Souza/IDT

Lactalis, the world’s largest dairy company, plans to consolidate its leadership in Brazil, targeting a market share of 15% by 2028—up from 11% last year. In the short term, the French company will focus on integrating the operations of DPA Brasil, a venture created by Fonterra and Nestlé. The R$700 million deal, completed in December 2023 after receiving approval from Brazil’s Administrative Council of Economic Defense (CADE), marks a significant step.

The company aims to increase its milk processing volume from 2.5 billion to 3.5 billion liters per year by 2028. In terms of dairy sales, Lactalis seeks to boost its market share from 13% in 2023 to 20% within five years.

“We see significant growth potential for our group in Brazil. Therefore, we are investing substantially in Brazil compared to its current contribution to our overall revenue, emphasizing its importance as a priority market for us,” Lactalis CEO Emmanuel Besnier told Valor. On Tuesday (17), the executive visited the operations of Itambé, which belongs to the group, accompanied by French journalists.

Lactalis has operated in Brazil for 10 years, investing €1.3 billion in acquisitions and €300 million in enhancing milk productivity, quality, and product development. The company owns 16 brands in the country, including Elegê, Itambé, Cotochés, Parmalat, and Batavo. Last year, sales totaled €2.5 billion.

Currently, the Brazilian operation accounts for nearly 10% of the group’s global revenue, according to Lactalis CEO in Brazil, Patrick Sauvageot. In 2023, Brazil was the fifth largest market for Lactalis, trailing behind France, the United States, Canada, and Italy. In the first quarter of 2024, Brazil surpassed Italy in sales.

For 2024, Lactalis’s priority is to integrate the DPA operation properly. “We’re going to keep the company independent but look for synergies with the group’s other activities,” said Mr. Besnier. The acquisition adds the Chandelle, Chamyto, and Chambinho brands to Lactalis’s portfolio, along with the rights to use the Nestlé brand on refrigerated products. DPA has two factories, in Garanhuns (state of Pernambuco) and Araras (state of São Paulo), eight distribution centers, and employs 1,300 people. In 2023, the operation generated net sales of €361 million.

To gain long-term market share in Brazil, Lactalis has focused on creating higher value-added products. “Brazil is a big commodity market. It sells a lot of UHT milk and cheese groups that offer very low profitability,” said Mr. Besnier. The company plans to expand its range of fine cheeses, yogurts, and other dairy products with higher added value.

Mr. Sauvageot noted that Lactalis had also felt the impact of increased imports of powdered milk from Argentina and Uruguay into Brazil and the consequent drop in dairy prices. “We think that the whole chain needs the government’s help to ensure the improvement of the competitiveness of dairy production in the country,” he said.

Lactalis and other industry players, including cooperatives, recently proposed that the federal government increase the refund rate for PIS and Cofins—taxes on business revenue funding social security and healthcare—from 50% to 100%. In exchange, the industrial companies would boost the percentage of credits earmarked for investments in productivity improvements from 5% to 10%. He estimates that this would raise investments from R$110 million to R$440 million per year, on average. He explained that since the 2015 implementation of a rule allowing PIS and Cofins tax credits to be returned in exchange for investments, industries have launched over 1,800 projects. These projects represent investments exceeding R$900 million and have benefited more than 168,000 producers.

*Por Cibelle Bouças — Belo Horizonte

Source: Valor International
Increased fiscal uncertainty, significant company devaluations, instances of government interference, and rising U.S. interest rates are contributing to a challenging stock market environment in Brazil


Thalles Franco — Foto: Silvia Costanti/Valor

Thalles Franco — Foto: Silvia Costanti/Valor

Brazilian stocks have experienced steeper declines than those of other major emerging markets this year, signaling that domestic challenges play a substantial role in the underperformance of local equities.

According to a Valor Data survey using MSCI stock indices—which measure the performance of stock exchanges across various countries and regions—Brazil’s stock market has seen a decrease of 14.89% in 2024. In contrast, the average for emerging markets has only dropped by 0.5%, while the global average has actually increased by 3.5%. These comparisons are denominated in U.S. dollars, highlighting that the recent appreciation of the American currency against the Brazilian real has further exacerbated the poor performance of Brazil’s index.

Several domestic issues distinguish Brazil from its peers, including fiscal uncertainty following the adjustment of next year’s fiscal targets, struggles with key stocks such as Vale on the local exchange, and the volatility spurred by governmental attempts to meddle in the affairs of domestic companies.

On a global scale, the anticipation of a more restrained U.S. monetary policy has impacted equities worldwide. Brazil, where foreign capital had been more heavily invested prior to changes in the U.S. economic outlook, has felt the pinch acutely, suffering from a more pronounced outflow of funds.

According to J.P. Morgan, the significant underperformance of variable income in Brazil this year can be primarily attributed to a sharp decline in Vale shares, persistently high interest rates, and a substantial devaluation of the real.

The bank’s report highlights that Vale has been a major contributor to Ibovespa’s—Brazil’s benchmark stock index—losses in 2024. “If Vale’s performance had remained stable this year, Brazil’s performance in local currency would only be 1% behind MEXBOL,” notes the bulletin from J.P. Morgan’s equity strategy team for Brazil and Latin America, headed by Emy Shayo Cherman. MEXBOL refers to the Mexican stock exchange.

Vale’s common shares, which make up 14.16% of the Ibovespa and 10.99% of the Brazilian MSCI, have fallen by 15.65% this year. This decline is largely due to the global decrease in iron ore prices despite some recent signs of recovery. For most of 2024, however, the price of the commodity has been on a downward trend. Additionally, the Brazilian government’s attempt to appoint former Finance Minister Guido Mantega as the CEO of Vale has introduced further volatility, according to local fund managers.

“The price dynamics of iron ore until last week were quite poor, significantly impacting Vale. Several factors have negatively impacted the company, including discussions involving the CEO and instances of government interference,” explains Thalles Franco, partner and manager at RPS Capital. “With Vale being such a pivotal component of the index, the stock’s downturn largely mirrors the overall performance of Brazil’s market.”

Managers are particularly concerned with the fiscal challenges that have resurfaced following the government’s recent revision of next year’s fiscal target from a primary surplus of 0.5% of GDP to zero. “The fiscal dilemma has consistently been the weakest link in Brazil’s economic discussions. It surfaces repeatedly, manifesting with varying degrees of severity across different administrations. This recurring issue sets Brazil apart,” explains Eduardo Carlier, co-managing director at Azimut Brasil Wealth Management.

The adjusted fiscal target has recently prompted a rise in future interest rates, casting a shadow over the stock market. This increase places downward pressure on stocks linked to local consumption and heavily indebted companies while simultaneously boosting the appeal of fixed-income investments over variable-income investments in the country. “The balance still favors fixed income over riskier assets. Brazil needs to redirect local financial flows to make the stock market seem more enticing. However, periodic debates over fiscal policies hinder this; they obscure the market’s trajectory,” Mr. Carlier notes.

Additionally, there has been a notable retreat of foreign investors from the Brazilian stock market. Data from B3, the Brazilian stock exchange, reveals that this year, sales of shares by non-residents have outstripped purchases by R$27.39 billion. Meanwhile, global stock markets, including Brazil’s, are feeling the impact of shifting expectations for the U.S. Federal Reserve. Robust economic indicators from the United States are postponing any anticipated reductions in interest rates, posing challenges for global stocks. The exception has been the U.S. stock market, which continues to draw support from robust performances in the technology sector.

Welliam Wang, head of equities at AZ Quest, noted a shift in market expectations regarding disinflation in the United States. “Initially, the market anticipated a scenario where the U.S. could achieve disinflation without major sacrifices. Now, it appears we are moving toward a situation where, as the textbooks say, sacrifices are necessary,” Mr. Wang explained. Initially, Fed funds futures at the start of the year hinted at the beginning of monetary easing in March. However, current forecasts have adjusted this expectation to September.

Mr. Wang added, “With the U.S. entering an election period in September, the likelihood of interest rate cuts could further diminish, depending on the electoral frontrunner. The market perceives former President Donald Trump, who is seeking reelection, as potentially more inflationary due to his proposals to increase tariffs on China and restrict immigration, thereby reducing the labor force in the U.S.”

Thalles Franco, from RPS, highlighted how external movements have affected Brazil’s stock market. “Foreigners had significantly increased their investments in Brazilian stocks at the end of last year, drawn by attractive pricing. However, as U.S. interest rates began to divert investment flows away from emerging markets, Brazil, having seen substantial foreign investment, was particularly hard hit. The retraction of these funds around the turn of the year has been a major factor in Brazil’s underperformance,” he remarked.

In the final two months of 2023, non-residents injected a net R$38.49 billion into Brazilian stocks, accounting for the majority of the net R$44.85 billion that flowed into the country’s equity market throughout the entire year.

J.P. Morgan suggests that conservative expectations regarding the Federal Reserve’s actions may curb significant capital flows into the Brazilian stock market, even as U.S. interest rates begin to decline. The firm questions the impact of the Fed’s cautious stance: “Will a more restrained approach by the Fed be sufficient to support ‘high-beta trades’ [potentially higher returns] like those in Brazil? It might, eventually, but the potential gains from such a scenario are now less compelling than they were prior to the Fed’s temperance,” according to the report.

*Por Augusto Decker — São Paulo

Source: Valor Inernational

The first step is to choose potential primary shareholders


Natalia Resende — Foto: Silvia Costanti/Valor

Natalia Resende — Foto: Silvia Costanti/Valor

The São Paulo state government released on Wednesday (17) information on the model for the privatization of water utility Sabesp. However, some points are yet to be defined. The plan is that the offer will occur in two stages. First, a competitive process will be carried out between groups with the potential to be the primary shareholder, holding 15% of the company and having greater control over management. At this stage, the two groups offering the highest prices will be selected. In the following stage—which will be part of the same process, but not necessarily will take place on the same day—there will be a dispute between the two groups previously selected. In this stage, other investors will choose the winner.

In this second stage, two book-building processes will be carried out with the broad market, meaning that investment intentions will be collected for each of the potential primary shareholders. In the dispute, the bookbuilding with the highest total value will be the winner. However, detailed rules for this selection are yet to be defined as there should be a combination of criteria between price and volume. If there is a potential primary shareholder who, in the market’s view, is more qualified to lead the company, this group will have an advantage in the competition.

More detailed information about the model of the offer will be disclosed in the coming weeks. It remains unclear, for example, whether the price paid by the primary shareholder will be equal to the value of shares acquired by the broader market. According to people familiar with the matter, this possibility is currently being studied, but it hinges on legal and regulatory analyses.

The Sabesp privatization model was unveiled to the press by Natalia Resende, São Paulo’s secretary of environment, infrastructure, and logistics.

The concept of having a primary shareholder was introduced by the state government to ensure that the sanitation company will have a partner with a longer-term vision and the capacity to carry out the necessary changes in the company’s management following the privatization.

This primary shareholder should comply with a lock-up period of up to five years, in which the acquired shares cannot be sold and the universalization of services must be implemented.

After that period, the primary shareholder will be allowed to sell the shares but the government included a rule to try to keep the group in the company. If this partner reduces its stake to less than 10%, the shareholders’ agreement—to be signed with the government to set the governance rules—will be terminated. The terms of the shareholders’ agreement will be finalized before the offering.

The issue of governance involving future partners is regarded as crucial for potential primary shareholders, who want to learn what type of control mechanisms they will have. Several groups are mentioned as potential primary shareholders, including Equatorial, Aegea, Cosan, Votorantim, Veolia, and IG4 Capital, among others. However, they await the definition of governance, which will be central to the decision.

On Wednesday (17), an important step was taken in the process. The São Paulo City Council approved, in the first vote, the bill for the company’s privatization. The proposal allows the maintenance of the municipal government’s contract with the company after privatization. The project had 36 votes in favor and 18 against in the first vote. The City Council will hold public hearings until the end of the month, before the second and final vote. The date for the final vote has not been scheduled.

*Por Taís Hirata, Cristiane Agostine — São Paulo

Source: Valor International
Operations are mainly driven by asset recycling and portfolio reduction


Leonardo Cabral — Foto: Leo Pinheiro/Valor

Leonardo Cabral — Foto: Leo Pinheiro/Valor

In the operations portfolio of the big banks, transactions linked to the electricity sector have represented a significant weight, especially in terms of financial volume. Financial institutions estimate that the sale and purchase of companies (M&A) will generate at least R$30 billion in 2024 and could reach up to R$40 billion over 18 months.

If this expectation is confirmed, the financial volume has the potential to almost double that recorded in 2023, when mergers and acquisitions in the sector reached around R$20 billion in a year that was lukewarm for transactions in Brazil.

Of the operations that are already on the table, one of great importance is Eletrobras’s thermal power plant package, a process that has already entered its second phase with three interested parties and could be worth around R$8 billion, as anticipated by Valor. Another important one is that of AES Brasil, which has decided to leave the country. One of the interested parties is Auren (controlled by the Votorantim group and CPPIB), which owns 5% of AES—the company even made a binding offer, but it didn’t please AES Corp.

Portugal’s EDP adds to the list. It is trying to sell its hydroelectric plants in Amapá and, at the beginning of the year, re-engaged Bradesco BBI in the process. In the last attempt, the Canadian fund CDPQ made an offer to buy the assets, but the group did not find what it classified as “fair” conditions for the sale.

For the head of Citi’s investment bank in Brazil, Eduardo Miras, the energy sector continues to occupy an important place in the bank’s pipeline in typical portfolio asset recycling operations. “In the electricity sector, unlike other segments, asset recycling is common, even among strategic assets.” That means that companies and financial investors, from time to time, sell assets to look for other opportunities that can bring more return.

In 2023, the bet was on a busier market for the sector, but in the end, the mergers and acquisitions scenario was less than expected in general. As a result, some transactions were postponed due to values that were lower than those anticipated by the sellers. The weaker environment also came in the wake of low electricity prices and a drop in activity across the industry, primarily due to the still high interest rate environment and the local stock exchange having been closed to IPOs for more than two years, damaging financing fronts. Even so, major billion-dollar operations came off the drawing board and marked the year, such as the sale of a 50% stake in eight Neoenergia transmission assets to GIC. Another deal was closed by EDP Brasil, which sold transmission assets for R$2.7 billion to the Actis infrastructure fund.

Given the scenario of lower inflation and interest rates for this year, M&A operations are back on the table and could boost transactions in 2025. According to market sources, there is another impetus. The recent privatization of two giants in the sector, Copel last year and Eletrobras, has put two more companies on the table that were previously practically left out of the M&A scenario but now have no more strings attached to the sale of assets or even new investments in companies. Copel, for example, is receiving proposals for the sale of Compagas, another transaction expected to be completed in 2024.

Mr. Miras, from Citi, points out that the recent fall in the price of energy has acted as an impetus for new conversations since companies are now weighing up options between new investments (greenfields) or M&A strategies, which may make more sense in such a context. The Citi executive also mentions deals involving the oil and gas industry, which are gaining momentum and should accelerate throughout the year.

The breakthrough in this segment came at the end of 2023, when the J&F Group, owned by the Joesley and Wesley Batista brothers, entered the oil and gas sector with the acquisition of Fluxus. In April this year, Azevedo & Travassos bought fields in the Potiguar Basin and returned to oil exploration. More recently, Enauta and 3R signed a merger agreement.

The same heat is felt in Santander. There, operations involving energy and utilities are numerous and account for almost half of the volume if the analysis is based on financial value, said Leonardo Cabral, Santander’s head of investment banking and capital markets in Brazil. The executive points out that operations involving foreign buyers should also gain momentum, given the interest in the sector in Brazil.

In addition, the recent past has shown the strength of the sector and a broad movement of asset recycling. Data from M&A boutique RGS Partners sent to Valor shows that between 2013 and 2023, the electricity sector drove the M&As and capital markets segment in Brazil due to the intense pressure to decarbonize the energy mix with renewable sources, notably wind and solar.

Hugo Pacheco, a partner at RGS Partners, believes that solar distributed generation operations should be the highlight of the year. Recent operations prove as much. Nova Milano, Squared, and Brookfield, for example, have entered the sector with major acquisitions and capital injections.

This is due to regulation changes, which have triggered a “gold rush” in the construction of assets to take advantage of subsidies. Recently completed developments now pass from the hands of the previous owners, who took on the construction risk, to investment funds or consolidators, who prefer to take ownership of the developments without exposing themselves to the construction risk.

“In the regulatory environment, due to the opening up of the free energy market, we are already seeing a major conversion of new consumers to this new energy contracting environment, and we are also beginning to see a movement within some trading companies, which should complete the M&A movement,” Mr. Pacheco said.

Copel, Ibitu, Sterlite, and Enel declined to comment. AES said that its parent company, AES Corp, is assessing alternatives to finance its growth and improve its capital structure. Eletrobras and Cemig did not respond to an interview request.

*Por Fernanda Guimarães, Robson Rodrigues — São Paulo

Source: Valor International
Roberto Campos Neto argued that it is still unclear what, from the recent turmoil, will or will not become more perennial


Roberto Campos Neto — Foto: Marcelo Camargo/Agência Brasil

Roberto Campos Neto — Foto: Marcelo Camargo/Agência Brasil

Brazil’s Central Bank President Roberto Campos Neto got rid of the forward guidance that indicated a 50-basis-point interest rate cut for the next meeting of the Monetary Policy Committee (COPOM) in May and left open four possibilities. At an XP Investimentos event in Washington, he said that international and fiscal uncertainties have increased too much to allow the COPOM to keep the old promise.

On the other hand, he argued that it is still unclear what, from the recent turmoil, could remain in place for enough time to affect the Central Bank’s work in lowering inflation to the target—and consequently, the trajectory of the Selic policy rate.

Three weeks before the next COPOM meeting, Mr. Campos Neto listed four theoretically possible scenarios that could lead to different outcomes for the decision to be made on the interest rate.

First hypothesis: “We could see a reduction in uncertainty, which means we would follow the usual path.” He was not explicit about what the usual path would be, but apparently it would be a reduction in interest rates by 50 basis points, as was previously signaled, to 10.25% per year from 10.75%.

Second hypothesis: “We could have a situation where uncertainty remains very high, but it does not change significantly. That would mean a reduction in pace.” That is, the Central Bank would cut 25 basis points, to 10.5% per year.

Third hypothesis: “We could have a situation where uncertainty begins to affect more strongly important variables, and we would have to change the balance of risks.” Mr. Campos Neto was not explicit about what this hypothesis would mean for interest rates, but the logic of the gradation he employed seems to indicate a maintenance of the rate.

Fourth hypothesis: “We could have a scenario where uncertainty worsens, creating global stress. In this case, we would change our global scenario,” said Mr. Campos Neto. In this case, apparently, he is referring to the possibility of raising the policy rate.

This way, the Central Bank’s chief provided a sort of roadmap for the financial market to monitor the development of the recent crisis—international and fiscal—in order to anticipate the COPOM’s reaction to each of the situations.

And why didn’t he deliver a hawkish, more direct message? For him, with the current high degree of uncertainty, it’s difficult to anticipate the situation that the COPOM will encounter in three weeks.

“You do not want to react too much to short-term data, but at the same time you do not want to ignore a structural change to the point of losing your credibility,” said Mr. Campos Neto.

To know what the COPOM will do, it’s important to pay attention to what Mr. Campos Neto said about what is a surprise and what is not in recent events. It’s also good to re-examine the Central Bank’s so-called reaction function, that is, how it uses the new information that will emerge in the next three weeks to make its decisions.

He said he kind of expected the worsening in the international environment. This helps to understand why he said last week, after the release of U.S. inflation data, that the scenario had not changed substantially.

But another factor wasn’t in the Central Bank’s calculations: the deterioration of Brazil’s fiscal situation. Still, on at least two occasions he expressed doubts that this worsening will translate into a permanent increase in the risk premium. “When you change [the fiscal target], the premium moves further,” he said. “I hope that doesn’t happen.”

Mr. Campos Neto expressed concern, in particular, about the relationship between fiscal credibility and monetary credibility. The main indicator that the Central Bank has lost credibility will be inflation expectations, especially longer-term ones.

As for the monetary policy reaction function, the main message is that there is no mechanical relationship between fiscal policy, external environment, and monetary policy. It will be necessary to see how these recent events affect the COPOM’s central scenario for inflation and the balance of risks. This is what will determine which of the four hypotheses above will be adopted by the COPOM at its next meeting.

*Por Alex Ribeiro — São Paulo

Source: Valor International
The matter was sent to the Lower House; Senate committee authorized charges on platforms to foster local film industry


The Senate’s Committee on Economic Affairs approved on Tuesday (16) a bill that regulates streaming services in Brazil. The matter will now be analyzed by the Lower House.

The text determines that streaming companies are charged up to 3% for the Contribution to the Development of the National Film Industry (CONDECINE).

The new rules also extend to platforms for sharing audiovisual content and to platforms that offer television channels on online services.

The wording also makes it clear that the provisions of the law must be applied to companies that offer the services to Brazilian users, “regardless of the location of their headquarters or the infrastructure for the provision of the service.”

The text cites the “valorization of Brazilian audiovisual content,” including independent content. For this, the bill foresees minimum amounts of Brazilian audiovisual content in the streaming services, which vary according to each one’s catalog. Compliance with the new legislation, if approved, can be gradual and completed in up to eight years.

By the final wording, streaming platforms with up to 2,000 shows must reserve 200 for Brazilian audiovisual content; those with 3,000 shows must reserve 150; those with 5,000 must reserve 250; and those with 7,000 must reserve 300.

If the analysis is completed, the economic agents providing the video-on-demand service, audiovisual content-sharing platforms, and internet application television providers must apply for accreditation before regulator ANCINE within 180 days after the start of offering the service to the Brazilian market.

*Por Julia Lindner — Brasília

Source: Valor International