Number of deals may grow 15% to 20% in 2023, but fiscal risk weighs against them
12/19/2022
The market for mergers and acquisitions regained vigor in the second half of the year, after a weak start in 2022, but the amounts involved dropped by almost half. For next year, there is a chance that the volume of transactions will surpass 2022 by 15% to 20%, depending on the improvement of the investment environment, industry sources say.
This year is expected to close with the number of transactions at the same level as 2021, hitting a record high with 1,627 transactions, according to the U.S. consulting firm Kroll. However, for the pace to accelerate again, clear signs of a commitment from the elected government with a responsible fiscal agenda and an unlocking of stock offerings will be needed. Investment banks also see greater participation of foreign capital in future deals.
A Kroll research revealed to Valor shows that until November there were 1,389 operations, slightly below the same period in 2021 (a decrease of almost 6%). The consultancy firm believes that 2022 is likely to repeat the level of around 1,600 deals because several operations are being announced in December. The survey does not show the value of the deals.
The data from Dealogic point out that in the year to date until last week, mergers and acquisitions totaled $50.5 billion, with 909 operations. In 2021, they were $90.2 billion, with 922 deals. In its survey, Dealogic considers the deals with disclosed values.
This difference in values can be explained, according to sources consulted, by the drop in “valuations” of businesses this year, with the greater instability in the markets and devaluation of assets, and the effect of the strong comparison base of 2021. In that year, transactions in several sectors were closed at high ticket prices before the election period.
This week, important transactions were announced — the national giant Eurofarma disbursed R$725 million to buy assets in the pharmaceutical sector (such as the Valda brand), and the American company Aligned acquired Odata, a data center company from Pátria fund, valued by the market at R$10 billion.
The entry of capital with new issuances on the stock exchange historically helps to accelerate negotiations.
“No one sees an ‘initial romance’ phase, with the acceleration of transaction announcements as early as the first months of 2023. But we see liquidity in the world and a demand from investors for projects in the country, such as in the financial services area, which is already increasing. This can gain pace if stock offerings grow,” said Alexandre Pierantoni, head of corporate finance at Kroll.
“These positive aspects help, at least, to maintain in 2023 the volume of mergers and acquisitions of 2022, especially with more operations in the second half of the year, when there will be greater visibility of the actions in the new government,” said Mr. Pierantoni.
A relevant part of the funds from initial public offerings (IPO) in the country in recent years was destined for growth through acquisitions.
Investment banks have a greater flow of mergers and acquisitions that may be concluded throughout 2023. Infrastructure and energy, retail, and healthcare are likely to remain on the radar of companies, bank executives said.
“We will continue to see sector consolidation happening in 2023 and most of the transactions will happen by exchange of shares [rather than cash payment] until the capital markets can become functional again. When it does, we will see a more balanced mix between cash and shares,” says Alessandro Zema, Brazil’s country head of Morgan Stanley and co-head of investment banking in Latin America.
The banks see a scenario of sector consolidation in which companies with stronger balance sheets seek more scale, private equity funds (which buy stakes in companies) capitalized to take the opportunity to invest more, and even global multinationals are once again looking at Brazil with greater interest, according to Mr. Zema.
According to sources heard by Valor, the Canadian Brookfield, one of the most active investment firms in mergers and acquisitions this year, is evaluating selling assets in solar energy, through the company Elera. The business is estimated between R$9 billion and R$10 billion, including debts, and there are already investors interested.
At the end of July, the Canadian investment firm, through Quantum, sold five transmission concessions to the group Energía Bogotá (GEB), for about R$4.3 billion. In renewable energy, it bought the Seridó wind project, in Rio Grande do Norte, and plans to make investments of R$1.8 billion. The Canadian company, which operates in several sectors, also bought year assets of the car rental company Localiza for R$3.5 billion and disbursed R$5.9 billion in 12 corporate buildings of BR Properties.
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Luiz Felipe Thut — Foto: Silvia Zamboni/Valor
Felipe Thut, managing director of Bradesco BBI, recalls that 2022 was atypical because of the war between Russia and Ukraine, the lockdowns in China, and the capital markets having a low performance worldwide, not only in Brazil. “Many companies that thought about doing IPOs but couldn’t do it, resorted to M&A. Here at BBI this year was a record in revenues,” added Mr. Thut.
“We had a relatively good year in M&As and we project that the market will remain heated next year,” says Gustavo Miranda, head of the investment banking area at Santander. For Roderick Greenlees, global head of investment banking at Itaú BBA, there is more interest from foreign groups in Brazilian assets.
In the oil and gas market, for example, expectations for Petrobras are high. The state-owned company, which in recent years has gone through a movement of heavy divestments — this year, for example, it sold Gaspetro to the Cosan group — may buy assets in the area of renewables in the coming months, said a person familiar with the topic.
In 2022, estimates are 60% of transactions of groups with domestic capital and 40% with foreign capital, the same average in recent years. This year, in addition to energy and gas, financial services and technology have also grown — Safra closed weeks ago the purchase of the Alfa bank, and B3 this month acquired Neurotech Tecnologia da Informação.
In Mr. Pierantoni’s view, this profile of strategic acquisitions marked 2022 — about 70% may have this focus, and 30% for financial reasons — but in 2023 deals are expected to remain more selective.
“It is clear that the ‘deals’ end up occurring today considering a more careful analysis of variables due to the increase in the cost of capital, after the key interest rate Selic high, and the risks involved. But in the current scenario, there is still a bias towards M&As in 2023,” said the Kroll executive.
From January to September, private equity groups led investments of R$35.8 billion, compared to R$4.5 billion in the same period in 2021 and R$6.2 billion in 2020, according to research by the Brazilian Private Equity and Venture Capital Association (Abvcap), which represents the sector, and KPMG.
Private equity and venture capital combined invested R$57.8 billion until September — a record sum for the survey, which exists since 2011. For Abvcap, with the loss of vigor in stock offerings in 2022, and with the higher cost of capital, funds were gaining ground and emerged as an option to lead part of those investments in companies in the year.
For 2023, despite the expectation that equity offerings gain ground — which helps “turbocharge” the M&As — Piero Minardi, president of Abvcap, also sees an increase in selectivity by the market.
This reflects the negative signals that the elected government has been sending to the market. If IPOs slow down in this environment, private funds may remain more active in certain specific segments, highlights Mr. Minardi.
“IPOs will come back but it won’t be such a strong wave because we have high-interest rates, and everything indicates that they will remain high longer. And even with active private equity, we will still see these intense price negotiations [of funds] with buyers, each seeking better conditions,” he said.
About the political risk, Mr. Minardi says that despite the increased level of uncertainty in the country due to Mr. Lula’s comments on rapidly accelerating public spending has been causing unbalance in the accounts, “there are many people still waiting, and taking the risk.” And this can affect the acquisition market if the government maintains this line.
For 2023, more optimistic estimates project paper offers of up to R$100 billion, as Valor reported last week — with an average of R$60 billion to R$70 billion. This year, issuances reached R$55 billion until November, but in 2021 they reached R$130 billion.
“If it reaches R$100 billion, we believe it could have a 15% to 20% rise in the number of M&A transactions because IPOs help to move this market as a whole,” said the Kroll executive.
Brookfield was not available for comment on ongoing negotiations. Petrobras informed that its plans in renewables are restricted to what the oil company has already disclosed in relevant facts.
*By Adriana Mattos, Mônica Scaramuzzo — São Paulo
Source: Valor International