War, weak growth slows down M&A activity

Mergers and acquisitions are down sharply this year in light of the economic instability abroad and in Brazil and the uncertainties caused by Russia’s war against Ukraine. In total, 134 deals were announced this year to April 10, down 14.6% year over year. The slowdown is greater when the combined amount involved is considered: it’s down 57% to $12.2 billion, according to a survey by Dealogic.

The partial data points to uncertainties about the trend for M&As in 2022, when Brazil holds a presidential election. “What we have seen so far shows that the year will be more difficult than the market predicted at the end of last year,” a source familiar with the market said, asking not to be named.

According to the snapshot presented by Dealogic, the market saw a lower participation of foreign groups than in 2021. Only 20%, or $2.4 billion, involved investors from abroad.

Although the flow of foreign capital has increased in the stock market, foreign groups are waiting for a clearer scenario to define where to allocate their funds. With the war, many investors have put plans for acquisitions on the back burner.

Gustavo Miranda, head of investment banking at Santander in Brazil, says that the market volatility has an impact on the price references of the assets traded. “We have a scenario of inflation and monetary tightening here and abroad. Economic uncertainties also affect multiples of listed companies.”

According to the executive, the cost of raising new money has also increased as a result of rising interest rates. This factor influences how companies finance deals.

The business environment at the beginning of this year in the country was more turbulent compared to the same period last year. At that time, although Brazil was still under the strongest effect of the pandemic, the expectation regarding the recovery of the economy was more optimistic than now. In 2021, the country saw record volumes in the capital market, as IPOs and secondary offerings totaled R$130 billion. M&A transactions ended the year at around $90 billion, the highest level in a decade.

At the beginning of last year, key deals were closed – the merger of Intermédica and Hapvida created a new company valued at R$110 billion at the time the deal was unveiled, in early March last year. Another important deal in early 2021 was the spin-off of Itaú Unibanco’s stake in XP, which helped boost the value of the business. “This is not exactly classic M&A, but it was computed by Dealogic in the first quarter,” Mr. Miranda said.

According to another source in the financial market, a good part of the M&A deals, especially in the technology industry, face lower reference prices than those seen last year due to the devaluation of some stocks in the U.S. “There is a substantial correction in the valuation of technology companies,” he said.

This source also points out that the definition of asset prices in mergers and acquisitions also occurs in companies from other sectors in Brazil. With the fall of shares of Brazilian companies listed on the stock exchange, the difference between what the seller asks and what the buyer is willing to pay has increased this year. This factor also helps explain the drop in volumes of deals announced in the first months of this year. Assets linked to commodities (mainly minerals), agriculture and metals, as well as oil and gas companies, are the exceptions.

One of the largest transactions unveiled in 2022 was Rede D’Or’s transaction with healthcare group SulAmérica. The hospital network valued the insurer at R$15 billion. Another important deal underway in the healthcare field is the sale of a stake in Hospital Care, which has Crescera and Abaporu funds, owned by the family of businessman Elie Horn, as shareholders. Bradesco Saúde and private-equity funds are among the interested parties.

Major deals may be closed in the coming months, especially in the power industry. Among them is the sale of Quantum, which gathers Brookfield’s assets in this field, evaluated in R$7 billion. Dommo Energia, resulting from the restructuring of OGX, was also put up for sale, as reported by Pipeline, Valor’s business website.

The sale of the petrochemical company Braskem is also among the most expected by the market. However, the negotiation is considered more complex but may total R$40 billion.

According to Mr. Miranda, with Santander, many private investments, especially from private-equity funds, can be made in companies that failed to go public last year.

If, on the one hand, it is more difficult to draw a scenario for M&A at the beginning of this year, the picture is clearer for the capital market. Given the uncertainties in Brazil and abroad, and the volatility caused by the presidential elections, the market is unlikely to see any IPO in the first half. The projections are more focused on secondary offerings. The market awaits the Eletrobras deal, which may total R$30 billion.

Source: Valor International

https://valorinternational.globo.com