According to the São Paulo Industries Federation (FIESP), Brazilian investment rate for 2014 will be lower than 18% of the GDP, which in turn is lower than 2013 figures. The investment rate decline may be explained by the poor results of the Brazilian economy during the year of 2014 which are continuously impacting investors' confidence in the country's development outlook. Despite the reduction in the investment rate, the volume of mergers and acquisitions (M&A) in 2014 has increased according to data gathered by PwC which is analyzed throughout this article. There may be good reasons to believe that the M&A market will continue to be active in 2015, but a significant change in the direction of the Brazilian economy and the legal framework will determine whether one should expect less or more interest in Brazil in the coming years.
The volume of M&A transactions up to the third quarter of 2014 has increased at an approximate rate of 10% compared to the average of the last years. Market sources expect that such growth will be sustained until year close or may even exceed such percentage. The sectors that lead the ranking in volume of transactions, include IT, services and retail, but it is key to extend an analysis of the Brazilian M&A environment in relation to the agribusiness and infrastructure sectors due to their role in the economy and increasing demands. The majority of the deals had the participation of strategic investors but as, in recent years, private equity and other financial investors became a relevant player and important source of funding.
The IT sector led the way and was responsible for about 17% of the total number of transactions reported until the third quarter of 2014. The relevant participation of the IT sector may be explained by the need for consolidation felt in this market, a trend which will most likely continue in 2015.
On the opposite direction, services and retail sectors, which are also relevant in the number of transactions, are maintaining or even reducing their share in the total volume of 2014. One may further expect a decrease in volume of transactions for the next years in view of the challenges these sectors are already facing and of the low pace of growth of the economy and consumption in 2014.
The agribusiness sector is the big star of the Brazilian economy for the year of 2014. Despite the rest of the economy is going down (GDP growth is expected to be at a rate around 0,2%-0,3% in 2014), the Brazilian agribusiness sector is expected to grow 4% in relation to 2013. This sector will continue to be relevant in the coming years in terms of M&A activity, despite some adjustments that may be imposed on the ethanol industry which will certainly go through more consolidation and financial restructuring during the year of 2015.
Investment in infrastructure will be key to obtain a sustainable growth of the Brazilian economy. Infrastructure in industries and sectors such as oil and gas, energy, telecommunications, mining, hydro ways, ports, airports, railroads and roads are highly dependent on a fairly stable legal framework. The legal framework for many of these sectors has been highly unstable in the last years. Despite the lack of interest for long term investments in many of these sectors, existing assets continue to be attractive to investors, especially assets that will benefit from the continuous growth of the agribusiness sector and increasing demands by the population in relation to urban mobility. M&A may be a tool for consolidation of some of these industries and an aid for many of them to face the financial challenges of projects already contracted but not necessarily, or properly, funded.
In terms of players involved in M&A deals, the economic slowdown tends to affect more of the short term investors rather than strategic players looking with a long term view. However, short or medium term players such as private equity and other financial investors may actually look into Brazil as an opportunity given the devaluation of the Brazilian currency and the reduction of price expectation by Brazilian sellers.
Many of these M&A growth drivers (consolidation in certain sectors, importance of agribusiness, additional infrastructure requirements and financial restructuring) will continue to result in a significant volume of transactions but this volume will not be sustainable if the Brazilian macro-economic environment is not adjusted and the country does not offer stability to investors in its legal framework. M&A growth is not an alternative for an increasing need of growth in the investment rate ― more M&A deals do not necessarily lead to more investment and ― without more investment, the Brazilian economy will not find its path to growth again.
By José Setti Diaz, partner at Demarest Advogados
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