Brazil M&A deals to recover after 27 percent drop in Q1

By Guillermo Parra-Bernal and Aluisio Alves

SAO PAULO (Reuters) – Mergers and acquisitions activity in Brazil will gain traction after a 27 percent drop in the first quarter, as a private equity frenzy and a strong local bond market fuel takeovers in the energy, consumer and commodities sectors, bankers said on Tuesday.

About $18.55 billion worth of M&A deals were announced last quarter, compared with $25.38 billion a year earlier, according to Thomson Reuters data. In all, 142 deals were unveiled, 8.4 percent less than the 153 in the same period in 2010.

Goldman Sachs (GS.N: Quote, Profile, Research), the world’s most profitable securities firm, topped the ranking in Brazil after advising three deals worth $10.37 billion, the data showed. Spain’s Banco Santander (SAN.MC: Quote, Profile, Research) and local powerhouse Itau Unibanco (ITUB4.SA: Quote, Profile, Research) followed, with $10.1 billion and $6.42 billion worth of deals, respectively.

The steep decline in M&A activity, which bankers blamed on their decision to bring forward announcements from the fourth quarter, will be reversed in coming months as power, sugar and ethanol and consumer companies look to add scale and financial muscle by joining forces with rivals.

“We are currently seeing a huge level of interest in Brazil, which we expect to continue for the rest of the year,” Daniel Wainstein, head of investment banking in Brazil at Goldman Sachs, said in an interview.

Corporate tie-ups, he said, could gain momentum as millions of Brazilians join the middle class, the country’s macro economic fundamentals remain solid and companies have greater access to diverse sources of capital.

The need for domestic consolidation and a strong currency, which makes foreign takeover targets cheaper when measured in Brazilian reais, will also propel M&A transactions.

Foreign and local investors are confident that Brazil will fend off a recent pick-up in risk aversion and offset perceptions that local valuations are rich.

“Relative to other regions, like Europe, Brazil is El Dorado,” Flavio Valadao, head of M&A for Santander in Sao Paulo, said, referring to the mythical “Lost City of Gold” that symbolizes an elusive, as-yet unfound bonanza.

“Companies that want to position themselves in Brazil won’t miss this chance just because of isolated events” like concern over debt crises in Europe or a recent rise in Brazil’s inflation rate, he added.

GLOBAL REACH

The more emerging market companies expand, the bigger is their need to seek M&A advisory with banks with global reach like Goldman Sachs. The New York-based powerhouse acted as an advisor in three of the four largest combinations announced in the period, the data showed.

Possible deals include Banco do Brasil’s (BBAS3.SA: Quote, Profile, Research) expected takeover of a small U.S. regional lender that may be announced this week. Late on Monday, retailer Lojas Renner said it agreed to buy rival Camicado for an undisclosed sum.

The largest, Telefonica’s March 25 merger of its mobile phone carrier Vivo (VIVO4.SA: Quote, Profile, Research) into its fixed-line unit Telesp (TLPP4.SA: Quote, Profile, Research), was valued at $5.52 billion. Spain’s Iberdrola (IBE.MC: Quote, Profile, Research) $2.4 billion takeover of Brazilian energy distributor Elektro (EKTR4.SA: Quote, Profile, Research) was ranked as the quarter’s No. 2 deal.

Wainstein, whose division last year poached seven senior M&A dealmakers from rivals including Citigroup, said part of that recovery will be propelled by an appetite from private equity firms for Brazilian assets.

Last year, three of every four Latin American private equity-led deals took place in Brazil, industry group LAVCA said. Among those, the Carlyle Group (CYL.UL: Quote, Profile, Research) completed two purchases worth a combined $1.7 billion, and the Blackstone Group (BX.N: Quote, Profile, Research) bought a stake in local fund Patria Investimentos.

“Private equity will continue to play an increasingly active role in the M&A market, particularly as leverage becomes more attractive with lower interest rates,” he noted.

Jean-Marc Etlin, who oversees mergers and acquisitions for Itau Unibanco’s Itau BBA unit, expects red-hot dealmaking in biofuels, infrastructure and logistics — traditionally areas where buyout firms act.

Santander’s Valadao expects a surge in food and beverages and consumer goods mergers throughout the rest of the year.

“Businesses are avidly looking for expansion opportunities, via acquisitions, via organic growth,” said Luiz Muniz, managing director for Rothschild & Co. in Brazil.

(Editing by Raymond Colitt and Maureen Bavdek)

Brazil M&A deals to recover after 27 percent drop in Q1