Latin Finance - January/February 2011 - 55

brazil m&a

2009. While 362 deals worth $64.3 billion were completed in Brazil in the full year 2009, in the year to November 24, 2010, 502 deals worth $149.7 billion had been announced. Dealogic only includes deals where financial advisors were retained. With GDP forecast to keep growing at a relatively fast clip, M&A deal activity is not expected to cool any time soon.

Pumped Valuations

The Brazilian oil and gas sector is also seeing valuations that are often higher than those of similar companies elsewhere. As an example, Jorge Barreda, partner at SinoLatin Capital, which advises on M&A deals between LatAm and China, says a recent transaction valued oil assets at $15 per barrel. “A similar deal in Argentina priced at around $10 per barrel,” he adds.

As M&A activity has increased, valuations have risen dramatically, particularly in sectors poised to take advantage of increased spending by a growing middle class. According to Isacson Casuich, an M&A-focused partner at Rio de Janeirobased Banco Modal, the consumer sector in particular has seen valuations climb, going from 5x-6x Ebitda only a few years ago to 10-11x Ebitda in December. In contrast, consumer product companies in the US and Europe are only being valued at around 5x-6x Ebitda, according to Rodrigo Pasin, a partner at the São Paulo office of V2Finance, a shop dedicated to M&A advisory and company valuation. Pasin points out that companies in established countries are unlikely to experience the 15%-25% revenue growth their Brazilian counterparts are enjoying. CETIP, the Brazilian clearinghouse, justified its 2.0 billion real acquisition of vehicle finance processing company GRV in part by pointing to expectations of 65% growth in revenues at the target. Analysts say the December deal is accretive, despite the fact that it estimates CETIP paid around 15x 2010 estimated Ebitda, because the acquirer itself was trading at around 34x 2010 estimated Ebitda. Pfizer in October made a 400 million real investment in genetic pharmaceutical company Laboratorio Teuto Brasileiro to take a 40% stake, with an option to acquire the rest of the company. Pfizer explicitly identified its desire to gain greater access to the growing Brazilian middle class as part of the rationale. That trend is likely to continue, as consumer spending is forecast to continue growing for years. According to an April 2010 study by Business Monitor International, private consumption in Brazil is expected to outpace GDP growth until at least 2014.

No Peak Yet

Despite a rise in valuation, a peak may not yet have been reached. “Buyers are paying what seems to be a higher valuation, but they are buying growth,” says Gonçalves. Brazil’s GDP was expected to have grown 7.5% last year, and average 5.0% over the next 10 years, according to Pasin. That is not to say valuations are not seeing some pushback from buyers. “Prices are still reasonable in Brazil if you consider the rate of growth in the country, but buyers are starting to take a closer look at valuations before buying,” says Barreda. Some of those potential buyers are Chinese companies, whose investment horizons may make them more willing to pay higher premia. “They seek long-term opportunities that make strategic sense and are not focused on the immediate return on investment,” he explains. Rising valuations have still not been enough to dampen buyer enthusiasm, with some saying volume is only set to increase this year. “I believe M&A will be even more active in 2011 than in 2010 in various sectors,” says Gonçalves.

they already have a big share of the local market. These companies need to have sources of production outside of Brazil, so you are likely to continue to see them expanding internationally.” Proof can be seen in recent outbound deals. In June, Brazilian beef company Marfrig said it was acquiring US-based food products manufacturer Keystone Foods from US-based private equity firm Lindsay Goldberg, which had held the company for about eight years, for $1.26 billion. In September, steel company Gerdau announced it would acquire US-based steelmaker Tamco for $165 million. Also, in August Gerdau finalized the acquisition of a minority stake in US-based Gerdau Ameristeel for $1.6 billion, bringing its stake to 100%. One of the largest deals this year, Braskem’s $4.2 billion acquisition of Quattor, was predicated on the idea of creating a Brazilian petrochemicals company that could compete for overseas assets. Shortly after the deal was announced, Braskem turned around and acquired Sunoco Chemicals in the US for $350 million.

Fees Compress

Brazilians Abroad

Brazilians are expected to continue to shop beyond Brazil’s borders, aided by a strengthening real that makes US targets look cheap. The real went from a low of 1.89 reais to the dollar in February to 1.71 in December. “Brazilian companies now are the ones hunting the big global companies. The global players now see these Brazilian champions as peers,” says Palden Namgyal, senior managing director at New York-based boutique Atlas Advisors. Gonçalves agrees. “Many Brazilian companies, exporters particularly, are trying to expand internationally because

Increased competition for mandates has in turn pummeled fees. While more deals were announced in 2010 than the year before, revenue is not keeping pace. According to Dealogic, in the year to November 24 2010 the top 10 M&A fee earners in Brazil took in $289 million. In the corresponding period of 2009, they raked in $292 million. Overall, M&A advisory fees climbed to $362 million in the year-to-date in 2010 from $348 million for the same period in 2009, a 4% increase. This compares with a doubling in overall deal volume. Dealogic shows that the top 10 investment banks had 79.8% share of revenue through November 24. For the corresponding period of 2009, they owned 84.1%, suggesting more and smaller players are grabbing a piece of the pie. Data also shows that five out of the top 10 banks saw net revenues decline, while four enjoyed an increase and one saw revenue flat. LF

January/February 2011

LatinFinance 55

Latin Finance - January/February 2011

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