Tuesday, February 16, 2016

Brazil’s recession creates boon for M&A bankers

It has survived two world wars, the Spanish Flu epidemic that wiped out half its workers, and Brazil’s numerous political and economic disasters.
Now, Alpargatas, the producer of Brazil’s trendy Havaianas flip-flops is battling the country’s most disruptive crisis yet, which has prompted an ownership change at the footwear company after more than three decades.

Already under pressure from Brazil’s recession, the Camargo conglomerate has promised to pay back more than $200m after its executives were convicted of participating in the vast bribery and kickback scheme at state-run oil company Petrobras.Camargo Corrêa, Alpargatas’s majority shareholder since 1982, is in the process of handing over control to Brazil’s billionaire Batista family for R$2.67bn (US$716m).
The sale, first announced in November, is one of several deals struck mid-crisis that has led to Brazil’s best fourth quarter for mergers and acquisitions since 2013 and the third-best since records began in 1995. The total number of deals in the country reached $22.59bn during the last three months of 2015, according to data from Dealogic.
Bankers are optimistic this level of activity will continue this year. While Brazil’s deepest recession since 1901 has heaped pressure on homegrown companies, it is proving to be a boon for bankers as companies such as Camargo sell non-core businesses.
The near-45 per cent depreciation in the Brazilian real against the dollar since mid-2014 has made Brazilian assets more affordable for foreign investors, attracting buyers from Europe, the US and increasingly Asia.
"We are cautiously optimistic, especially on the M&A front. Long-term strategic investors continue to be interested — they feel they need to be in Brazil and that this is the time when they can buy at the bottom of the cycle,” says Roderick Greenlees, global head of investment banking at Itaú BBA.
At first glance, Brazil’s situation is dire. The International Monetary Fund expects the economy to contract by 3.5 per cent this year after shrinking 3.7 per cent last year. Inflation is running at almost 11 per cent and two credit rating agencies have cut the country’s debt to junk as the budget deficit has ballooned to about 10 per cent.
The corruption scandal at Petrobras — the largest in the country’s history — has brought the oil and construction industries to a standstill and implicated more than 30 members of Congress. Meanwhile, President Dilma Rousseff, the most unpopular leader in living memory, is herself facing impeachment proceedings over allegations her government cooked the books.
Despite the gloomy prognosis, bankers say the recent spate of M&A suggested investors, accustomed to Brazil’s boom-and-bust cycles, still see long-term potential in the country, particularly as a result of its vast domestic consumer market and ample natural resources.
Long-term strategic investors continue to be interested — they feel they need to be in Brazil and that this is the time when they can buy at the bottom of thecycle
- Roderick Greenlees, Itaú BBA.
US-listed fragrance group Coty paid $1bn for the beauty care unit of Brazil's Hypermarcas consumer group, betting on the fast-growing industry. Brazil’s beauty and personal care market was worth $43.45bn in 2014 — the world’s third-largest, according to Euromonitor’s most recent data.
UK-listed consumer goods group Reckitt Benckiser followed suit in January, snapping up Hypermarcas's condom business for about $170m. Bankers expect the group to put its nappies division on the block next.
The Chinese have been scouring the country for assets. In one of the biggest deals in recent months. State-owned power company China Three Gorges paid $3.7bn for the rights to operate two large hydropower plants on Brazil’s Paraná river.
"The Chinese are more interested in the power sector and the Europeans have shown a lot of interest in infrastructure. The interests of American investors are more diversified," says Marcus Silberman, head of M&A in Brazil at Bank of America Merrill Lynch.
M&A activity in Brazil during the last three months of 2015
While dealmaking usually slows between Christmas and Brazil’s carnival celebrations, which came to an end last week, bankers are preparing for another round of M&A, driven by domestic as well as foreign operators.
“At the bottom of the chain there are a lot of horizontal mergers, such as companies merging with their neighbours, and a lot of that is domestic," says Eduardo Guimarães, head of M&A at Itaú BBA.
Aside from the recession, the Petrobras investigation, termed Lava Jato or ‘Car Wash’, will also be responsible for many of the deals this year, says Waldo Perez, head of M&A for Latin America at Deutsche Bank. “The Lava Jato situation has left a series of construction companies and infrastructure players highly levered and so there is a lot of talk about their assets being for sale.”
The first pair of Havaianas sandals were made in 1962 by Alpargatas, a renowned Brazilian footwear and apparel company. Inspired by the design of traditional rice straw and fabric Japanese sandals, 21st century Havaianas flip flops combine authentic vintage design with modern technology, to ensure your feet stay stylish and comfortable
Havaianas flip-flops
BTG Pactual has also rushed to sell assets such as Swiss private bank BSI after its founder André Esteves was arrested in connection with the scandal. Mr Esteves denies wrongdoing.
Meanwhile, Petrobras plans to sell $15.1bn of assets by the end of this year to pay down debt — a goal some analysts have deemed too ambitious, given the collapse in the price of oil.
Its sale process is also likely to be hindered by the extra due diligence required as a result of the scandal, combined with market volatility, bankers caution. “Take a deal that was announced at the beginning of 2015 and closed at the end of the year — imagine the number of things that had to be assimilated in that time,” says Fábio Mourão, head of investment banking in Brazil at Credit Suisse.

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