| SAO PAULO
SAO PAULO Jan 6 Stricter legal and regulatory
scrutiny may slow mergers and acquisitions in Brazil this year,
compounding the impact of a harsh recession and lingering
political turmoil that is keeping buyers and sellers at odds
over valuations, bankers and lawyers said.
In recent months, trade unions and citizen advocacy groups
have increased pressure on industry watchdogs and federal
auditors to stop state asset sales aimed at cutting Brazil's
debt. More companies tapped antitrust authorities to review
rival industry tie-ups, putting the brakes on several deals.
For example, federal audit court TCU halted Petróleo
Brasileiro SA's asset sale program in December,
saying its terms should be more transparent. The decision led
the state-controlled oil company known as Petrobras to miss a
two-year, $15.1 billion goal by more than $1 billion.
Likewise, fallout from the "Operation Car Wash" corruption
probe has led to increased due diligence in asset sales for
engineering conglomerate Odebrecht SA and others ensnared in the
scandal. The usual time for such proceedings has doubled over
the past year, taking up to six months in some cases, lawyers
Thomson Reuters data shows at least 14 planned divestitures
or takeovers worth more than $8 billion that could have been
announced last year have been left for 2017, as buyers have
become more cautious of reputational and legal risks in Latin
America's largest economy.
Although M&A activity gained steam in recent months, tougher
compliance, the harshest recession in a century and the
political aftershocks of the Car Wash probe are putting off
announcements, said Flávio Valadão, head of M&A at Banco
Santander Brasil SA, which topped Thomson Reuters' 2016 advisory
rankings for Brazil.
The sale of a majority voting stake in Petrobras' fuel
distribution unit and Odebrecht's exit from a Peru gas pipeline
project were among the deals stuck in the mud last year.
"Legal and regulatory hurdles along with a growing zeal for
compliance have become day-to-day features in Brazil investment
banking," said Marcus Silberman, Bank of America Merrill Lynch's
head of Brazil M&A. "It makes it more challenging for buyers and
sellers to close a deal."
Companies announced $54.308 billion worth of Brazil-related
mergers last year, up 23 percent from 2015, the rankings showed.
Still, the number of announced deals fell to 578 from 676, the
biggest drop in three years, according to the data.
TOPPING THE CHARTS
Santander Brasil, the local unit of Spain's
Banco Santander SA, topped value rankings after working
on 16 deals worth $19.24 billion.
Itaú Unibanco Holding SA's Itaú BBA unit led the
number of deal rankings after working on 39 transactions,
followed by Grupo BTG Pactual SA at 27.
At Santander Brasil, Valadão and his team advised State Grid
Corp of China on the $10 billion purchase of power utility CPFL
Energia SA, Brazil's biggest M&A deal last year.
Silberman's Bank of America Merrill Lynch worked with
Santander on the deal, which is pending a buyout of minority
For years, investment banks have derived nearly half of
their annual revenue in Brazil from M&A work. As dealmaking
suffered with the country's economy, banks have turned to
structured lending to make up for declining advisory fees.
Likewise, transactions slated to close months ago, such as
steelmaker Cia Siderúrgica Nacional SA's sale of a stake in an
iron ore mining unit, have stalled as bids tend to come in below
asking prices, according to people involved in the deals.
Yet bankers and lawyers expect companies trying to
restructure more than 150 billion reais ($47 billion) of debt to
cave in to pressure from creditors and speed up asset sales,
which could drive prices lower.
"Bankruptcy protection and debt restructuring cases that
involve divestitures should gain extra steam in coming months,"
said Carlos Frederico Bingemer, a partner at Rio de
Janeiro-based law firm Barbosa, Müssnich & Aragão.
Car Wash-related M&A casualties include Petrobras' decision
to reconsider exiting Braskem SA, Latin America's
largest maker of resins, the people said. Potential buyers
fretted about the involvement of Odebrecht, Braskem's largest
shareholder, in the probe, those sources added.
Petrobras and Odebrecht had no immediate comment.
Despite the long list of suspended deals, advisory work
remains intense, forcing banks to shuffle staff from areas with
lighter workloads to handle more M&A and debt restructuring
Marco Gonçalves, BTG Pactual's head of M&A, said the power,
healthcare and infrastructure industries could help produce a
stable stream of deals in coming months. Bidders are also eyeing
assets in troubled sectors, where sellers need fresh capital as
Still, such needs pose a challenge for buyers and sellers
alike, as the time frame for an economic recovery in Brazil
remains unclear and concern about global market volatility
grows, Gonçalves said.
"More deals should be announced, for sure, although not at
the price sellers would like to see," he said. "The M&A market
in Brazil continues to be a buyer's market."
($1 = 3.2160 reais)
(Editing by Daniel Flynn and Lisa Von Ahn)