2 minute read 21 Nov 2018
Helicopter pilot looking down over mountainous terrain

New government spells good news for M&A outlook in Brazil

By

Felipe Miglioli

EY-Parthenon, Strategy Services, Ernst & Young Assessoria Empresarial Ltda.(Brazil)

Experienced professional focused on strategy to help companies invest, transact and grow.

2 minute read 21 Nov 2018

The recent election of a pro-business candidate is expected to stimulate local M&A, particularly in privatization and private equity activity.

This article is part of our M&A report Global Capital Confidence Barometer, 2nd half 2018.

When we were surveying Brazilian executives for the latest edition of our semiannual M&A report, the Capital Confidence Barometer, there was an overwhelming feeling of uncertainty as everyone awaited the outcome of the country’s recent elections.

For 36% of Brazilian respondents, evolving government and regulatory intervention were seen as key risks to business growth, while 41% saw regulatory and political uncertainty as an ongoing concern for dealmaking.

Although executives expressed overwhelming confidence in the global economy, we saw optimism in the local economy diminish somewhat, with 56% of Brazilian executives indicating it was improving, down from 84% six months earlier. We believe a slower pace of economic recovery than earlier this year contributed to this sentiment.

Confidence in local economy

56%

of Brazilian executives felt local economy was improving, down from 84% six months earlier.

As a result of the uncertainty, we saw many Brazilian companies delay their M&A; 42% of executives said they would be pursuing deals in the next 12 months versus 72% six months previously. Those who were forging ahead with transactions were primarily looking to address changes in customer behavior or enter new markets.

In this state of change, 61% of Brazilian companies indicated they had turned their attention inward, focusing on improving working capital management as part of their capital allocation strategy and investing in existing operations. Brazilian companies also stepped up the pace of their portfolio reviews, with 78% finding assets ripe for divestment, either because they were underperforming or at risk for disruption.

Portfolio reviews

78%

found assets ripe for divestment, either because they were underperforming or at risk for disruption.

Now that elections are over and Brazil has elected a pro-business candidate as president, we anticipate an uptick in M&A activity in the months ahead. There is some consensus that Brazil’s new president will introduce fiscal reforms that will improve market confidence and attract new investment. Specifically, we expect to see the privatization of public companies across numerous industries, from infrastructure to energy. We also anticipate that the new government will create incentives to encourage public-private partnerships (PPPs) to fund infrastructure, health care and education programs.

Given these developments, we will be looking for private equity to play a much larger role in the M&A market, something 39% of Brazilian executives expect will be a key M&A theme in the next 12 months. In fact, more than half expect their fiercest competition to come from private equity firms, venture capital and sovereign wealth funds. In the spirit of the saying: “if you can’t beat them, join them,” Brazilian corporates may want to consider collaborating with private equity on some deals rather than competing against them.

Summary

The recent election of a pro-business candidate is promising for M&A outlook in Brazil. Dealmaking had been down; those pursuing deals cited addressing changes in customer behavior or entering new markets. Brazilian executives have been focusing inwardly, on improving working capital management, investing in existing operations and reviewing their portfolios. We expect private equity and privatization to play larger roles in the near-term M&A outlook. Download the full report (pdf).

About this article

By

Felipe Miglioli

EY-Parthenon, Strategy Services, Ernst & Young Assessoria Empresarial Ltda.(Brazil)

Experienced professional focused on strategy to help companies invest, transact and grow.