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The Brazilian economy is gradually recovering and this could have a positive impact on M&A activity in 2018.
However, local political risk in terms of next year's presidential elections and external risk in the shape of US tax reform, could prompt some investors to hold back on large-scale investment decisions.
To find out what to expect on the Brazilian M&A front in 2018, BNamericas spoke with Rogerio Gollo (pictured), a partner at PwC in Brazil.
BNamericas: We are seeing a recovery in the number of M&A transactions this year. Was this recovery in line with your expectations?
Gollo: Our expectation at the beginning of this year was for an expansion of 15% in the number of [announced] M&A transactions.
However, in the middle of the year a difficult political environment erupted which disrupted the whole scenario. In this new scenario, we should end the year with a lower-than-expected performance, with some 600-620 transactions announced and growth of around 5%.
BNamericas: What do you expect for 2018?
Gollo: For 2018, our expectation is that M&A activity will expand 20%. The end of the economic recession should be positive for M&A transactions.
It is however important to highlight that there is a risk on the political side.
If one candidate takes a more interventionist narrative regarding the economy and if another candidate takes a more a market-friendly posture, the [M&A] transactions will depend on how each candidate is positioned in the polls.
Acquiring a company involves a long-term bet. From the perspective of the local investor, what is most important is the final price paid for the asset, whether it is cheap or expensive.
In the case of the foreign investor, the question of the exchange rate and exchange rate predictability is very important because it can have a significant impact on the investment return.
Political uncertainty could at some point next year lead to a paralysis in M&A activity.
BNamericas: What business sectors are likely to see most deals in 2018?
Gollo: The technology sector tends to generate most transactions because it is very fragmented with many small companies, which favors movements of consolidation. There are still few mid-sized companies in this sector and even fewer large companies.
With the help of the improving economy, the energy and retail sectors should also see several deals.
BNamericas: What sectors are not likely to attract many investors?
Gollo: Investors will likely be cautious about the infrastructure sector.
This sector depends a lot on the government and since we have a presidential election next year, investors want to see where the next administration is going. They will want to see if we will have a more interventionist administration or if it will be more market friendly.
The infrastructure sector is of course huge and there are always certain transactions taking place, but in general the trend will be for investors to wait and see until the election outcome.
BNamericas: What is the behavior of global investors in Brazil?
Gollo: Chinese investors have a different profile than others. In general, they have much more appetite for risk and are willing to make longer-term investments.
US investors tend to take a more cautious stance, with much less appetite for risk and they like governments that do not intervene. The Europeans are halfway between the Chinese and US investors.
BNamericas: Could the US tax reform hurt M&A activity in Brazil?
Gollo: The US tax reform will affect M&A activity across the globe, not only in Brazil.
There will be a reduction in liquidity around the world if US investors that are looking for tax benefits, bring their money back to the US.
There are some sectors, such as IT, which should not suffer as much since these companies need to have a more global presence anyway.
That being said, major acquisitions could be impacted.
BNamericas: In the recent past, Brazil saw a record number of M&A deals. When can we see this kind of volume again?
Gollo: In 2014 we had a record year in terms of the number of announced transactions .
If a market-friendly candidate wins next year's election, we could see the record being reached once again in 2020. Now, if we end up with a president with a more interventionist stance towards the economy, the record level could only be attained after 2024, under a new administration.
BNamericas: Brazil's key interest rate is now almost at a historical low. How do lower interest rates impact M&A?
Gollo: The effect of interest rates is huge on M&A activity. Transactions are usually done through financing and if rates stay low for three or four consecutive years, it can generate many more deals.
This underscores the importance of the [proposed] pension reform so we can have structurally lower interest rates. With this in mind [and the economy, elections, and the exchange rate], M&A activity in Brazil will depend mostly on local factors.
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