Economic growth drives M&A

  • 01 Jul 1997
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Merger and acquisition activity is booming in Brazil as the country's new-found economic stability as a result of the Real plan encourages greater confidence among strategic buyers and widespread rationalisation in several sectors of the Brazilian economy.
Foreign investors are starting to acquire in size, in sectors like banking, insurance, construction and food retailing that are benefiting from economic expansion.
Local industrial conglomerates and financial institutions have hit the acquisition trail to build up critical mass in their sectors and provide stiffer competition for foreign rivals.
And privatisation is creating new opportunities for foreign and local parties to take strategic stakes in some of the country's biggest industrial assets.
As their clients increasingly move into Brazil, foreign investment banks are targeting M&A as a major growth area. But they face a struggle in competing with the local firms, many of whom have ridden Brazil's economic shocks with their clients and have formed strong ties as a result.

IN THE early 1990s Price Waterhouse's London executives would politely tell their São Paulo office not to bother putting Brazilian companies on their worldwide list of companies for sale.
"They would tell me that they did not think it was worth the time and effort," explains Raul Bier, manager of M&A at Price Waterhouse in Brazil.
Now, with the Real plan heading towards its third anniversary in July and with inflation expected to come in around 7% this year, Latin America's biggest economy is crawling with foreign strategic buyers hunting out Brazilian corporates for acquisition and joint ventures.
Before the Real plan Brazil was lucky to see 180 M&A transactions a year, and most deals were for not much more than $10m in size.
Foreign capital accounted for less than a third and then mostly involved multinationals already established in the region buying non-controlling stakes in companies as a cautious bet on Brazil's future.
But, despite what some describe as the obstructive attitude of Brazilian antitrust regulatory authority CADE, the pace of activity has picked up in the last two years as corporate investors have woken up to the opportunities in Brazil. Last year there were 387 public deals, 20% more than the record 318 deals in 1995 and deal sizes have come in at up to $1bn.
M&A volume figures for Latin America are notoriously inaccurate because the vast majority of transactions are never disclosed. Nevertheless, estimates by leading players suggest there were well over $5bn worth of deals in 1996, up from about $3.5bn in 1995.
Already this year around $2bn worth of deals have been announced and conservative estimates are that the final figure will be well over $8bn by December. The 1997 figures do not include privatisation, which will alone raise about $12bn this year.
"It's really booming," says Harry van Dyke, executive director and co-head of Latin American M&A at Morgan Stanley in New York.
"We officially organised our Latin M&A effort five years ago and at the time Brazil was not one of the countries that our clients were focusing on. Naturally enough at that time it was more Argentina, Venezuela and Mexico. But Brazil has come from the back of the pack and now, at least in terms of our business, leads the rest of the region by a fair margin - and our business basically follows our clients' interest levels."
Driving the interest is the country's new-found economic stability under the Real plan. On the sell side it has forced Brazilian industry to rationalise; on the buy side it has spurred an avalanche of both foreign and bigger Brazilian players into the acquisition arena.
Brazil has enjoyed record levels of foreign capital inflows since 1994, of which an increasing portion is due to M&A. It is estimated that so far this year about 70% of all Brazilian M&A deals have involved foreign capital participation, up from about 50% in 1996 and about a third in 1993.
These companies have primarily been US based, although increasingly UK, European and Asian firms are entering the fray. "There is a recognition by the buyers that the growth potential in Latin American companies generally exceeds the risk factor of where they are based," says van Dyke.
The vast majority of foreigners are buying at the very least controlling stakes in their targets and very often the entire company.
The bigger deals announced this year include HSBC's $1bn acquisition of retail bank Bamerindus; Singaporean NatSteel's $500m acquisition of a controlling stake in leading Brazilian steel producer Aco Minas Gerais SA; and Lloyds Bank's $550m purchase of the remaining 50% of Banco Multiplic.
Last year's bigger deals included Dutch company Royal Ahold's $683.5m purchase of a 39% stake in supermarket chain Bompreco and French based Lafarge Coppee's $215m acquisition of Matsulfur, the cement company, from the controlling family.
"They're not always multinationals," says Bier. "We have also seen an increasing number of medium-sized companies buying Brazilian corporates, especially companies from the US."
THERE are even some firms which bailed out of Brazil several years ago that have decided to come back again. US-based Agco is an example, recently acquiring Maxion, a Brazilian tractor manufacturer.
Others, meanwhile, are not all that fussy about which companies they buy - just so long as they expand their sales. "In many cases they are not necessarily asking us to find them a particular company in a specific market segment. Instead they say things like 'I need $300m in extra sales in three or four different segments'," says Bier.
Luring foreign companies is the prospect of double digit returns in sectors which are barely growing at home. The drop in inflation has turned a consumer base restricted to the upper class into a swarming mass of aspiring middle class people buying refrigerators and television sets for the first time in their lives.
Foreign companies have also realised that Brazil is far too daunting to tackle from scratch. "Brazil has trade marks that are very strong, at least in comparison to Argentina or Chile. So entering the market with a greenfield operation is probably more difficult to do in Brazil than in other Latin countries, simply because the trade marks are much better established here," says Bier.
Besides, apart from a few sectors, there does not appear to be a dramatic shortage of sellers. Like the rest of Latin America, increased competition from imports and relaxed rules on foreign participation in local industry sectors has been adopted by Brazil as part of its economic reform programme.
That, along with the inability to index against inflation and to make huge profits simply by investing in central bank bonds indexed to price indices, has forced a wide range of sectors - particularly the financial segment - into rapid consolidation.
"Supply of acquisition targets is often driven by local companies realising that a multinational partner is a useful thing to have for technology, strategic product and breadth of resources," explains van Dyke.
"You don't want to be a small local player competing against three giant multinationals that have just bought up your competitors. Scale is becoming more and more important in Brazil. You need to have the distribution network in things like consumer products."
Food and beverages was one of the first sectors to generate a high level of M&A activity. "It still is active, but it's not as hot as it was three years ago because a lot of the attractive targets have already been sold," says a senior M&A banker at one of the leading Brazilian investment firms.
There are still deals being done in the sector, including Danone's acquisition of 51% of food company Campineira in May this year. Last year's acquisition by Royal Ahold of Bompreco is also an example.
Nabisco continued to increase its already sizeable presence in Brazil with a number of acquisitions last year, including the purchase of food company Companhia de Produtos Pilar in April 1996 and food company Gumz Alimentos in January 1996.
The past 18 months' hottest M&A spots, however, have been insurance and banking as foreign and local banks prepare themselves for a boom in demand for banking products in a country where only about 40m people out of a population of about 160m have bank accounts.
Behind the consumer boom is a need for credit, hence a focus on retail and consumer banking acquisitions. Before the Real Plan banks largely made their money by what they call 'float', or simply investing in the local debt securities indexed to inflation.
Now that indexation has been wiped out, they have been forced to learn the more traditional banking businesses - and many have failed dismally in their efforts. That has left Brazil with a treasure trove of struggling banks with well established branch networks.
HSBC, for instance, took over the 2,000 branch network of Bamerindus, a bank which underwent a forced sale because of its inability to adapt to the new low inflationary environment. Santander has also been buying, having recently purchased a majority holding in Geral Do Comercio for $220m, and is expected to expand substantially from that base.
Banco Bilbao Vizcaya and Bank Boston are also said to be looking for banks and even Citibank is rumored to be thinking of changing its stance and looking at growth through acquisition.
Brazil is also one of the most under-insured countries in the world, and among the fastest growing. "The opening of the insurance market with new regulation allowing foreigners to come into the market has led to a lot of growth potential in the insurance market," says a local M&A banker in São Paulo. Recent deals include Aetna's $425m purchase of a 48% stake in a joint venture with Sul America. Last year Liberty Mutual acquired Paulista Seguros, a São Paulo-based insurance company.
Foreign companies are by no means the only buyers. Brazil has a very strong group of large, sophisticated and well established conglomerates and businesses, which are as keen as their foreign counterparts to gain critical mass and avoid missing out on the huge gains to be made as Brazil continues on its path of economic stability.
Brazil's leading banks, Bradesco, Unibanco and Itaú have all been moving to expand their already formidable presence in both banking and insurance in anticipation of increased foreign competition. Unibanco, for instance, bought Banco Nacional from the central bank last year after Nacional was taken over by the authorities amid a fraud scandal.
This year, Bradesco continued to build on its insurance capabilities by purchasing a 40% holding in Indiana Seguros in March.
In the last year Itaú also bought BFB, the high net worth bank previously owned by Crédit Lyonnais, and a smaller player, Banco Excel, significantly expanded its presence last year with its $420m acquisition of Banco Econômico.
Many of Brazil's biggest conglomerates had already been rationalising and refining their strategies well before the Real plan, in anticipation of eventual economic reform.
Now conglomerates like Vicunha (steel and textiles), Votorantim (cement, aluminium, pulp and paper) Camargo Correa (construction), and Odebrecht (construction and petrochemicals) are, like the country's banking operations, reinventing themselves as bigger corporates better able to meet the competition.
Many are vying for privatisation assets. Vicunha, which owns 14% of CSN, was among the winners in the CVRD auction, while Votorantim was on the losing side. Last year Vicunha also bought a 50% holding in Hering do Nordeste, the textile company.
Buyers from other Latin countries are few and far between, partly because it is so daunting for Argentine and Chilean companies to purchase Brazilian firms that are often double their own size.
Nevertheless, bigger players like Chile's Madeco, the copper manufacturer owned by the powerful Luksic Group, has recently announced its 49.3% purchase of wires and cables company Ficap. CTC, the biggest Chilean telephone operator, is also eyeing the sell-off of Telebras assets scheduled for next year.
Amid this local and international buying spree are a small group of the more fearless financial buyers sniffing out deals, like Hicks, Muse, Tate & Furst and Texas Pacific.
"We've definitely seen an increase in these financial buyers looking for deals, but it's tough for them to compete with strategic buyers," says a Brazilian banker.
Morgan Stanley's van Dyke, however, says they are used to the competition and expects to see such firms securing an increasing number of deals in Brazil.
"Companies like Hicks Muse and Texas Pacific have developed Latin groups that focus on deals just in Latin American and they will become an important part of the market," he says.
The focus for investment banks, however, will be on the local and the international trade buyers. For the past three years Garantia, the private and best established Brazilian investment firm - the country's equivalent of Goldman Sachs - has been ranked the number one M&A adviser in Brazil.
However, along with the increasing number of acquirers coming from abroad, the big local M&A houses like Garantia, Pactual and Banco Bozano Simensen are seeing very strong competition from foreign investment and commercial banks, like Credit Suisse First Boston, Morgan Stanley, JP Morgan, Chase, Merrill and Lehman and non-US investment firms like ING Barings, SBC Warburg and Dresdner Kleinwort Benson.
NEVERTHELESS, local M&A players continue to control a very large part of the market and are the chief advisers for Brazilian firms looking to sell or acquire. They also attract a strong number of foreign firms wanting the long established expertise of a local player.
"We have been the leader in this market for the last five years," claims a banker at Garantia. "That is a significant weapon. We have critical mass and deal flow and the most significant experience dealing with M&A, and corporates in Brazil and Brazilian and foreign firms are aware of that."
Foreign firms often team up with Garantia, Banco Bozano Simensen and Pactual because they simply cannot beat the history and rapport that these big local players have with the cream of Brazilian corporate executives.
As Paulo Ferraz, chief executive officer of Bozano Simensen explains, nothing can beat the bond that developed among bankers and their corporate clients during the many and varied economic shocks Brazil has suffered over the last two decades.
"We understand better the business of our corporate clients because we are here all the time," says Ferraz. "We have suffered with them through all of the economic shocks." Bankers flying from New York who do not even remember the 1980s debt crisis are just not in the same league.
As a result, the likes of Garantia, Bozano and Pactual are well entrenched favourites among the conglomerates and foreign bankers know it.
"The local guys obviously have the longest history in the market. They've been there through thick and thin and they know the Brazilian corporate community better than anyone," says a US banker.
"They have more personnel and local transactions are their strength. Our strength is our global reach, but the market is so big. There is definitely room for foreign firms and local investment banks, as long as we all provide top service." EW

  • 01 Jul 1997

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