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Brazil's sliding stock market makes M&A targets

EconomyJan 24, 2022 05:19AM ET
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© Reuters. A man stands near an electronic board showing the recent fluctuations of market indices on the floor of Brazil's B3 Stock Exchange in Sao Paulo, Brazil October 28, 2021. REUTERS/Amanda Perobelli

By Carolina Mandl and Tatiana Bautzer

SAO PAULO (Reuters) - A frenzy of talks for mergers and acquisitions has caught some Brazilian bankers off-guard in the early weeks of 2022.

With the economy in recession, inflation in double digits and a polarizing election looming, a sliding stock market has made many companies into easier targets for takeovers, they say.

"It has been a long time since we began a year with such a large M&A pipeline," said Roderick Greenlees, global head of investment banking at Itau BBA.

Brazil's benchmark Bovespa index fell 17% over the last six months, and the real has weakened 5% against the dollar as investors fret about macroeconomic risks, slipping fiscal discipline and the outcome of an October presidential election.

The most fragile companies are the recently listed ones that lost significant market cap, bankers said, without citing specific potential targets.

Furniture retailers Mobly SA and Westwing Comercio, mileage program Dotz SA, outsourcing service Getninjas SA and marine engineering firm Oceanpact Servicos Maritimos lost more than 70% of their value since their IPOs last year.

"There is a good number of small- to mid-cap listed companies with significant price and liquidity challenges to tap into the equity capital markets to raise fresh money, so M&A becomes a more reliable and, in some cases, the only alternative," said Gustavo Miranda, investment banking head at Banco Santander (MC:SAN) Brasil SA.

Banco Modal SA, for example, had lost almost 60% of its value since an April IPO and received an all-share bid to be acquired by broker XP (NASDAQ:XP) Inc this month.

Discussion between mall operators Aliansce Sonae and BR Malls for a tie-up also come as shares in both companies were down more than 20% from a year earlier amid the pandemic. The deal seems to be motivated by a need to show growth and good news to investors even as the mall sector struggles to rebound from the pandemic.

BR Malls has rejected Aliansce Sonae's proposal, but talks are expected to continue. Retailers Americanas SA and Marisa Lojas SA did not reach an agreement on a potential transaction last year.

Ricardo Lacerda, CEO and founder of investment bank BR Partners, said the recent rout interrupted plans of newly listed companies and may force them into deals. "Some of them were counting on new stock sales to fund expansion but couldn't complete the transactions due to market volatility," he said.

Debt has also become more expensive for companies, as Brazil's central bank hiked its benchmark rate last year to 9.25% in December from 2% in March, adding to fundraising costs.

"Given all the volatility hitting share offerings, M&A volumes in 2022 may surpass last year," said Hans Lin, Bank of America (NYSE:BAC)'s co-head of investment banking in Brazil. Last year, deals involving Brazilian companies totaled $101.6 billion, up 152% from 2020.


Most bankers have held off forecasting share offerings this year, but several expect the volumes to fall from 2021. Share offerings totaled $26.2 billion last year, slightly below 2020's volumes in dollar, but in 78 deals, 17% up year-over-year.

"Last year we had a record year for share issuances, 2022 will not be as strong for equities as a result of macro and political volatility," said Itau's Greenlees.

Some companies have already announced plans for follow-on offerings, such as chicken and pork processor BRF SA (NYSE:BRFS) and petrochemical company Braskem SA (NYSE:BAK). The privatization of Eletrobras is also expected by June.

Bankers see follow-ons as more likely to occur than IPOs this year, as investors tend to rely on known assets during volatile periods.

"Depending on how the market absorbs this pipeline of follow-ons, we are going to see investor sentiment improve, potentially making room for some IPOs," said Eduardo Miras, Brazil head of investment banking at Citi.

Brazil's sliding stock market makes M&A targets

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