Infrastructure, health and technology sectors should be the highlights in the coming years
The economic recovery has driven the M&A market in Brazil. Recent data from consulting firm KPMG shows that 1,231 M&A transactions were completed in 2019, a 27.3% leap versus 2018, when 967 transactions were announced. This is the third consecutive record-breaking year for M&As, which had 830 transactions announced in 2017.
According to Levindo Coelho Santos, a senior partner of G5 Partners, the data reflects a recovery in economic growth after Brazil underwent its biggest recession in history.
“The liberal agenda adopted by the government since 2016 has allowed the government and state-owned companies to reduce their presence in the economy by selling companies to the private sector. The key example is Petrobras, which has since implemented a relevant divestment program and has been responsible for some of the largest M&A transactions during this period, many involving international strategic investors as buyers of the assets”, he explained.
The expressive result in 2019 was also due to domestic transactions, which has benefited from an improved stability and a more financially predictable scenario. During this period, these transactions leaped from 550 in 2018 to 782 in 2019 – a growth of 42.2%. Acquisitions by foreign companies also increased significantly, by 19%, totaling 374 transactions in 2019 against 315 in 2018. These transactions accelerated sharply in the second half of 2019, when 223 deals were closed, compared to 151 during the first half of the year.
Internet and technology lead the ranking
The internet sector maintained its leading position in the 2019 KPMG ranking, registering a 73% increase in the number of transactions in the year, from 169 in 2018 to 293 in 2019, followed by the information technology (158), hospitals and clinical analysis laboratories (87) and real estate (77) sectors.
According to Santos, transaction sizes were smaller for internet companies and represents a natural consolidation phenomenon for an industry that has an intense and permanent innovation pace. In many situations, smaller companies are merging with others of similar size in search of gains in scale and higher competitiveness.
Acquisitions, on the other hand, are typically carried by larger companies, many of which are traditional players in their sectors searching for new technologies that can quickly be incorporated into their operations.
The Southeast region leads the M&A movement
The Southeast and South regions stood out among the regions with the highest number of transactions, as follows (according to State): São Paulo with 750; Rio de Janeiro with 119; Paraná with 73; Minas Gerais with 60; Rio Grande do Sul with 53; and Santa Catarina with 44.
Future years
According to Santos, a senior partner of G5 Partners, the M&A market is expected to continue to grow and several sectors have high potential for consolidation in the country.
“Internet and technology companies, in particular Fintechs focused on financial products and services, will continue to demand quick responses from established players as they offer solutions that complement their portfolio and guarantee greater competitiveness. This, in many cases, will happen through acquisition strategies implemented by banks and other established players. The current low real interest rate and controlled inflation economic scenario, associated with the growing need for companies to obtain funds for expansion investments, will lead to ongoing changes in the relationship dynamics between investors, companies and financial service providers, all of which still strongly rely on a small number of large banking institutions. This is a global phenomenon and is expected to continue to drive the Brazilian market in the years to come”, he concluded.
Other sectors that are likely to have increased M&A activities are those related to logistics infrastructure, such as roads, ports and airports. The energy (oil & gas), electricity and basic sanitation sectors are also expected to experience increased business activities.
Brazilian sectors with competitive advantages, such as pulp & paper, mining and agribusiness should continue to attract interest from international investors and thus becoming natural targets for M&A transactions.
Finally, domestic sectors that directly benefit from the increase in employment levels and average per capita income may experience even greater consolidation. Within this group, the health, education and retail sectors significantly stand out.
“As soon as economic stability and predictability is established, companies are more confident to invest, leading to a natural market consolidation trend through M&A strategies”, highlighted the senior partner at G5 Partners.
G5 Partners
For the past four years, the Strategic Advisory department of G5 Partners has been the leading M&A advisor among independent advisory firms in Brazil *.
*Source: Bloomberg, Thomson Reuters, Anbima M&A Ranking. January 2020