Market talk: q3.2020 outlook
Interview with Otavio Vasconcelos de AzevedoM&A Executive Director, BTG Pactual
By Joe Rowley
Blue chip companies and investors are beginning to explore potential acquisition targets in Brazil, but heightened country risk and lingering uncertainty are making many reluctant to pull the trigger, said Otavio Vasconcelos de Azevedo, M&A Executive Director at BTG Pactual in São Paulo.
After a second quarter that saw investors suspend or cancel acquisitions to preserve liquidity as the coronavirus shuttered swathes of the Brazilian economy, some are now dusting off their investment plans and tentatively returning to the market to explore the potential targets on offer.
BTG was recently approached by several Asian and European players pursuing large transactions in the energy and infrastructure sectors. The bank is also handling three transactions valued between BRL5 billion and BRL7 billion it expects to sign in the third quarter and “could probably support our year,” said Azevedo.
“Based on the pipeline that we have and the pipeline that we converted in recent months, the [third] quarter will be better than the second,” he said, while adding it is unlikely to match the levels reached in the same period in 2019. BTG reported total revenues of BRL2.18 billion ($452 million) and adjusted net income of BRL1.07 billion in 3Q19.
Brazil recorded a record high of 1,231 M&A transactions in 2019 representing a 27% increase over the period driven by a surge of transactions in the tech sector, according to a report published by KPMG earlier this year.
Brazil is unlikely to see a repeat of these heady levels of activity in the short-term. Lingering political and economic uncertainty is making some investors hesitate on potential acquisitions, said Azevedo.
BTG sent teasers for several transactions in its pipeline earlier this year and found several investors were quicker to sign non-disclosure agreements and initiate deep dive analyses than in the past. However, they requested more time to submit a non-binding offer or failed to follow through on a bid.
Guarantee packages have also had to be strengthened in some cases with the addition of more robust indemnifications and warranties in order to conclude transactions, said Azevedo.
“They have dry powder to transact, they are willing to invest, but it is not obvious at the moment where they should deploy this dry power. Brazil´s country risk is forcing investors to be more cautious analyzing and moving forward with the opportunities,” he explained.
Consequently, Azevedo said that while he expects investors to start gaining traction in the third quarter, the M&A market is unlikely to start approaching the previous levels until the end of the year.
“Nobody knows how the situation is going to advance, so based on that my expectations are greater for the fourth quarter, rather than the third quarter,” he said.