Brazil agribusiness primed for M&A activity

Despite a murky short-term outlook, Brazilian businesses are primed for a surge in M&A activity as investors seek out attractive valuations.

Brazil is poised for a surge of mergers and acquisitions activity, with agribusiness continuing to draw strong attention from investors, panelists at the Brazilian American Chamber of Commerce said on Monday.

Falling domestic consumption and less financing have pushed valuations down, while driving up the demand for credit through M&A, speakers said.

“There are a lot of assets for sale now; very good assets that you would never expect to be for sale,” said Marcus Silberman, co-head of M&A for Latin America at Bank of America Merrill Lynch.

Agribusiness, one of the few bright spots for Brazil in 2015, is ripe for investment. Brazil’s stumbling ethanol market should be looked at in a separate category from the rest of the agribusiness sector, said Silberman.

“If you look at the [sugar ethanol] sector you see a lot of companies in distress, so the opportunities there are through restructuring and consolidation,” he said. “In the other sectors you have a lot of opportunities to acquire growth companies in a sector that is strong.”

The majority of activity will be in small-and medium-sized enterprises. More than 75 percent of Brazil’s M&A activity occurs in transactions of less than $100 million.

“Small and medium [enterprises] are always a large portion of the activity,” said Frederico Mennella, managing director for mid-market investment bank Lincoln International. “But they are going to be even more prominent going forward.”

Minority acquisitions in private and family-owned companies will also play a major role, said Karyn Koiffman, a partner at law firm Baker & McKenzie.

The growth in minority-stake acquisitions is part of a move toward M&A as a financing mechanism. Brazil has traditionally had a high cost of capital, but with a depreciating real and growing interest rates for private debt, financing has become prohibitively costly. Investors increasingly have the opportunity to get favourable terms on minority acquisitions.

“I think there are a lot of opportunities for minority investments. That’s been true over the last couple of years but especially now,” said Koiffman. “I think controlling shareholders and family-owned companies, because of the need of capital, are more agreeable to the terms of shareholders.”

Some foreign investors who entered Brazil at its peak have been burned by more than a year of currency turbulence, but investors that remained on the sidelines are poised to make value acquisitions with long-term potential.

“Some [private equity firms] got hurt because of the exchange rate, but there are also a lot of newcomers who’ve been waiting to get into the markets and now they think it’s time to invest,” said Silberman.