Why Brazil should have a record for mergers and acquisitions in 2021

In April, Hering was bought by Grupo Soma for R$ 5.1 billion.

In April, Hering was bought by Grupo Soma for R$ 5.1 billion.| Photo: Disclosure/Hering

With the recovery of the economy after the uncertainties caused by the pandemic of the new coronavirus, the volume of merger and acquisition operations of Brazilian companies should hit a historical record in 2021. Perspective of stability, dammed transactions and anticipation of plans on the eve of an election year are some of them factors that help explain the atypical movement, according to analysts.

Among the big deals are the purchase of Hering by Grupo Soma, for the amount of R$ 5.1 billion, after a dispute with Arezzo, and the merger of Hapvida and NotreDame Intermédica, the two largest health plan operators in the country .

In the first seven months of the year alone, there were 1,169 merger and acquisition (M&A) operations, which moved around R$ 285.5 billion – around US$ 55 billion –, according to a report by the Transactional platform Track Record (TTR). The numbers represent a 50% increase over the same period last year.

“The year 2020 started well, but the economy was hit – not only in Brazil, but in the world – with the pandemic. The first effect was to reduce the number of transactions, because it was a context in which everyone is more concerned with the short term, with their survival, renegotiating debt, than looking at the long term”, says Luís Motta, a partner at KPMG.

“But with the pandemic also began – and this is an unprecedented fact – the strategy of many companies to invest in acquisitions in order to operate in the digital world. In the context of the pandemic, we saw a movement of traditional companies that needed to maintain their operations, focusing on e-commerce, on logistics, on the creation of platforms for segments ranging from distance learning to fintechs”, he adds.

With that, says Motta, companies that had long-term digitalization plans reviewed the projects in order to accelerate the projects through the acquisition of technology startups.

According to the TTR survey, the area with the most movement this year was technology, with a total of 449 businesses – an increase of 98% over the same period in 2020. The purchase of the Kabum! by Magazine Luiza in the amount of R$3.5 billion, including shares, and the acquisition of Santa Catarina RD Station by Totvs, through its subsidiary Bematech, estimated at R$1.8 billion, were some of these operations.

The M&As boom comes on the heels of an increase in the number of IPOs from companies that saw the need to raise cash. According to the Brazilian Securities Commission (CVM), 34 companies have gone public since the beginning of the year, against 28 throughout last year. There are also another 15 public offerings planned for 2021.

“Soon after the crisis broke out, at the beginning of last year, there was a moment when companies wanted to raise money to strengthen their balance sheet and withstand that difficult situation”, he explains. “That’s why we saw an activity in the stock market, such as IPOs and follow-ons, which came faster than the mergers and acquisitions market”, explains Gustavo Miranda, responsible for the Investment Banking area at Santander.

“Next, when you start to have a scenario with more perspective that the economic situation will stabilize, with interest rates and spreads on debt at lower levels, this gives confidence to companies that want to consolidate in their sectors make acquisitions, because they know they will be able to raise money to honor the commitments of these operations”, says Miranda.

Acquisitions of Brazilian companies by foreign ones grow again

In the most recent survey by KPMG, which has analyzed the scenario quarterly for more than two decades, the first three months of the year had the highest number of merger or acquisition operations in the historical series. Between January and March alone, there were 375 deals, the majority (244) between Brazilian companies.

But the number of foreigners involved in acquiring local companies also drew attention. In this period, 116, or 31% of the transactions were of the CB1 type, that is, foreign companies buying Brazilian ones. It was the highest volume in all quarters analyzed historically by the institution.

Another 13 operations were of the CB2 type, when Brazilians acquire a company established abroad from foreigners; one was of the CB3 type, in which a Brazilian acquires a company established in Brazil from foreigners; and one was CB4, in which a foreigner acquires a company established in another country from foreigners.

“There is a movement to retake the presence of foreigners in the country, which had been lost last year, when the pandemic began”, analyzes KPMG partner and research coordinator, Luís Motta. “In the context of crisis, companies were more focused on survival and on the main market in which they operate, which meant that some internationalization plans were put aside until there was a more predictable scenario.”

Trend should continue until the end of the year and decrease in 2022

There is a prospect that the trend observed in the first months will continue or even intensify until the end of the year. “From what we see in our activity, in the Santander sample, the movement is not decreasing”, says Miranda. “If in the first half the M&A market made more than US$ 50 billion, it is quite possible to imagine something like US$ 110 or 120 billion by the end of the year.”

There are reasons for the estimate. In general, companies prefer to complete transactions before the end of the fiscal year to close the balance sheet with offers already announced, explains the economist. “There is a rush of offers before December 31.”

Another reason is that the discussion on the various stages of the tax reform being processed in Congress may make the market anticipate operations for 2021. tax, which can make the second half better than the first.”

The fact that there will be general elections in 2022 should also make the next year less conducive to negotiations of this type, opening up opportunities to anticipate plans. “When the campaign period starts, the market often prefers to wait for the result of the elections to find out what economic policy the central government will actually follow, to know how to price assets,” he explains. “The trend is to have a shorter market window in 2022, with a concentration of offers and transactions until the beginning of the year.”