After a slump in the first half of this year, M&A activity is expected to recover in the second half as improving company valuations boost sales prices. Most of the deals will be in the commodities, energy and financial services sectors
Mergers and acquisitions activity in Latin America and the Caribbean is on track to grow in the third quarter of this year, as prospects improve for stronger economic growth and a decline in interest rates, analysts and executives say.
Activity got off to a slow start this year, as high rates and low growth soured the appetites of buyers and discouraged sellers.
In Brazil, a spate of debt restructurings, led by retail chain Americanas and power utility Light, added to the sluggishness there, as it made companies “more conservative in their short-term decisions,” says Bruno Amaral, head of M&A at BTG Pactual in São Paulo.
The number of M&A deals in the region tumbled 37% to 581 in the year to June 15 from 918 in the year-earlier period, while volume dropped 36% to $30.5 billion from $47.3 billion over the same period, according to data from Dealogic.
Amaral says the hunger for deals is improving in Brazil, bolstered by a flattening in local interest rate curves since May. This is fueling expectations that the central bank will soon begin to cut the benchmark rate from 13.75%.
“Lower rates will give companies more firepower for M&A activity,” he says. “The outlook for the third and fourth quarters is much brighter than what happened in the first quarter.”
A recovery in the Ibovespa, a benchmark index on the B3 stock exchange in São Paulo, is also encouraging more companies to consider selling. The index surpassed 120,000 on June 21, up 22% from a low of 98,000 in late March, before dropping to less than 118,000 toward the end of June. The increase is boosting the market valuations of listed companies as a reference for private companies to sell at higher prices to potential buyers, Amaral says.
A BUYER’S MARKET
Levindo Santos, managing director of G5 Partners, a financial advisory firm in São Paulo, says the global economic and geopolitical uncertainty coupled with a sharp drop in activity in the equity capital markets since 2021 has made it a buyer’s market in Brazil.
“Whenever you face more challenging periods like this, buyers become the ones who dictate what movements will take place rather than the sellers,” he says.
Most of the deals over the past year or so have been peers looking for synergies through mergers, helping to cut costs and expand their “footprint in a certain value chain,” he says.
Photo: Levindo Santos
An example is Brazilian healthcare provider Rede D’Or’s $3 billion acquisition of local insurance company SulAmérica in 2022.
The sectors that could drive M&A growth in Brazil over the rest of this year include commodities, financial services, power and retail, which traditionally rebound first from slowdowns, Santos says.
At the same time, the decline in market valuations has led a number of foreign companies to enter or expand their operations in the region. In May, German insurance company Talanx Group agreed to acquire Boston-based Liberty Mutual’s property and casualty insurance businesses in Latin America for $1.48 billion. Abu Dhabi sovereign wealth fund Mubadala Investment Company is in talks to acquire a 20% stake in a new football league in Brazil for nearly $1 billion.
Santos sees plenty of potential activity in oil and natural gas, as big international companies come into Brazil and other countries to ramp up production. If the services companies they work with don’t have what is needed on the ground, those suppliers will consider buying local providers of such services, he says.
In the rest of the region, the traditional sectors are also expected to see more activity, such as mining and power, as part of the global energy transition to net-zero carbon emissions by 2050.
Mexico could see a surge in deals. Mexico City-based boutique investment bank Vace Partners expects cross-border M&A to gain this year as more companies – including Asian firms – shift operations to Mexico to supply the United States following a rise in China-US tensions, says founder and partner Carlos Vara.
Marcos Kantt, CFO of Colombian property technology firm Habi, said there could be a rise in activity in the proptech sector, led by smaller businesses seeking to achieve more scale.
G5’s Santos says technology will remain a perennial source of M&A in the region, from education to financial services, healthcare and retail, as companies seek to meet increasing consumer demand for convenience in the wake of the pandemic.
This technology push “is not likely to go away because the economy is expanding or contracting at a certain period of time,” Santos says. “This is a relevant trend for as long as we can see.”
There could also be some mergers in the technology industry as smaller players struggle at times of high interest rates and low liquidity.
“We are seeing some consolidation,” says Gastón Irigoyen, CEO of Pomelo, an Argentine maker of technology for financial services. “When we go through these sort-of rough patches, when a lot of companies have difficulties in raising money, they have to look for exits as an alternative. At the same time, companies that are well positioned and have a good cash balance become aggressive in these cycles. There is consolidation, but there are also companies that are being more conservative because they want to deliver good results.” LF