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Brazil's Petrobras and others deals may slow this year because of stricter due diligence




SAO PAULO
Petroleumworld.com 01 09 2017

Stricter legal and regulatory scrutiny may slow mergers and acquisitions in Brazil this year, compounding the impact of a harsh recession and lingering political turmoil that is keeping buyers and sellers at odds over valuations, bankers and lawyers said.

In recent months, trade unions and citizen advocacy groups have increased pressure on industry watchdogs and federal auditors to stop state asset sales aimed at cutting Brazil's debt. More companies tapped antitrust authorities to review rival industry tie-ups, putting the brakes on several deals.

For example, the federal audit court (TCU) halted Petróleo Brasileiro SA's ( PETR4.SA ) asset sale program in December, citing the need for more transparent terms. The decision led the state-controlled oil company known as Petrobras to miss a two-year goal of raising $15.1 billion by the end of 2016 by more than $1 billion.

Likewise, fallout from the "Operation Car Wash" corruption investigation has led to increased due diligence in asset sales for engineering conglomerate Odebrecht SA and others ensnared in the scandal. The usual time for such proceedings has doubled in the past year, taking up to six months in some cases, lawyers said.

Thomson Reuters data show at least 14 planned divestitures or takeovers worth more than $8 billion that could have been announced last year have been left for 2017, as buyers have become more cautious of reputational and legal risks in Latin America's largest economy.

Although M&A activity gained steam in recent months, tougher compliance, the harshest recession in a century and the political aftershocks of the Car Wash probe are putting off announcements, said Flávio Valadão, head of M&A at Banco Santander Brasil SA, which topped Thomson Reuters' 2016 advisory rankings for Brazil.

The sale of a majority voting stake in Petrobras' fuel distribution unit and Odebrecht's exit from a Peru gas pipeline project were among the deals stuck in the mud last year.

"Legal and regulatory hurdles along with a growing zeal for compliance have become day-to-day features in Brazil investment banking," said Marcus Silberman, Bank of America Merrill Lynch's co-head of Latin America M&A. "It certainly makes it more challenging for buyers and sellers to close a deal."

Companies announced $54.308 billion worth of Brazil-related mergers last year, up 23 percent from 2015, the rankings showed. Still, the number of announced deals fell to 578 from 676, the biggest drop in three years, according to the data.

TOPPING THE CHARTS

Santander Brasil ( SANB11.SA ), the local unit of Spain's Banco Santander SA ( SAN.MC ), topped value rankings after working on 16 deals worth $19.24 billion.

Itaú Unibanco Holding SA's ( ITUB4.SA ) Itaú BBA unit led the number of deal rankings after working on 39 transactions, followed by Grupo BTG Pactual SA ( BBTG11.SA ) at 27.

At Santander Brasil, Valadão and his team advised State Grid Corp of China on the estimated $10 billion acquisition of power utility CPFL Energia SA ( CPFE3.SA ), Brazil's biggest M&A deal last year.

Bank of America Merrill Lynch worked with Santander on the deal, which is pending a buyout of minority shareholders and other steps.

For years, investment banks derived nearly half of their annual revenue in Brazil from M&A advisory. As dealmaking suffered with the country's economy, banks have turned to structured lending, transactional banking or, in some cases, securities trading to make up for declining advisory fees.

PRICING CHALLENGES

Likewise, transactions slated to close months ago, such as steelmaker Cia Siderúrgica Nacional SA's sale of a stake in an iron ore mining unit, have stalled as bids tend to come in below asking prices, according to people involved in the deals.

Yet bankers and lawyers expect companies trying to restructure more than 150 billion reais ($47 billion) of debt to cave in to pressure from creditors and speed up asset sales, which could drive prices lower.

"Bankruptcy protection and debt restructuring cases that involve divestitures should gain extra steam in coming months," said Carlos Frederico Bingemer, a partner at Rio de Janeiro-based law firm BMA - Barbosa, Müssnich, Aragão.

Car Wash-related M&A casualties include Petrobras' decision to reconsider exiting Braskem SA ( BRKM5.SA ), Latin America's largest maker of resins, the sources said. Potential buyers fretted about the involvement of Odebrecht, Braskem's largest shareholder, in the probe, those people added.

The steelmaker known as CSN, Petrobras and Odebrecht declined to comment.

'BUYER'S MARKET'

Despite the long list of suspended deals, advisory work remains intense, forcing banks to shuffle staff from areas with lighter workloads to handle more M&A and debt restructuring transactions.

Marco Gonçalves, BTG Pactual's head of M&A, said the power, healthcare and infrastructure industries could help produce a stable stream of deals in coming months. Bidders are also eyeing assets in troubled sectors, where sellers need fresh capital as valuations sink.

Still, such needs pose a challenge for buyers and sellers alike, as the time frame for an economic recovery in Brazil remains unclear and concern about global market volatility grows, Gonçalves said.

"More deals should be announced, for sure, although not at the price sellers would like to see," he said. "The M&A market in Brazil continues to be a buyer's market."



Story by Guillermo Parra-Bernal and Tatiana Bautzer ; Editing by Paul Simao and Bill Trott from Reuters.

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