Mergers and Acquisitions 2017

Last verified on Thursday 9th March 2017

Brazil

Francisco Antunes Maciel Müssnich and Thiago Frazão
Barbosa Müssnich & Aragão
  1. 1.

    Has the level of M&A activity slowed, increased, or remained flat in 2016 as compared to 2015, and what are conditions like today? In general terms, what level of activity is foreseen for 2017? What are the factors influencing the level of M&A activity – Economic? Political? Commodity prices? Weakness in currency? Liquidity? Rule of law? Other?

  2. In general, Brazilian M&A activity in 2016 has remained at the same level in terms of M&A values and number of deals in comparison with 2015, even though Brazil has continued to experience an economic recession and political uncertainties resulting from the continuing development of the investigations regarding the alleged corruption scandal involving oil company Petrobras and the impeachment of former President Dilma Rousseff. Although 2016 also ended with a certain degree of market pessimism as regards to Brazil’s capacity to initiate an economy recovery in 2017, the level of M&A activity in 2017 is expected to remain flat or even increase, to the extent that certain deal opportunities may arise, especially for foreign buyers, owing to lower asset values, a weaker but relatively more stable Brazilian currency and a lower inflation, together with a potential easing of monetary conditions in the short term and the potential approval of a fiscal and social security reform, that could further push economic activity next year.

  3. 2.

    Which industries do you expect will see the most M&A activity in 2017?

  4. As in the past few years, the infrastructure sector will continue to offer the most significant investment opportunities, especially considering the concession programme the federal government relaunched in 2013 after almost 10 years and recent governmental initiatives taken in the second semester of 2016. On the other hand, some large economic groups with activities related to the infrastructure sector and Petrobras are being forced to sell certain assets and/or restructure debts, boosting M&A activity in those industries. Also, the agribusiness and education industries are expected to remain with a flourishing M&A activity, as well as the healthcare sector, which in 2015 underwent a legislative change allowing more participation by foreign investors. An increase of M&A activity involving financially troubled companies is also expected owing to the last couple of years’s recession, as well as M&A deals related to corporate restructurings and spin-offs resulting from the alleged corruption scandal involving Petrobras.

  5. 3.

    What types of deals do you expect to see?

  6. As in the past couple of years, incorporation of joint ventures – boosted by major players joining forces for the purposes of participating in governmental concessions – and total acquisitions will remain the main type of deal structures in Brazil, as well as minority investments establishing strong protection rights to the minority shareholder. Consolidation efforts in certain industries may also intensify, owing to the lack of strong players in specific sectors.

    Cash deals continue to represent the vast majority of M&A transactions in Brazil. Earn-out provisions and long-term retention plans have been constantly seen in recent M&A deals involving Brazilian target companies, revealing a common trend of establishing alignment mechanisms with local management.

    Finally, the Brazilian IPO market in 2016 was essentially inactive, as in 2015 and 2014, with only one IPO taking place in the last quarter of 2016, the first since June 2015, mainly because of Brazil’s ongoing battle with economic recession and due to the global economic uncertainty of recent years. We do expect some changes in this scenario for 2017, since there have been several talks in the press of a number of companies considering an IPO, subject however to an effective recovery of market and economic conditions. In the meanwhile, 2016 confirmed last years’ trend for the issuance of corporate bonds (debêntures) as the current financing choice for many companies, with a number of high-volume funding rounds being successfully concluded, generating an aggregate funding volume similar to 2015 and significantly greater than in 2014.

  7. 4.

    Discuss the level of M&A activity you have seen over 2016 and expect to see in 2017 of:
    (i) pure domestic deals;
    (ii) deals in your jurisdiction involving a domestic target and foreign acquirer from Latin America, or a foreign acquirer from outside Latin America; and
    (iii) deals involving a domestic acquirer and foreign target in Latin America or a foreign target outside Latin America.

  8. Pure domestic deals remain the usual practice, especially within the context of a consolidation trend in certain industries. However, it is expected that the most significant deals in amounts involved will continue to be represented by cross-border transactions.

    As in previous years, Brazil will be the stage for a number of significant cross-border transactions, both inbound and outbound, with M&A transactions involving Brazilian targets and foreign acquirers rising as Brazilian economy struggles with recovery from the recession, high levels of inflation and interest rates. Within Latin America, Brazil maintains its role as the main economy in the region, despite the increasing importance of economies such as Mexico, Chile and Colombia, although one must pay attention to the potential recovery of the Argentinean economy.

  9. 5.

    What is the level of private equity activity? Are domestic or international funds involved? What kinds of deals are they doing?

  10. Private equity activity represented a major component of the Brazilian M&A market in 2016. More specifically, the participation of local private equity firms and investment banks in M&A deals has gained significant prominence over the past couple of years and this trend is expected to continue throughout 2017, including divestitures that are swept up by other private equity funds.

    Depending on the improvement of market conditions and a lower degree of uncertainty, the involvement of international private equity funds may increase in 2017 as compared to 2016, especially considering the economic recession and the Brazilian currency’s steep devaluation over the past couple of years, conditions which are aiding the funds to spot interesting local M&A opportunities and lower asset values.

  11. 6.

    Is acquisition financing available for deals? For strategic buyers? For private equity buyers? From domestic or international sources? What amount of debt/ equity leverage are you seeing in private equity transactions? Where is financing coming from – domestic sources, international lenders? Governmental agencies? Banks or capital markets?

  12. The financing market for M&A deals in Brazil has become relatively steady while the country was able to maintain a period of economic stability. However, owing to the economic struggles since 2014 and rising interest rates attempting to handle high levels of inflation, local financing market for M&A deals became more selective and expensive and we expect it to remain so in 2017. Although cash is still the main form of consideration in Brazilian M&A deals, a variety of sources played a significant role in the past years, such as highly capitalised strategic buyers and stronger local private equity firms and investment banks, especially those funded in foreign currencies. As noted above (see question 3), it is worth mentioning the sustained rise in issuance of corporate bonds (debêntures) both by publicly traded and closely held companies. Long-term financing, however, continues to be an issue for M&A deals.

  13. 7.

    How open is your country to investments and acquisitions by foreign buyers? Is there a level playing field when foreign and domestic bidders compete to buy the same domestic target company?

  14. Despite an extensively regulated exchange market, Brazil is generally open for investments and acquisitions by foreign buyers and, except for a better familiarisation with the Brazilian legal system, foreign and domestic bidders have a level playing field for domestic companies. It is worth mentioning, however, that in certain sectors (such as banks, airlines and media companies), Brazilian law, as in other countries, provides for a limitation on the amount of direct or indirect equity that may be held by foreign investors (although some restrictions were lifted in 2015 in the healthcare sector, for instance).

  15. 8.

    Are corruption and compliance concerns affecting M&A activity?  Are there industries where this is a particular issue?

  16. Since the enactment of the Brazilian anti-corruption law in 2013 and the continuing development of the investigations regarding the recent alleged corruption cases involving Petrobras and certain private companies, corruption and compliance concerns have played an important role in M&A activity for both sides of the negotiation. Prospective buyers have been more attentive in due diligence processes in investigating potential red flags and negotiating indemnification protections. On the same note, targets and sellers are increasingly looking after legal advice on implementing anticorruption compliance programmes and on ways to address related potential contingencies. In general, regulated industries and groups whose revenues are heavily dependent on public sector demand are those where the corruption and compliance concerns are more likely to have a greater influence on M&A activity.

  17. 9.

    How big a part of M&A activity is the restructuring of financially troubled companies? Have you seen more of this in 2016 as compared with 2015? What are the prospects for 2017?

  18. M&A activity involving financially troubled companies always represents a part of the local M&A deals, especially in industries facing a consolidation trend.  2016 has confirmed the trend that even large economic groups in Brazil may experience severe adverse financial situations, with some companies filing judicial recovery requests. In particular, the financial impacts in the economic groups involved in the Petrobras corruption scandal are likely to continue to increase the M&A activity related to corporate restructurings and spin-offs within those groups, as well as certain divestments by Petrobras itself. These facts are likely to cause some level of increase in the amount of M&A activity involving distressed assets or companies in financial difficulty in Brazil. 

  19. 10.

    Does your country’s bankruptcy law permit the reorganisation of the debtor as a going concern, and the acquisition of the entity out of bankruptcy? Are you seeing much activity in this area?

  20. Yes. Since the enactment of Brazilian Federal Law No. 11,101, in 2005, the legal framework regarding bankruptcy and creditor arrangements have had significant changes and impacts in this kind of situation. Under the strict terms and conditions of such legislation, Brazilian companies in financial distress are permitted (and encouraged) to enter into arrangements with its creditors to restructure its debts, therefore allowing the debtor to reach conditions to reorganise itself as a going concern and to avoid bankruptcy. The new legal system also allows the acquisition of the entity out of bankruptcy. It is worth mentioning, however, that tax issues are treated separately from the bankruptcy law and therefore continue to be subject, on a case-by-case basis, to specific long-term installment programmes.

  21. 11.

    Has there been any increase in shareholder activism and hostile takeovers? Are international hedge funds active in your market? What defences are target companies permitted to adopt?

  22. The great majority of Brazilian publicly traded companies have a defined controlling shareholder or group of shareholders. For this reason, the practice of hostile takeovers is still in its early stages.

    It is important to note that during the IPO boom before the 2008 economic crisis, a great number of publicly traded companies adopted shark-repellent provisions (Brazilian Pill) in their incorporation documents, the most common of which would be a provision regarding the requirement for the implementation of a public tender offer directed to all shareholders in the event that a shareholder (or third-party acquirer) exceeds a certain amount of equity interest in the company, for a pre-defined acquisition price in almost punitive mounts (for instance, a large EBITDA multiple). Another common provision in the by-laws of publicly traded companies with broad ownership is the limitation of the votes that may be casted by any shareholder to a given maximum percentage of number of shares, regardless of the equity interest effectively held by the shareholder.

    Shareholder activism is not so commonly found in Brazil, also because a large number of the publicly traded companies have a well-defined controlling shareholder. Minority shareholders are mainly passive and rarely use its equity interest to favour shareholder activism as seen in the United States and Europe, although some Brazilian companies have faced aggressive activism from qualified investors in the past few years. In 2016, in particular, this has been the case with a couple of companies that had to deal with active shareholders. In general, however, the level of activism we see in Brazil is usually driven by local investors, with international investment funds adopting a more passive investment strategy. Nevertheless, there has been a continuing rise in the voluntary adoption of stricter corporate governance practices by publicly traded companies, which certainly helps and enhances the development of Brazilian capital markets.

  23. 12.

    How well protected are minority shareholders in public companies? What recent developments have there been as relates to independent directors, special committees, independent advisors, fairness opinions?

  24. In general, there has been a continuing effort in recent years to improve the protection of minority shareholders’ rights in Brazilian public companies, either through regulation and enforcement by the Brazilian Securities Exchange Commission (CVM) or by the creation of minimum corporate governance requirements by the rules of the Brazilian stock exchange (BM&FBovespa). For instance, the most demanding of the listing segments (Novo Mercado or New Market) requires that public companies listed in such segment shall have at least 20 per cent of the board composed of independent directors.

    Regulation by the CVM has also been passed in the recent years with the ultimate goal to promote and incentivise a higher level of protection to minority shareholders’ rights, such as the formation of special committees to evaluate related-party transactions (for instance, those that involve the company and relevant shareholders) and the creation of audit committees responsible to oversee the independent auditors’ work. Recent developments include the passing of regulations aimed at increasing the involvement and voice of minority shareholders and reducing absenteeism in shareholders’ meetings, by issuing new rules regarding remote participation and voting, which became mandatory in 2017 to companies included in the IBOVESPA and IBrX-100 indexes and will be mandatory to all traded companies from 2018 on.

  25. 13.

    Have directors, management and controlling shareholders changed how they conduct themselves in M&A deals? What kind of fiduciary duties do directors, management and controlling shareholders have under the laws of your jurisdiction? From your experience, are directors, management and controlling shareholders more diligent today in their review of M&A transactions and other matters?

  26. There seems to be a continuing rise in the level of professionalism in how directors, management and controlling shareholders conduct themselves in M&A deals. With the increase in the bargaining power that Brazilian companies have held in cross-border deals in recent years, these players have become more compelled to be more diligent in the conduct of the negotiations, commonly relying on financial and legal advisers. Under Brazilian laws, certain types of deals require even higher degrees of diligence by directors, management and controlling shareholders, especially when involving related-party transactions with potential to raise issues regarding conflict of interests. In these cases, directors, management and controlling shareholders have clearly been developing a greater level of precaution (including, for instance, the formation of special committees).

  27. 14.

    Should directors, management and controlling shareholders be more concerned today about negative publicity, shareholder criticism, regulatory pressure and liability from potential litigation?

  28. As mentioned in question 11, shareholder activism is not so commonly found in Brazil as in the United States and Europe. However, as the Brazilian capital market continues to evolve, and in light of the recent corruption scandals, one can expect to see a gradual increase in this kind of concern by directors, management and controlling shareholders.

    In the past few years, certain industries have seen an increase in regulatory and political pressure, especially in the financial, tele¬communication and energy industries, as the government pushed companies to lower rates charged to consumers as an attempt to stall inflation, putting potential foreign investments in these sectors on hold.

    Further, the potential liability arising from the application of anti-corruption, anti-bribery and anti-money laundering local and foreign legislation has raised concerns both in domestic players and in potential foreign investors. In light of the history of the Brazilian business environment and its struggling effort to cope with public-sector corruption, the applicability of such legislation should be carefully considered in any M&A deal, especially since the enactment and entering into force of the Brazilian anti-corruption law (see question 19).

  29. 15.

    Are there major differences in how domestic and cross-border deals are being conducted? For instance, does the type of purchase agreement used in your jurisdiction differ significantly from the international style of agreement? If so, which type is being used more often?

  30. The differences between how domestic and cross-border deals are conducted have been increasingly reduced over the years. Both the legal and business aspects of the negotiation of deals and its terms have developed a more international pattern and such development can be perceived in the way Brazil is being seen by foreign investors as a major player in the global economy. There is not much doubt that the majority of significant M&A deals in Brazil are conducted as any international and cross-border deal.

  31. 16.

    Have there been changes in the process for how M&A transactions are conducted in your jurisdiction?

  32. Owing to the changes that took place in 2012 in the Brazilian antitrust legal environment (see question 19), the dynamics of more significant M&A transactions have to be addressed in a different approach, since the Brazilian antitrust system is now based on a pre-merger review system with a suspensory regime, requiring the Brazilian antitrust agency’s prior approval for transactions that meet certain thresholds.

    Apart from this substantial change, M&A activity in Brazil is as sophisticated and complex as M&A deals elsewhere, mainly owing to the economic growth of recent years.

  33. 17.

    Do domestic buyers have a greater tolerance than multinational buyers for risk in transactions, such as (i) assuming risk of tax, labour, environmental and other contingencies; (ii) assuming risk of regulatory approvals; or (iii) bearing the risk of non-compliance/corruption issues at the target company? If so, does this give domestic buyers a competitive advantage over international buyers? 

  34. In general, since domestic buyers are relatively more acquainted with the Brazilian legal environment and the country’s particularities, local buyers seem to have a greater risk tolerance in local M&A deals, as compared to multinational or purely foreign buyers. In practical terms, domestic buyers are more prone to understanding and accommodating particular issues that normally arise in Brazilian M&A deals. However, although this greater tolerance could present a competitive advantage over international buyers, other factors seem to act in favour of international buyers, such as their greater funding access in comparison to domestic buyers, especially in the scenario of a weaker Brazilian currency and an economic recession as has been the case throughout the past few years.

    The enactment of the Brazilian anti-corruption law in 2013, and the application of the FCPA and other international anti-corruption legislation, have posed a major challenge for international buyers considering investments in Brazil in recent years, especially considering the Brazilian political landscape and the recent alleged corruption cases involving Petrobras (see question 8). Considering that the new Brazilian legislation imposes strict liability on legal entities for acts of corruption within a broader range of punishable acts, as compared to its foreign counterparts, and that, owing to its newness, it is still difficult to predict how exactly this new legislation will be applied by Brazilian courts, international potential buyers seeking to invest in Brazil should be particularly careful with the legal risks involving corruption issues with respect to their targets. 

  35. 18.

    For international buyers and investors looking at deals in your jurisdiction, what are the three most important pieces of advice you have and what are the three most important pitfalls that should be avoided?

  36. At first, since Brazilian judicial courts are still not highly technically proficient in dealing with complex transactions such as cross-border M&A deals and the process remains highly costly and time-consuming – although the enactment of a new Brazilian Civil Procedure Code (Brazilian Federal Law No. 13,105, in 2015), which came into force in 2016, aimed at expediting lawsuits and improving dispute resolution by Brazilian courts –, the provision of an alternative dispute resolution such as arbitration is mandatory for a better resolution of potential disputes. In general, foreign buyers and investors prefer to agree in international arbitration chambers. However, in recent years, as a greater number of cases are presented in Brazilian arbitration chambers, they have consistently proven to be reliable and highly qualified for the resolution of disputes in the context of cross-border M&A deals. In fact, a 2015 amendment to the Brazilian Corporation Law (Brazilian Federal Law No. 6,404) strengthened the use of arbitration as a dispute resolution mechanism within Brazilian companies, by expressly stating that a shareholders’ resolution may approve a by-laws arbitration clause, binding to all shareholders, which, however, allows dissenting shareholders to withdraw from the company.

    Secondly, the hiring of full-service law firms with recognised experience in complex and multinational transactions should not be overlooked. The Brazilian legal system is so complex and unique in a variety of matters that being represented by the top firms can represent a huge impact on the outcome of negotiations.

    Finally, the international buyer or investor should make a real effort to be acquainted with the particular characteristics and regulations of the target’s activities in Brazil, since Brazilian laws are crucial and very influential in the conduct of business.

  37. 19.

    Have there been any significant regulatory developments affecting M&A – your country's securities exchange commission, antitrust regulators, tax authorities, Central Bank, other regulators that review deals etc? 

  38. In May 2012, Brazilian Federal Law No. 12,529 (enacted on November 2011) came into force, setting a completely new antitrust legal environment in Brazil. Among the several modifications introduced by the new antitrust law, the Brazilian antitrust system is now based on a pre-merger review system with a suspensory regime, requiring the Brazilian antitrust agency’s prior approval for transactions that meet certain thresholds. Currently, the thresholds require that a transaction be filed when one of the economic groups involved in the transaction presents a gross turnover in Brazil in the previous year of more than 750 million reais and the other more than 75 million reais. In practice, with the new rule, the turnover of all parties to the transaction will be considered and the previous market share criterion was excluded. Further, the Brazilian antitrust agency (CADE) has 330 days to issue its decision regarding the transaction. So far, CADE has proven to be agile in most cases, generally taking no longer than 60 days to grant the required approval for less complex transactions. However, the outcome in the context of more complex deals will depend on the particularities of each deal and the parties involved.

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Questions

  1. 1.

    Has the level of M&A activity slowed, increased, or remained flat in 2016 as compared to 2015, and what are conditions like today? In general terms, what level of activity is foreseen for 2017? What are the factors influencing the level of M&A activity – Economic? Political? Commodity prices? Weakness in currency? Liquidity? Rule of law? Other?


  2. 2.

    Which industries do you expect will see the most M&A activity in 2017?


  3. 3.

    What types of deals do you expect to see?


  4. 4.

    Discuss the level of M&A activity you have seen over 2016 and expect to see in 2017 of:
    (i) pure domestic deals;
    (ii) deals in your jurisdiction involving a domestic target and foreign acquirer from Latin America, or a foreign acquirer from outside Latin America; and
    (iii) deals involving a domestic acquirer and foreign target in Latin America or a foreign target outside Latin America.


  5. 5.

    What is the level of private equity activity? Are domestic or international funds involved? What kinds of deals are they doing?


  6. 6.

    Is acquisition financing available for deals? For strategic buyers? For private equity buyers? From domestic or international sources? What amount of debt/ equity leverage are you seeing in private equity transactions? Where is financing coming from – domestic sources, international lenders? Governmental agencies? Banks or capital markets?


  7. 7.

    How open is your country to investments and acquisitions by foreign buyers? Is there a level playing field when foreign and domestic bidders compete to buy the same domestic target company?


  8. 8.

    Are corruption and compliance concerns affecting M&A activity?  Are there industries where this is a particular issue?


  9. 9.

    How big a part of M&A activity is the restructuring of financially troubled companies? Have you seen more of this in 2016 as compared with 2015? What are the prospects for 2017?


  10. 10.

    Does your country’s bankruptcy law permit the reorganisation of the debtor as a going concern, and the acquisition of the entity out of bankruptcy? Are you seeing much activity in this area?


  11. 11.

    Has there been any increase in shareholder activism and hostile takeovers? Are international hedge funds active in your market? What defences are target companies permitted to adopt?


  12. 12.

    How well protected are minority shareholders in public companies? What recent developments have there been as relates to independent directors, special committees, independent advisors, fairness opinions?


  13. 13.

    Have directors, management and controlling shareholders changed how they conduct themselves in M&A deals? What kind of fiduciary duties do directors, management and controlling shareholders have under the laws of your jurisdiction? From your experience, are directors, management and controlling shareholders more diligent today in their review of M&A transactions and other matters?


  14. 14.

    Should directors, management and controlling shareholders be more concerned today about negative publicity, shareholder criticism, regulatory pressure and liability from potential litigation?


  15. 15.

    Are there major differences in how domestic and cross-border deals are being conducted? For instance, does the type of purchase agreement used in your jurisdiction differ significantly from the international style of agreement? If so, which type is being used more often?


  16. 16.

    Have there been changes in the process for how M&A transactions are conducted in your jurisdiction?


  17. 17.

    Do domestic buyers have a greater tolerance than multinational buyers for risk in transactions, such as (i) assuming risk of tax, labour, environmental and other contingencies; (ii) assuming risk of regulatory approvals; or (iii) bearing the risk of non-compliance/corruption issues at the target company? If so, does this give domestic buyers a competitive advantage over international buyers? 


  18. 18.

    For international buyers and investors looking at deals in your jurisdiction, what are the three most important pieces of advice you have and what are the three most important pitfalls that should be avoided?


  19. 19.

    Have there been any significant regulatory developments affecting M&A – your country's securities exchange commission, antitrust regulators, tax authorities, Central Bank, other regulators that review deals etc? 


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