1. Has the level of M&A activity slowed, increased or remained flat in 2019 as compared to 2018, and what are conditions like today? In general terms, what level of activity is foreseen for 2020? What are the factors influencing the level of M&A activity – Economic? Political? Commodity prices? Weakness in currency? Stock market performance? Liquidity? Rule of law? Other?
In 2019, the number of M&A transactions in Brazil has shown an increase of approximately 31 per cent in comparison to 2018. The number of deals announced last year also stands for the highest volume of transactions in the past five years.
The approval of the pension reform and other deep structural changes to be implemented in 2020 by the current government should accelerate the growth rate of M&A deals this year, a market highly affected during the period of economic uncertainty in Brazil that started in 2014. The optimism for investors’ appetite for new deals is also due to a positive expectation of the Brazilian GDP expansion since target companies tend to perform financially better. As the Brazilian economy gradually recovers driven by important structural reforms, a more favourable business environment should positively affect the number of M&A deals in 2020. Another factor that should increase M&A activity is the contraction of the basic interest rate (SELIC – Brazilian treasury bonds yields), from 14.5 per cent in 2016 to 4.5 per cent in 2019, the lowest rate ever, creating a pressure that will end up on the diversification of many portfolios into private investments.
2. Which industries do you expect will see the most M&A activity in 2020?
In 2019, the technology industry had led the number of M&A transactions in Brazil and is likely to continue playing a leading role in 2020. This may be explained by the companies’ needs for innovation and optimisation in all areas by applying new technologies. Such need fosters the emergence of robust business (fintech, proptech, sportstech, etc), which are very attractive to investors. Within this industry, one relevant transaction announced in 2019 was the acquisition of i3Si, a data centre and cloud service provider, by Penso Tecnologia, a Brazilian company that offers different solutions in information technology. Another relevant transaction announced last year was the acquisition of the Argentinian company Interaxa, a global integrator of technology solutions for contact centres, by Mutant, a Brazilian company that develops customer service solutions across platforms. As already explained, deals of this sort are likely to be expected in 2020. Other industries that played a significant role in 2019 and are likely to rise are the oil and gas industry and the electrical energy sector.
3. What types of deals do you expect to see?
The number of partial and total acquisitions has led to the number of deals in 2019 and is expected to maintain acceleration in 2020. While the number of joint ventures was not much significant (approximately 16), it counted for an increase of roughly 220 per cent in comparison to 2018. Following the trend of the past years, mergers and spin-offs are not likely to play a significant role in M&A deals in 2020.
4. Discuss the level of M&A activity you have seen over 2019 and expect to see in 2020 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.
Pure domestic deals were significantly predominant in 2019. M&A deals involving foreign investors have increased in comparison to 2018, especially involving investors from the United States, Japan and Germany. Within Latin America, Chile is the only significant country from which investors were involved in M&A deals. However, Chilean investors represent roughly 3 per cent of the total foreign investors in Brazil. Pure domestic deals will probably prevail in 2020. Although foreign investors seem to be optimistic about great business opportunities in the country as the Brazilian economy improves, they are still cautious with the structural reforms to be implemented by the government.
It is also worth mentioning the internationalisation trend of Brazilian companies. For instance, the Brazilian cosmetics company Natura &Co has just completed the acquisition of the global beauty company Avon. Another example is WEG SA, a Brazilian company in the industry of machines and equipment. This company has been acquiring several targets in Latin America and abroad.
5. What is the level of private equity activity? Are domestic or international funds involved? What kinds of deals are they doing?
In 2019, the number of M&A transactions involving private equity funds had shown an increase of approximately 34 per cent in comparison to 2018. The majority were domestic investors (65 per cent). International funds account for the rest (35 per cent). The market for private funds is currently hot and they have been involved in all sorts of M&A deals. The top industries invested by private equity funds are information technology, the financial sector and the retail industry.
6. Is acquisition financing available for deals? Where is financing coming from? How much concern do you have that an increase in interest rates or risk of a recession will limit the availability of financing?
It is well known that the cost of credit in Brazil is highly expensive when compared with other jurisdictions. Acquisitions are typically funded by securities offerings or leveraged funds. For particular cases, private equity investment funds are also used as financing mechanisms. In addition, not all sectors have access to local funding. Inbound cross-border projects are usually financed outside Brazil. Leveraged buyouts are not so uncommon, and in some cases, pre-acquisition debt may be pushed down to the target after closing, subject to certain conditions where the target is a listed company.
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?
In general, foreign-controlled buyers are not limited to investing in most sectors, subject to a few exceptions (particularly nuclear power, postal and telegraph services, and satellite launch and orbital positioning and related activities). Brazil does not have a foreign investment committee such as CFIUS in the United States. However, in order to acquire frontier land or equity in a company that holds frontier lands, prior consent of the General Office of the National Security Council is required. In addition, foreign shareholders may be subject to additional obligations that do not apply to nationals, such as registering its investments with the Brazilian Central Bank and appointing a legal representative domiciled in Brazil with powers to receive summons. Considering that most of the game is played under these rules for near two decades and that the level of high standard services from the Brazilian professional services firms, especially law firms and CPAs, the level of familiarity with the game provide information and ability, bringing a spirit of fair play where foreign buyers will be at the same level of competition while bidding with a domestic buyer.
8. Are corruption and compliance concerns affecting M&A activity? Are there industries where this is a particular issue?
The Car Wash Probe, the Weak Flesh Probe and the sanction of Brazil’s Clean Company Act (Law No. 21,846) have all significantly affected business in the country and how M&A deals are conducted. However, the year of 2019 was much less turbulent, as we have not seen many companies involved in corruption scandals. One relevant measure that sellers and buyers have been adopting in order to mitigate this issue is to conduct compliance due diligence in target companies, which is a practice that was not so common years ago.
9. How big a part of M&A activity is the restructuring of financially troubled companies? Have you seen more of this in 2019 as compared with 2018? What are the prospects for 2020?
In view of the recent financial crisis, there are still many companies filing for reorganisation plans. The giant telecom provider Oi has been under a court-supervised reorganisation since 2016, and Odebrecht, since 2019. Among the many ways to generate cash is by selling assets through M&A deals. As the Brazilian economy recovers, we expect to see fewer M&A transactions of financially troubled companies as they benefit from low-interest rates and a projection of a lower dollar price.
In addition to that scenario, the Insolvency Law in Brazil (Law 11.101/05) is being amended by Congress by a Bill that foresees a major improvement by inserting a new framework for multinational and multi-jurisdiction insolvency, bringing international creditors, debtors and investors in a level of equality. The most relevant amendments will recognise an international insolvency case and will also grant and easier access to foreigners to participate in an insolvency case in the Brazilian courts.
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?
Yes, Brazilian legislation affords numerous benefits as to reorganisation to avoid bankruptcy. Among these benefits, the Bankruptcy Law grants a 180-day stay period during which all claims against the debtor are suspended, with a few exceptions on highly privileged debts. In the case of the telecom carrier Oi, the stay period was renewed more than four times. Also, after the 2016 crisis, there was an increase in the filing for court-supervised reorganisation, but then in 2019 this number declined in comparison to 2018, due to the recovering of the Brazilian economy.
The expected amendment on the Brazilian Insolvency Law will also consider the application in Brazil of a similar protection of assets to the US Chapter 15. Assets in Brazil will be subject to cross-border protections from international court reorganisation and insolvencies. This will probably increase the M&A activity in Brazil in with distressed assets from ongoing liquidation or reorganisations conducted abroad.
11. Has there been any increase in public company M&A?
In comparison to 2018, there was a significant increase in the amounts involved in M&A deals of public companies and a slight decrease in the number of transactions. While the average transaction value has almost doubled, the number of deals has retracted.
12. How well protected are minority shareholders in public companies? What recent developments have there been as relates to independent directors, special committees, independent advisers, fairness opinions?
The Brazilian corporate legislation provides several rights to minority shareholders, including participation in the board. In addition, special listing segments of Brazil’s Stock Exchange were created to foster high standards of corporate governance that, among other things, benefit minority shareholders. For instance, in the event of the sale of corporate control, companies listed in the highest segment (Novo Mercado) shall grant tag-along rights where the acquirer pays minority shareholders 100 per cent of the premium price paid for the controlling block.
13. 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?
Due to certain features of the Brazilian corporate law, shareholder activism is still under development in Brazil. Shareholders usually rely on representations before the Brazilian Securities and Exchange Commission (CVM) as a first step before filing a civil lawsuit for damages. The environment for activists’ campaigns is not very favourable, but there has been pressure for change because foreign investors holding deposit receipts have been obtaining indemnification awards in other jurisdictions while investors in Brazil have not been successful, although lawsuits have been filed based substantially on the same facts. In addition, most public companies in Brazil have a high concentration of ownership and, as a result, there are very limited threats to management through takeovers. In Brazil, shareholder activists are usually pension funds, investment fund managers, state-owned companies and other institutional investors as minority shareholders. Finally, although hostile takeovers are not that common, listed companies usually adopt poison pill clauses in their by-laws.
14. 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?
It is of common knowledge that the Car Wash Probe and the Weak Flesh Probe have shaken the Brazilian financial market and how M&A deals are conducted in the country. Following the events involving Petrobras, JBS, Odebrecht and CCR, good corporate governance practices and high compliance standards are increasingly being demanded by investors, the market and by the Brazilian Securities and Exchange Commission (CVM). Thus, due diligences in target companies have been more rigorous in order to mitigate risks, especially those related to corruption. Under Brazilian corporate law, the chief fiduciary duties of executives are of diligence and loyalty. Although the law is still somewhat abstract concerning these duties, they have been progressively becoming clearer by regulators of the market and by jurisprudence. In view of all of this, directors, managers and controlling shareholders are becoming more aware of good corporate governance practices and high compliance standards in M&A deals.
15. Should directors, management and controlling shareholders be more concerned today about negative publicity, shareholder criticism, regulatory pressure, shareholder lawsuits and liability from potential litigation?
Considering that the great majority of listed companies have defined control, shareholder activism is still not as common in Brazil as it is in other countries. However, directors and controlling shareholders have recently become more aware of negative publicity and shareholder criticism as minority shareholders (mainly asset managers and pension funds) have become progressively more active. Considering the developments of the Car Wash Probe and other corruption scandals, institutional investors have been demanding stricter corporate governance practices, internal controls and compliance policies by listed companies.
16. 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?
The New York style of purchase agreement used in cross-border deals is becoming progressively common in pure domestic deals. However, one significant difference from the international standard agreement when dealing with Brazilian targets is that the indemnity provisions in M&A deals in Brazil are usually not limited to breaches to representations and warranties, but also cover some (if not all) liabilities derived from facts prior to the transaction. Since the current Brazilian market is hot for buyers, most of the purchase agreements are buyer-friendly, which explains a broader indemnification provision in favour of buyers.
17. Have there been changes in the process for how M&A transactions are conducted in your jurisdiction?
Over the past few years, the Brazilian market has seen profound changes in the structuring and legal framework of M&A transactions. On relevant change is that, for the first time, the Brazilian Securities and Exchange Commission (CVM) expressly authorised a cash and stock merger on the Brazilian securities market. In addition, M&A practitioners must now be more accountable for the higher active role of the Brazilian antitrust authority (CADE). Discussions in Brazil on break-up payments and rules on "Hell-or-High-Water" were almost non-existent a few years ago. However, after CADE started to follow a more stringent antitrust enforcement strategy (resulting in the dismissal of several high-profiles deals), antitrust clearance, buyer's divestment requirements and significant break-up payments have become some of the most discussed issues in deals involving players in the same sector.
Regarding changes in the legal framework, the Brazilian President recently passed the Economic Freedom Act, which aims to reduce judicial interference in private transactions, among other things.
18. How level is the playing field for domestic and international bidders?
In general, given the familiarity of the complexity of the Brazilian legislation (especially tax and labour), domestic buyers are usually more acquainted with the legal risks surrounding an M&A deal. On the other hand, the great majority of multinational buyers hire a local team in the country that can better assess all potential liabilities of a particular transaction and advise foreign buyers concerning the risks implied. Moreover, local counsel can negotiate solid indemnity provisions in the purchase agreement covering all past liabilities of the target company. This is especially true considering the current market, which is hot for buyers.
19. 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?
International buyers and investors looking at deals in Brazil should be fully aware that despite the fact that the country has consolidated democracy and solid legal and governing institutions, the Brazilian legislation is highly complex and often of difficult understanding. Therefore, it is important to study the Brazilian tax system carefully, which is challenging to keep up to date due to constant changes. In addition, foreign investors must have a comprehensive understanding of their legal obligations when it comes to the Labour Law. Despite the efforts of the current government to facilitate business, Brazil is still a highly bureaucratic country. It is of the utmost importance to bear this in mind and work with experienced local professionals to mitigate this issue. Conducting compliance due diligence on potential targets is also strongly advisable to avoid unpredictable liability. Finally, it is also appropriate to understand the culture of how businesses are made, especially considering that Brazil is a country of continental proportions and of different cultures.
20. 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?
The more active and strict role of the Brazilian antitrust authority (CADE) has been forcing M&A practitioners to negotiate provisions that were not much discussed years ago, such as break-up payments and rules on "Hell-or-High-Water".