Brazil Booms, published in Emirates Business magazine
Published in Emirates Business magazine
At a time when investors are exercising caution and restraint, with many developed economies falling into recession, the global financial community is becoming increasingly alert to signs of positive growth from unconventional sources.
For a host of reasons, recent figures being reported from Brazil have pricked the attention of international investors. The country's M&A volumes are running at record highs, its levels of inward investment are soaring, its export figures are rapidly improving and its larger companies have become acquisitive, with a string of overseas M&A transactions completed in the past year.
"While the credit crunch continues to affect economies and M&A the world over, Brazil remains one of the few markets with strong M&A growth," says David Sonter, partner at law firm Freshfields in Brazil. Deal volumes in the year to June 2008 were double the previous 12 months, totalling more than 600 transactions with a value of more than $43bn.
"Brazil is one of the fastest growing economies in the world with arguably the most sophisticated capital markets of the BRIC countries. Its growth is being propelled by the commodities boom, enormous riches in natural resources, a stable political system and a labour force of 200 million plus people. The country is riding a growth wave which could see the next few years establish it as one of the world's leading economies," says Sonter.
Following years of economic mismanagement and currency crises, Brazil's election of Lula da Silva in 2002 has proved to be a tremendous advantage for the country. The economic and political stability that has reigned since that date has allowed inflation to fall dramatically, employment to rise, and has prompted the development of first world financial conditions such as widespread availability of credit, a reduction in black marketeering and informal labour, bringing employees into the tax and benefit system, increasing national wealth and security and raising productivity. An estimated 190m people have been brought into the 'consumer market' for the first time under president da Silva.
Obliging companies to demonstrate that they comply with government regulations on tax and employment has meant that they can no longer take advantage of untaxed workers and has increased productivity and efficiency. Income inequality has fallen and growth rates overall have risen from less than 2 percent per year between 1990 and 2003 to more than 4 percent.
Brazil was rewarded for its successful reforms in spring this year when Standard & Poor's granted the country's sovereign debt investment grade rating. So far this year, foreign investors have acquired more than $11bn worth of Brazilian assets, an 18 percent increase on the same period in 2007.
Looking at the M&A market in more detail, David Sonter at Freshfields points out that although the majority of Brazilian M&A remains domestic, "much of the ebullient mood in Brazilian M&A results from the country's ability to attract foreign capital, which in 2007 and 2008 accounted for almost half of all disclosed deals. While the US continues to be the country's biggest direct investor in Brazilian M&A, it is countries from the European Union that have made the largest financial commitments in recent years.
"Growing local business confidence is also seeing more Brazilian companies turning to international markets for M&A growth opportunities," adds Sonter. "The past 18 months have witnessed Brazilian corporates investing over $10bn in 65 international acquisitions. As well as deals in other South American countries such as Argentina, Brazilian companies have also focused on Europe in search of transformational M&A deals."
Within Latin America there has been significant growth in cross border M&A, as Alexis Rovzar, partner and head of the Latin American practice at New York-based international law firm White & Case points out. "The south-south M&A is growing. Brazilian companies are buying Argentine companies, which are buying Mexican companies, etc. The largest countries in the region have created national champions that are competing with old world multinational companies."
An example is InBev, part-Brazilian, part-Belgian and the world's second largest brewing company - and potentially the largest if the acquisition of Anhauser Busch is approved. Food company Marfrig acquired Irish chicken processor Moy Park in June this year for $900m, making it the ninth largest poultry supplier in the world with sales of $2.4bn a year and bringing its number of acquisitions to 16 since May 2007. Other attempted deals include the giant iron ore producer Vale's $80bn bid for Swiss group Xstrata and steelmaker CSN's bid for Anglo Dutch company Corus.
Internally, telecoms company Oi Participacoes recently acquired rival Brasil Telecom for $3bn, while local stock exchanges BM&F and Bovespa merged in a $10bn deal. At the merged stock exchange, business has been quiet for the first half of the year, after a very active 2007 in which there were more than 60 IPOs. The lack of action is due to US investors drawing in their horns, according to local experts. Foreign investors accounted for 70 percent of IPO buying in 2007.
"We are having a difficult year, if you compare it to 2007," says Gilberto Mifano, CEO of stock exchange firm Bovespa Holdings. "But we are very optimistic about our future, even our near future." The country's GDP is rolling along at 5.4 percent and the exchange as a whole registered a small but significant year on year rise to June 2008, against a backdrop of falling indices around the world.
Whereas the aphorism used to be that 'if the US catches a cold, Brazil gets pneumonia', the current economic woes of the United States are barely touching Brazil this time around (IPOs aside). "I'm very optimistic even if the US does end up sliding into a recession," says Alexis Rovzar at White & Case. Brazil has "all its fundamentals aligned. Inflation is controlled, public debt is at historic lows, interest rates continue to diminish, which will only benefit Brazil's access to additional funds, finance, infrastructure and other requirements."
A massive oil field was discovered offshore Brazil in 2007, thought to contain between 5 and 8 billion barrels of oil, the largest find since an equivalent field was discovered in Kazakhstan in 2000. The field, called Tupi, could propel Brazil into the premier league of oil exporters and help to maintain Brazil's rapid ascent in global economic power. Although first oil from Tupi is not expected for another seven years, once it is onstream, Brazil will have an estimated 17bn barrels of proven reserves, putting it above Canada and Mexico. The country's president has expressed a wish to join the oil producing nations of OPEC.
Today, companies such as Shell and Exxon are diverting resources away from politically problematic locations such as Nigeria and Russia and investing in Brazil, where a national willingness to collaborate with foreign interests is neatly matched with vast untapped reserves. Expect to hear much more about this country in the coming years.