Increasing M&A impetus in Brazil encounters regulatory speed bump
by Ashley Luttenegger
Over the past decade, two words have become a bit more commonplace in Brazilian business vocabulary: fusões e acquisições; that’s Portuguese for “mergers and acquisitions.” Since 2002, the mergers scene in this developing country has been growing with an impetus mirroring that of the growth of the nation’s economy as a whole. From 2002 up until 2011, on average, this emerging South American economy realized a real growth rate in GDP of just over 3% per year, with the number of mergers increasing annually at a rate of about three times that. According to a study carried out by PwC published at the beginning of this year, a reported 746 M&A transactions took place last year, 273 of which disclosed values. The majority of those transactions with disclosed values were in the food and beverage, financial, retail, and construction and real estate industries. Three of the four most highly valued transactions were specifically related to steel, including a deal in which five Chinese companies purchased a 15% stake in Brazil’s niobium production giant: CBMM. In 2010, CBMM had a reported profit margin of nearly 40%, and demand for niobium is expected to rise, as Diana Kinch noted in a Wall Street Journal article published on September 2, 2011.
Not surprisingly, the vast majority of Brazil’s 2011 M&A action took place in the nation’s Southeast region, where the country’s two most populous cities, São Paulo and Rio de Janeiro, are located. The M&A transactions in these two locales alone accounted for approximately two-thirds of the economy’s overall merger activity.
Unfortunately for Brazilian M&A enthusiasts, the mergers momentum may face a slow down this year. Jones Day, a worldwide legal institution, reported this May that as of May 29, 2012, firms must notify and wait up to 330 days to obtain approval from Brazilian officials before they can close their deal. At the very least, they will face a statutory review period of 240 days. The new bureaucratic constraint may cause companies to experience an approval hold-up in Brazil similar to the one they face when carrying out mergers with Chinese companies. Firms that seal the deal without approval can face fines of up to 60 million reals (about 29 million US dollars), and Brazil’s regulatory agency, the Administrative Council for Economic Defense (CADE), could declare the deal void. However, minority interest deals such as the 2011 Chinese stake acquisition in CBMM are not required to notify. Nevertheless, in 2011, these types of deals made up less than one-third of all announced transactions. Meanwhile, merger and acquisition deals made up a combined total of 60% of these transactions. This means that the new law could have a substantial effect on the number of M&A deals that will occur on Brazilian soil this year and in years to come.