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Increased political stability, the return of positive GDP growth and a benign international environment are leading bankers in Brazil to revise upwards their expectations for equity transactions this year.
The Brazilian government has also announced an ambitious privatization and infrastructure concession programme that will combine to test the liquidity – apparently abundant – from international investors.
Bradesco BBI has increased its projections of 2017’s totals of new equity to between R$45 billion and R$50 billion, according to local newspaper Valor.
Meanwhile, Bank of America Merrill Lynch believes the end result could exceed R$50 billion as companies such as Camil, Tivit, Vulcabras, Neoenergia, Eneva and Magazine Luiza have registered deals with the local securities regulator CVM.
There are also market expectations of some large deals coming in the fourth quarter, including from BR Distribuidora, Burger King and Algar Telecom that will add to the R$25 billion of transactions already executed.
The improvement in the local economy and the continued inflows into emerging markets globally is boosting renewed international appetite for Brazilian companies. The recent Azul IPO generated a book of more than R$4 billion.
Key element
The international element is key for both public and private financing: although the Azul deal is an outlier, with international demand accounting for 85% of the total, there have been many other deals – Alliar, Carrefour, Biotoscana and IRB Brasil – where locals generated less than 40% of the total orders.
The Brazilian government plans to take advantage of the positive sentiment by including IPOs within a package of 57 privatization assets added to its Investment Partnership Programme (PPI), which it launched with an initial 25 assets in September 2016.
The most notable of these assets is the state electricity holding company Eletrobras: the government intends to dilute its controlling 80% ownership through a capital increase in the public markets in a deal that could raise billions; the company is valued around $9.5 billion.
As well as stock market transactions, the PPI includes many new concessions of ports, airports and highways – as well as a mix of concessions for new energy projects.
Bankers say bookrunners will have to keep an eye on mega deals when planning their pipelines of smaller private sector deals, but says “crowding out” isn’t an issue.
“These large deals will obviously have an impact – they absorb a lot of market attentions and investment capacity of the large players looking into Brazil – but we will [see] some meaningful private sector deals in the September / October window,” says Bruno Amaral, the partner in charge of M&A deals at BTG Pactual.
Amaral also says this round of concessions is likely to see a high proportion of assets going to international companies and consortia, as these companies respond to a unique opportunity to build scale in the Brazilian market.
“This round is a better opportunity for the international companies to establish a foothold in Brazil than in the past,” says Amaral. “The international companies are benefiting from positive financing conditions with low international interest rates and strong domestic markets.
“In addition, some of the local companies are facing their own struggles: the Brazilian economy is pointing in the right direction right now, but it is just emerging from a major recession. Add in the effects of the continuing corruption issues that breeds a cautious approach to using balance sheet from local banks, and foreigners are in a better shape than ever to participate.”
Stability
The current boost in investor sentiment is based on the greater stability of president Michel Temer, which investors hope will translate into a greater chance of his fiscal reform programme.
Brazil has a large fiscal deficit that needs to be addressed, with nominal deficit estimated at 9.2% of GDP in 2017 and 8.0% of GDP in 2018. However, the market has shrugged off the government’s lack of progress on consolidating; in June it announced weaker primary deficit fiscal targets for 2017 and 2018.
However, according to a report by Credit Suisse, while these asset sales will, if successful, have a positive impact, they are of secondary importance to key spending reforms, such as the proposed pensions reform.
The bank assumes a base case of R$18 billion in non-recurring revenues from the PPI – which is modest against the government’s deficit target of R$161 billion. Even if there is a positive surprise to revenues, Credit Suisse still sees a “limited” impact to the trajectory of gross government debt to GDP, which it forecasts will hit 82.5% by the end of 2018.
However, while noting that the PPI will need to be “well managed” to bring about the government revenues as scheduled, BTG’s Amaral thinks there will be a fiscal boost.
“From a broader perspective, an ambitious privatization programme that brings in new foreign players to the Brazilian market benefits the economy as a whole, which will help the government get back in better shape from a fiscal perspective, which in turn will be helpful to the private sector and lead to more M&A and equity transactions,” he says.
