Insights about M&A activity in Brazil and LatAm in 1H2024 and what to expect for 2H2024
Adriano Chaves and Larissa Lino
August 2024
Brazil started 2024 with signs that M&A activity would recover from its low point in 2023. First, Brazil’s GDP grew 2.9% in 2023 our Central Bank had been one of the first to start the process of reducing the basic interest rate (and there was an expectation that the USA would start its reduction process soon). Also, the unemployment rate reached its lowest level (7.4%) since 2014, and the country had strong levels of trade balance (near USD 100 billion) and foreign direct investments (USD 64 billion, second country in the world in FDI volume in 2023). S&P Global Ratings even upgraded Brazil’s long-term rating to “BB” in late 2023, following the approval of a tax reform by Congress. It is also worth mentioning that valuations had come down to more reasonable levels.
In the first quarter of 2024, it was possible to sense an acceleration in deal structuring and negotiation, particularly for strategic deals in the middle market. This movement was less clear for VC, PE and megadeals, given the lack of liquidity in the context of still high interest rates and lack of IPOs.
When it became clear that the USA would not reduce its interest rates in 1H2024, and the Brazilian Central Bank paused its movement of interest reduction, that optimism suffered a considerable impact. But while the new scenario made many players pause, the 1H2024 ended with a reasonable level of M&A activity. PwC saw a 2.13% increase in the number of deals (623) compared with 1H2023. On the other hand, even though TTRData (www.ttrdata.com) saw a 26.48% decrease in the number of deals (747) they followed, the value of such deals (USD 19.96 billion) represented a mere reduction of 3.42% when compared to 1H2023. In any event, in our experience, many middle market transactions are not captured in these surveys, given their size, which means that the level of M&A activity is likely much higher for smaller deals.
Other countries in LatAm had similar expectations, for reasons including the nearshoring movement (particularly Mexico) and the great volume of mineral reserves that are relevant to the electrification of the world. But the maintenance of high interest rates in the USA and the political instability of many LatAm countries were not helpful. According to TTRData, the number of deals (1,242) in all LatAm (including Brazil) represented a 26.25% decrease, while the value of such deals (USD 33.57 billion) represented a reduction of 15.81% when compared to 1H2023.
In this scenario, Brazil led the ranking as the most active country in LatAm as regards the M&A market in 1H2024, summing up near 60% of the transactions and deal value. The silver medal goes to Mexico, with 162 deals, and aggregated value of USD 5.85 billion.
As for the most active sectors, PwC states that technology represented 39.49% of the deals it covered in Brazil. For TTRData, technology led the number of deals in Brazil, followed by real estate and professional/financial services, while some of the largest deal values came from the energy (oil, electricity) and financial /business services fields.
TTRData indicates that, while the number of cross-border deals involving Brazil was modest (241), there seems to be a “comeback” from US bidders, who were the largest group of foreign bidders in Brazil. US bidders were also the most relevant in other LatAm jurisdictions covered by TTRData. China seems to have reduced its presence in the M&A market during this period.
What to expect for 2H2024
The recent news that the USA will probably start reducing interest rates in 2H2024 can be read as a good sign to the market. The fact the Brazilian currency has devalued considerably in 2024 can help in tactic or opportunistic deals as well. Dry powder available for PE investment funds summed up BRL 23.6 billion until July 2024 according to Spectra (at the request of Capital Aberto), little less than the total amount invested last year. Unemployment rate is at an even lower level (6.9%) and FDI is keeping its pace.
In this context, the general view for the second half of this year is of cautious optimism, with signs of potential rebound of M&A activity.
Again, technology should lead the number of deals, followed by deals in the energy, mining, real estate, infrastructure, and business services. Given the maintenance of high interest rates so far, coupled with an increase in the number of composition with creditors and judicial recoveries (Chapter XI-like proceedings, broadly speaking), there seems to be plenty of room for distressed asset deals as well.
This bulletin is for information purposes only and should not be relied upon to obtain legal advice on any of the topics dealt with here. For additional information, please contact the leaders of the Mergers and Acquisitions team.
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