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REFILE-Privatization to dominate capital markets, M&A in Brazil this year

By Tatiana Bautzer and Carolina Mandl

(Adds Morgan Stanley executive's full title in paragraph 9) By Tatiana Bautzer and Carolina Mandl SAO PAULO, July 10 (Reuters) - The sale of state-owned assets is expected to drive M&A transactions and share offerings volume in Brazil in the second half of the year, bankers and investors said, after a slower-than-expected first half. As court injunctions delayed asset sales by oil company Petroleo Brasileiro SA and discussion of pension reform dragged on in Congress, the volume of mergers and acquisitions in the first half of the year fell 19% to $20.8 billion, according to Refinitiv data. But state-controlled companies faced less hurdles to selling stakes in companies already listed, and the volume of share offerings rose 45% in the first half to 8.6 billion reais ($2.25 billion). It was the best first half of the year since 2013. After Brazil's Supreme Court finally cleared the way for Brazil's largest deal this year, the sale by Petrobras of gas pipeline network TAG to France's Engie SA for $8.6 billion, banks expect the volume of privatization-related M&A to grow. The next one on the block is fuel distribution unit Petrobras Distribuidora SA, which will be privatized through a share offering by the end of the month. "We are expecting a new round of infrastructure auctions that may include licenses to operate airports, railroads and highways", said Hans Lin, head of investment banking in Brazil at Bank of America. The approval of pension reform by Congress is expected to unlock strategic moves by Brazilian companies that were waiting for a clearer outlook for the economy. "We expect private M&A activity to rise more sharply next year, as the transactions take around nine months between initial talks and announcements," said Eduardo Miras, head of investment banking in Brazil at Citigroup. Citi is leading the M&A advisory ranking so far this year with five deals announced, totaling $10.2 billion. One of the few recent private deals announced is the proposed merger between food processors BRF SA and Marfrig Global Foods SA. Miras expects more deals on the power industry in the second half. Alessandro Zema, country head of Morgan Stanley in Brazil and also head of its investment banking unit, also noticed more activity in private mandates recently, and expects new deals in retail, following recent acquisitions of e-commerce Netshoes and appliance retailer Via Varejo SA. "Industries more directly affected by the recession, such as retail and consumer products, also had lower M&A activity," Zema said. "We believe this is going to change with a better outlook for the economy." Zema also pointed out that some Brazilian companies in good shape are looking for targets outside the country as a way to balance risks. Last month, Natura Cosmeticos SA acquired Avon Products Inc.. Another driver for future M&A activity is the fast growth of start-ups in the country, which has become a main target of investors such as Japan's Softbank. Softbank has raised a $5 billion fund for Latin America. EQUITIES Much of the growth in share offerings' volume was led by state-controlled banks Caixa Economica Federal and Banco do Brasil, which sold their stakes in Petrobras and power company Neoenergia SA, respectively. Caixa also sold a stake in the reinsurer IRB Brasil Resseguros SA, owned by a fund managed by the bank. Many follow-ons in the pipeline for the coming months also involve divestments by the government or state-owned companies, totaling at least 30 billion reais. This list includes follow-ons by Banco do Brasil, Alupar Investimento SA , Petrobras Distribuidora SA and IRB, besides an IPO by insurance company Caixa Seguridade. Despite high volumes in share offerings, only two companies dared an initial public offering so far: sporting goods retailer Centauro and Neoenergia SA. "IPO´s market would resume on a relevant scale once foreign equity investors massively return to Brazil," said Cristiano Guimaraes, Itau BBA's managing director. "Their return will largely depend on the approval of a significant pension reform." TABLES M&A drops 19% The value of mergers and acquisitions involving Brazilian targets fell 19% in the first half of 2019 from the same period in 2018 to $20.8 billion, according to Refinitiv data. Following are the investment banks with the most advisory work, by total deal value and by number of mandates: Rank Financial advisor Deals value Number of ($ million) deals 1 Citi 10,279 5 2 Morgan Stanley 8,682 2 3 Rotschild & Co 3,308 8 4 Banco BTG Pactual 2,780 15 SA 5 Itau Unibanco 2,565 10 6 Bank of America 1,847 3 7 Goldman Sachs 1,498 3 8 Riza Capital 1,261 2 9 BR Partners 1,097 3 10 TD Securities Inc 1,025 1 Industry 20,881 247 Total Equity offerings up 45% The value of Brazilian equity offerings rose 45% in the first half of 2019 from the same period in 2018 to $8.5 billion. Following are the investment banks with most bookrunning work, by proceeds and number of issues: Rank Book runner Proceeds Number of ($ million) issues 1 Bank of America 970 8 2 Itau Unibanco 808 9 3 Banco BTG 793 10 Pactual 4 JPMorgan 667 5 5 Morgan Stanley 639 5 Industry 8,693 17 total ($1 = 3.8168 reais) (Reporting by Tatiana Bautzer and Carolina Mandl; editing by Jonathan Oatis)