South America has been a special part of my life for four decades. I have lived many years in Brasil and Peru. I am married to an incredible lady from Argentina. I want to share South America with you.
Drive down any highway in Brazil and it is impossible to avoid the square green-and-gold signs bearing the initials “BR” that announce Petrobras petrol stations.
With 7,500 roadside outlets, the state-owned oil company remains one of the country’s most recognised brand names. But soon, its petrol distribution network — the biggest in Brazil — will have a new private-sector owner. Petrobras is selling the business to help cut its crippling debt, as it tries to recover from a sweeping corruption scandal. Media reports suggest it is seeking a price of R$30bn-R$40bn ($9bn-$13bn).
And its upcoming sale is adding to a growing wave of corporate mergers and acquisitions — a trend that, coupled with a strong rally in capital markets, is raising hopes of an upturn for Brazil’s long-suffering investment banks.
“We are seeing transactions across all industries, with a lot of interest from foreign players,” says Alessandro Farkuh, head of M&A at Bradesco BBI, an arm of the country’s second largest private bank.
However, whether this activity becomes a sustained M&A revival will depend on the success of Brazil’s new political and economic reforms as well as Petrobras’s short-term asset sale programme.
Renewed interest in Brazilian companies has come as hopes rise that the impeachment of the leftist former president Dilma Rousseff in August leads to an escape from a deep economic recession.
Her more business-friendly replacement, Michel Temer, has already introduced fiscal reforms, which have helped both the benchmark Ibovespa share index surge 44 per cent this year and lift the Brazilian real 22 per cent against the dollar.
“We are now seeing real measures being proposed and being implemented in Brazil and that is rare across our markets,” says Andrew Newington, chief operating officer at Actis, the emerging markets private equity investor.
Such a rapid rebound has also revived hopes for fundraisings in Brazil’s long moribund equity capital markets. In October, Brazil witnessed its first initial public offering for 15 months: a $242m share issue by Alliar Médicos à Frente, a medical diagnostics company.
While relatively small, the IPO nevertheless drew an ecstatic response from BM&FBovespa, the company that runs Brazil’s stock exchange. Its chief executive, Edemir Pinto, predicted that next year “will be the big year for IPOs for the Brazilian capital market”.
Such high hopes for 2017 may prove premature — so far 2016 has been the second worst for IPOs in Brazil in 13 years, beaten only by last year for lack of activity.
Even so, bankers agree that a pipeline of IPOs is building. “We will finish the year with up to six to eight equity deals,” says Roderick Greenlees, global head of investment banking at Itaú Unibanco.
Merger and acquisition activity has been stronger and steadier. Total deal value has reached $36.7bn so far this year compared with $27.8bn in the same period a year earlier, according to data from Dealogic.
But this is also low compared with Brazil’s boom years, and has been partly driven by companies caught up in the Petrobras corruption seeking to divest assets.
One such company, construction group Camargo Corrêa, sold its electricity business, CPFL Energia, to China’s State Grid for R$5.9bn in September.
Petrobras’s own divestment programme is even larger. It wants to raise $15.1bn from asset sales this year and a further $19.5bn over the next two years.
In the past months it has announced a series of transactions. In July, it sold a controlling stake in an offshore oilfield to Norway’s Statoil for $2.5bn. Then, in September, the group sold a natural gas distribution network for $5.2bn to a consortium led by Canada’s Brookfield Asset Management.
“For a state-owned company, having an M&A area … was a completely new experience,” said Petrobras’s new chief executive, Pedro Parente, in a recent interview with the FT.
Investors say its forthcoming petrol distribution sale will be the most competitive deal yet.
Petrobras is planning to sell a controlling interest in its distribution arm, BR Distribuidora, which manages its petrol station network — and many of Brazil’s biggest investors are considering a bid. They include Lojas Americanas — the retail chain controlled by 3G Capital, the investment group of Jorge Paulo Lemann, Brazil’s richest man, and his partners — and Itaúsa Investimentos, the holding company of Brazil’s largest private bank, Itaú Unibanco.
Media reports suggest France’s supermarket chain Carrefour may also be interested.
People familiar with the business say it is potentially one of the country’s most cash generative, with annual revenues of about R$100bn and only 4,000 staff.
In addition, its petrol stations are run as franchises, meaning the company is asset-light, and there is room for upside by developing the convenience store side of the business.
Among the risks, though, is possible government interference to control petrol prices. For this reason, bankers say a strong shareholder agreement allowing the buyer independence to set prices and source fuel supplies will be crucial to deal.
However, some are concerned that excitement around Petrobras-related M&A is causing investors to underestimate Brazil’s macroeconomic problems — such as its gaping budget deficits.
They note that a pick-up in dealmaking has not yet been translated into higher investment bank fees, either. So far this year, investment bank revenues from Brazil are marginally lower than a year earlier at $387m — which makes them the lowest since 2005, according to Dealogic.
While strategic investors might be willing to take the risk of cutting deals now, caution appears to reign among private equity groups. Antonio Bonchristiano, chief executive of GP Investimentos, said his firm recently bought back an earlier investment, BR Properties, because it was trading at an attractive price compared with replacement value.
“It was not really a bet on any significant improvement in the economy,” he admits.