The time is right to take a second look at Brazil
A report on Brazil by PwC’s Deals practice shows that Canada is largely missing out on opportunities with one of the world’s most promising emerging economies.
While foreign direct investment between Brazil and Canada has grown rapidly over the last decade, there has surprisingly been a lack of merger and acquisition deal activity between the two countries. During the last 10 years there have only been 70 announced acquisitions of Brazilian companies with total value under $3 billion. Activity has been highly concentrated among a small group of financial service, asset management, resource and mining companies, the report indicates.
“The time is right for Canadians to step onto the world stage to capitalize on a global economic realignment that is taking place, or we risk being left behind. Brazil, among other developing economies, presents a compelling investment case. PwC is forecasting that Brazil will achieve over 7% economic growth this year, eclipsing rates of all other developed nations. By 2050 we expect Brazil’s economy, measured by GDP, to outpace all other G7 nationals except the U.S.,” says Kristian Knibutat, PwC’s National Deals Leader and co-author of the report. “Our macro team has forecast that Brazil’s GDP will overtake that of Italy in 2017, rank higher than the UK in 2023, pass France in 2027, Germany by 2032 and Japan by 2044.”
Brazil, like Canada, is extremely well positioned to provide the world with the three basic building blocks of industrialization—energy, food and resources, the report says. As well, with a population of 190 million and an emerging middle class, there are opportunities in financial services, retail and consumer and industrial sectors, says Knibutat. Since it is hosting the 2014 FIFA World Cup and the 2016 Olympics, Brazil is also expected to experience a mini-boom in the infrastructure sector, he says.
Early stage ventures are currently the most highly attractive takeover targets, although middle market deals are set to rise. Deals with undisclosed values or values less than $100 million represent 84% of 2010 activity. Knibutat says the middle market will grow as Brazil’s private sector develops.
Other highlights from the report include:
- While declining in most developed countries, private equity is on the rise, representing 11% of activity in 2010 and 12% in 2009—decade highs.
- Mega mergers involving leading Brazilian corporations made up 4% of announced 2010 transaction volume.
- Like other resource-rich nations, activity in the materials sector represented the bulk of 2010 M&A activity (18%)
- The Brazilian consumer staples and consumer discretionary sectors (altogether, 28% of all activity) have seen an extraordinary volume of activity due to a vibrant consumer culture.
- From a volume perspective, entities from North America have a negligible role in Brazilian deal making, representing less than 3% of total activity on the buy side and the sell side.
Knibutat says, “These statistics are partially misleading, as some of the most noteworthy deals of this decade involved North Americans. For example, Brazil’s Vale acquired Canada’s Inco in 2006, the largest-ever acquisition by a Latin American company.” During the decade ended 2010, Brazilian buyers announced just 17 acquisitions of Canadian targets.
The good news for deal makers is that Brazil’s restrictions on foreign equity ownership is extremely relaxed compared to other emerging countries such as India and China. Even recent discussions around the introduction of capital controls to curb inflation have excluded capital inflows for M&A.
“Overall, transacting with Brazil may be one of the most promising new frontiers for Canadian deal makers. Indeed, exploring partnerships with the emerging world may be the answer to the question that is plaguing investors, economists and corporations alike—what will drive growth in Canada for the next generation?” Knibutat says.
[ PwC’s Shifting Centre of Gravity: Mergers and Acquisitons in Brazil – A Canadian Perspective, is available at www.pwc.com/ca/brazildeals
PwC’s The World in 2050 report is available from this link http://bit.ly/9BJnay ]
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