SAO PAULO: Stricter legal and regulatory scrutiny may slow mergers and acquisitions in Brazil this year, compounding the impact of a harsh recession and lingering political turmoil that is keeping buyers and sellers at odds over valuations, bankers and lawyers said. In recent months, trade unions and citizen advocacy groups have increased pressure on industry watchdogs and federal auditors to stop state asset sales aimed at cutting Brazil’s debt. More companies tapped antitrust authorities to review rival industry tie-ups, putting the brakes on several deals.
For example, the federal audit court (TCU) halted Petróleo Brasileiro SA’s ( PETR4.SA ) asset sale program in December, citing the need for more transparent terms. The decision led the state-controlled oil company known as Petrobras to miss a two-year goal of raising $15.1 billion by the end of 2016 by more than $1 billion. Likewise, fallout from the “Operation Car Wash” corruption investigation has led to increased due diligence in asset sales for engineering conglomerate Odebrecht SA and others ensnared in the scandal. The usual time for such proceedings has doubled in the past year, taking up to six months in some cases, lawyers said. Thomson Reuters data show at least 14 planned divestitures or takeovers worth more than $8 billion that could have been announced last year have been left for 2017, as buyers have become more cautious of reputational and legal risks in Latin America’s largest economy.
Although M&A activity gained steam in recent months, tougher compliance, the harshest recession in a century and the political aftershocks of the Car Wash probe are putting off announcements, said Flávio Valadão, head of M&A at Banco Santander Brasil SA, which topped Thomson Reuters’ 2016 advisory rankings for Brazil. The sale of a majority voting stake in Petrobras’ fuel distribution unit and Odebrecht’s exit from a Peru gas pipeline project were among the deals stuck in the mud last year. “Legal and regulatory hurdles along with a growing zeal for compliance have become day-to-day features in Brazil investment banking,” said Marcus Silberman, Bank of America Merrill Lynch’s co-head of Latin America M&A. “It certainly makes it more challenging for buyers and sellers to close a deal.” Companies announced $54.308 billion worth of Brazil-related mergers last year, up 23 percent from 2015, the rankings showed. Still, the number of announced deals fell to 578 from 676, the biggest drop in three years, according to the data.
