At a ceremony last month to announce the Brazilian mega-takeover by Suzano Papel e Celulose of Fibria Celulose to create the world’s biggest producer of market pulp, the raw material for paper, executives reached for superlatives.
“This will be the biggest Brazilian company in agribusiness,” said Walter Schalka, the chief executive officer of Suzano — an achievement in a country that is a world leader in agricultural goods ranging from sugar to coffee beans.
But the $14.5bn deal between the two Brazilian companies was significant for another reason — it put Latin America’s largest economy firmly back on the radar of the global international mergers and acquisitions market.
The deal was the biggest takeover of a Brazilian target company in Brazil’s history, excluding a 2010 government deal with state-owned oil producer Petrobras, according to data company Dealogic.
It was one of the top 10 deals globally by size in the first quarter of this year and it comes as other Brazilian companies are launching eye-catching deals. PagSeguro Digital, a Brazilian payments company, staged the second-biggest initial public offering in the world during the quarter, with a $2.6bn listing in New York.
Bankers argue the transactions represent a resurgence of the Brazilian market that is likely to continue in spite of heightened uncertainty in 2018, as the country faces its most unpredictable presidential elections in decades. Driving the interest is the nation’s economic recovery, with gross domestic product expected to grow nearly 3 per cent this year, up from 1 per cent in 2017, on the back of record-low interest rates.
“This year could be as good as or even better than 2017,” said Roderick Sinclair Greenlees, global head of investment banking at Itaú BBA, Brazil’s largest private sector bank. Itaú advised Suzano and was ranked second by deal value in the first quarter M&A league tables for Brazil, according to Dealogic.
Bankers argue the deal also represents one of the first large Brazilian transactions that was not related to the negative consequences of the country’s recession or crippling corruption scandals that have swept the country.
In 2017, for instance, companies such as JBS, the world’s largest meatpacker, were driven by their involvement in Brazil’s biggest political bribery investigation, known as Lava Jato, to deleverage by offloading assets.
While this trend is expected to continue — Petrobras, which was also at the centre of Lava Jato, is looking to sell a pipeline arm known as TAG, reportedly for about $8bn — other megadeals on the horizon are more strategic in nature.
These include talks between Boeing and Brazil’s Embraer, the world’s third-largest commercial aircraft producer, and the potential sale of Brazil’s largest fixed line telecom operator, Oi.
“There are many potential large deals,” says Bruno Amaral, head of M&A at BTG Pactual. The Brazilian investment bank represented a rival bidder, Paper Excellence, in the contest for Fibria. “It’s not hard to envisage a hot market till the end of the year,” Mr Amaral added.
Bankers say the Fibria deal also shows that bank finance is beginning to flow back into the market. A consortium of international banks — JPMorgan Chase, BNP Paribas, Mizuho Bank and Rabobank — is providing $9.2bn in loans to Suzano for the purchase.
“You cannot be considered an international bank if you are not present in Brazil,” said Sandrine Ferdane, chief executive officer of BNP Paribas in Brazil.
The big question mark on the horizon remains the October presidential election. Two populists, former president Luiz Inácio Lula da Silva from the left and Jair Bolsonaro from the extreme right, are leading preliminary polling. But there are countless other potential candidates, from a black supreme court judge, Joaquim Barbosa, to the powerful centre-right governor of the state of São Paulo, Geraldo Alckmin. Compounding the uncertainty is that Mr Lula da Silva is facing jail after being convicted of corruption and losing both of his appeals so far.
However, bankers say that whoever wins, Brazil’s tight fiscal situation will force the next president to undertake important reforms, such as overhauling the country’s expensive pension system.
“There’s a very good chance that, if it’s a business-friendly candidate in terms of policies and reforms … then we’re going to combine a cyclical recovery with a structural change,” said Mr Amaral of BTG.
In the meantime, M&A would continue as strategic investors moved into the region, although the equity market would be likely to take a break for most of the second half during the election.
“Elections are important for the capital markets and I think we will see those [equity] deals either happen now, in the first half of the year, or at the very end of the year,” Mr Greenlees said.