M&A: Market should remain positive in 2021

January 2024

By Daniel Lombardi, Partner and Vice President of G5 Partners 

Despite the great challenges faced with the covid-19 pandemic, the Brazilian mergers and acquisitions market recorded its second highest number of transactions in the last 20 years. This performance was supported by domestic transactions, which maintained the same level as in 2019, while acquisitions involving foreign companies decreased by almost 30%. The technology and telecom sectors were the highlights of the year, with the largest number of transactions. It should be noted that 2020 was an atypical year. After a promising start, the beginning of the pandemic in mid-March brought uncertainty in the second quarter, forcing companies to act cautiously and interrupt strategic development initiatives during the period. On the other hand, however, the accentuated resumption of economic activity during the second half of 2020 occurred at a higher-than-expected pace. More than 1,110 transactions were announced in 2020, only 9% lower than 2019 and representing the second highest result for the last 20 years. During the year, we witnessed an important profile changes in M&A transactions. Firstly, there was an increase in the number of transactions involving domestic companies: even with strong transaction base in 2019, the number of domestic transactions increased by 2% in 2020 for the fourth consecutive result. On the Other hand, transactions involving foreign companies reduced by 29%. 

In addition to the pandemic, lower interest rates and the depreciation of the national currency are factors that explain these results. Domestic companies were able to raise funds at very attractive costs, a reality that did not exist in the recent past when interest rates were substantially higher. On the other end, significant amounts of liquidity that was previously allocated in traditional fixed income assets were transferred to structured debt instruments and equity in search of additional profitability. Within this context, capitalized companies gained more appetite to implement growth and consolidation strategies through acquisitions. As an example of the market activity in 2020, a total of 28 new companies launched their IPOs on B3 while 24 already-listed companies raised funds through follow-on offerings during the year, totaling R$116 billion in transaction volume. Important changes in sector dynamics also took place. Sectors linked to technology and telecom were benefited the most given the increased pressure for innovation and connectivity services imposed by the pandemic. Important transactions included the acquisition of Linx, by Stone, and the sale of Oi’s mobile assets as part of its judicial reorganization. The year was also highlighted by the increase in capital raising and the expansion of activities provided by financial technology service companies (fintechs).

On the other hand, the privatization program by the federal government has advanced slower than previously anticipated. Activities such as tourism and hospitality faced greater challenges, resulting in the capitalization and sale of assets to balance capital requirements. We also witnessed different merger activities for sectors strongly impacted by the pandemic, with companies seeking to increase their operational and financial strength to face the crisis. These actions are commonly used to navigate turbulent market periods as they are aimed at joining forces to capture synergies by rationalizing costs and expenses. 

The Scenario for 2021 

The outlook for the mergers and acquisitions market in 2021 is positive, with indications that the macroeconomic scenario will continue with low interest rates and a gradual resumption of economic activities. The technology and telecom sectors are expected to continue positive, with intense activity from venture capital and private equity funds in the allocation of capital in technology companies in the country. Fintechs and insurtechs should also benefit from the anticipated changes in the regulatory environment and from open banking and is also expected to grow in the face of incumbents. In telecom, the consolidation of ISPs (regional providers) should gain momentum, a natural path in a capital-intensive sector. InfraCo transactions from incumbents are also expected to move the market. The health and education sectors continue to have very positive dynamics in the country, with great room for consolidation and growth. The recent IPO of Rede D’Or, the largest IPO on B3 since 2013, reinforces the investment thesis for the health sector and the availability of capital can foster and accelerate the sector’s consolidation process. 

The real estate sector is expected to remain in the spotlight, with investors’ appetite for income-generating assets. In 2020, a record number of Fundos de Investimento Imobiliários – FIIs funds were issued (over R$44 billion in volume), and a good performance should be repeated in 2021. In addition, the improved control of the covid-19 pandemic should help to reduce uncertainties, fostering even more transactions in the segment. Another sector with positive outlooks for 2021 is infrastructure. Brazil has a shortage of investments in this sector and the liquidity and risk appetite from investors offer a wider range of options for financial business structuring. Particular attention should be given to the sanitation segment, which has been announcing increasing numbers of private investment transactions due to its new regulatory framework.

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