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Overview of M&A activity

Despite the fact that the Brazilian economy was adversely impacted by the effects of the covid-19 pandemic, as reflected in a 4.1 per cent decline in the country's GDP, the worst rate since 1996 (as reported by Brazilian official research and statistics body IBGE),2 M&A activity had another record-breaking year.

According to PricewaterhouseCoopers (PwC),3 there were 1,038 transactions announced in 2020, an increase of 14 per cent compared to 912 deals completed in 2019, or up 48 per cent compared to an average of 710 deals per year in the past five years (2015–2019). In terms of value, deals with amounts disclosed (455 out of the 1,038) totalled US$26.4 billion in 2020, dropping by US$37.4 billion the amounts disclosed for 2019 deals (US$63.8 billion).4 Private equity activity, for its part, reached 283 transactions among Brazilian and non-Brazilian investors, a significant increase of 26 per cent compared to 225 transactions announced in 2019.5

This continued growth in M&A activity, despite the challenges brought by the pandemic, can be explained by a combination of factors experienced throughout 2020, including:

  1. the increased level of activity in certain sectors of the economy, such as e-commerce and technology;
  2. a positive outlook for more resilient sectors, like health and agribusiness;
  3. a very strong year for domestic initial public offerings (IPOs) and follow-ons caused by interest rates at historic low levels and a very liquid market; and
  4. a sharp devaluation of the Brazilian currency (with a very positive impact on commodities exporters).

The approval of the sanitation and water treatment regulatory framework in July 2020 was an important milestone for the second year of President Bolsonaro's administration. The framework aims for the universalisation of public basic sanitation services by 31 December 2033. To meet this ambitious goal, the new law expands the access of private actors to the sector and allows privatisation through the disposal of shareholding control of state-owned companies. By extension, investments in the order of 600 billion reais are estimated to be necessary until 2033. There are also important infrastructure projects that are being pursued by the government that tend to foster the investment agenda, including toll roads, transmission lines, airports and ports.

On the other hand, the Bolsonaro administration is still struggling to keep up with the plans for privatising government-owned companies, divesting assets from government-owned companies and ownership interests in private companies. In 2020, only nine federal projects of the Investment Partnership Program were concluded, while the government expected to auction at least 64 projects.6 Other aspects that are negatively affecting the M&A industry are a reduction in foreign investments, political interference and a lack of long overdue reforms (like the administrative, political and tax reforms).

The first quarter of 2021 was a busy period for M&A practitioners: according to PwC, 333 transactions were announced, a sharp increase of 50 per cent as compared to the same period in 2020 (222 transactions announced).7 In the first semester of 2021, M&A transactions in Brazil involved an amount of more than 250 billion reais.8

The overall scenario for the coming year is still uncertain, especially because it will be an election year, with expected increased polarisation and radicalisation from the main political actors. Inflation is also increasing, causing a migration from risk investments to fixed-yield investments. In any case, Brazil continues to offer plenty of opportunities in different sectors and there are multiple attractive assets that are good targets for investors.