M&A: WHAT TO EXPECT FOR THE 2020 - 2021 BIENNIUM

In January 2020, Brazil completed one year of its new administration and, unlike the last administrations, Jair Bolsonaro brought to the discussion guidelines with ideologies that are less populist and more pro-market. With the appointment of some good Ministers, it allowed the emergence of a government with ideas and policies based on fiscal, tax and administrative reforms. The approval of the Social Security Reform, hitherto considered fundamental for containing public spending and resuming sustainable economic growth, took place in October 2019. This positive sign helped to regain the confidence of foreign and domestic investors, becoming a milestone for this new Government in its first year of management. Regarding GDP, the Central Bank revised its projection for growth in 2020 from 1.8% to 2.3%, also as a result of the continued reform and adjustment scenario in the Brazilian economy.

Source: IBGE, Bacen and Focus ReportOther upward movements were also reflected in the Ibovespa in the second half of 2019, with the scholarship reaching 116,000 points at the end of 2019. In addition, SELIC was, at the last COPOM meeting (05/02/2020), reduced to 4.25%, which represents its lowest historical rate since the beginning of the Real Plan.

Source: IBGE, Bacen and Focus ReportAs a reflection of this reduction, Brazilian investors are increasingly motivated to leave their rentier status (investors with a more conservative profile, who invest in treasury bonds, investment funds linked to interest rates, CDB's, etc.), and to become an entrepreneur. With SELIC-backed Assets and Inflation losing attractiveness — the Brazilian economy's real interest rate at levels lower than 1% p.a. — investors start to return their capital to riskier assets. Consequently, debentures, multi-market funds, and equities are gaining space among the alternatives, driven by the exponential growth of investment advisory offices and platforms.

Brazilian Real Interest Rate (Selic/IPCA)

Source: XpesSE movement helps to promote the real economy, facilitating the financial leverage of companies through financing with more attractive interest rates and the issuance of debentures. This access to capital guarantees companies new possibilities for growth both Organically (hiring, buying machines, new production lines, etc.) and Inorganically, through mergers and acquisitions (M&A). Also, with the Selic Rate at the level of 4.25% p.a., Brazilian companies can finally consider operations via Financial Leverage, as presented in the article on LBO prepared by FC Partners. The direct reflection of this movement can be seen in the new PwC Mergers and Acquisitions (M&A) report. The year 2019 had 912 transactions, 39% higher than the 2018 transaction volume (658). The last month of 2019 was highlighted in the survey, with 114 transactions, an increase of 97% compared to the same period in 2018. This number reinforces the thesis that 2020 will be an even better year for Mergers and Acquisitions. Some Investment Banks project that the volume of stock offerings for 2020 will reach R$ 120 billion, between 20 and 30 transactions, adding up to IPO and subsequent offerings (Follow Us). If this volume is reached, it will be the new record for the variable income market in Brazil. An important agenda that helped boost investor sentiment in relation to M&A in 2019, according to PwC, was the Social Security Reform. Additionally, the expectations of the Administrative Reform, which will have a direct impact on the Federal Government's accounts, together with the MP for Economic Freedom and the expected privatizations, will positively influence the appetite of companies that are expanding their activities in an inorganic way.

Source: PWC The next biennium is expected to be promising for Capital Markets and Mergers and Acquisitions (M&A) in Brazil. The review of the perspective of Rating Brazilian from stable to positive and the possible change in Rating for the next two years serve as an affirmative signal to foreign investors. Therefore, there are still many uncertainties regarding the consolidation of reforms and privatizations. However, we have sufficient reason to believe that the coming years will be record-breaking. ARTICLE WRITTEN BY HENRIQUE PORTO — PARTNER OF FC PARTNERSGo to our site: http://www.fcpartners.com.br