Loss of confidence impacting M&A activity
The novel coronavirus pandemic has dealt a blow to merger and acquisition (M&A) activity in Brazil and around the world. High volatility, social isolation, and uncertainty about how deep and how long the effects on the economy will be led sellers and buyers to rethink the pace of transactions and even if they will actually materialize.
In Brazil, large ongoing deals will have more time to materialize - the sales of Petrobras's refineries and Oi's mobile business, for instance. Others have already suspended deals, such as the sale of Outback restaurants in Brazil and the disposal of assets of the Laureate education group, Valor learned. The sales of Echoenergia and Fosun's financial assets in the country are also temporarily frozen, three sources say.
The projection of Alvarez & Marsal consultancy, based on what happened in 2001 and 2008 crises, is for a global drop of 60% in this market. It sees a drop to just under $1 trillion in 2020 from $2.4 trillion in 2019. In Brazil, the average drop will likely be 64% compared to the R$26 billion seen in 2019 as the size of the deals will be impacted.
"We compared with previous crises to project how M&A would be impacted. Volumes fall in general, but the interest of distressed funds increases," says Carlos Priolli, a partner at the consultancy. "If history is a guide, volumes tend to return to pre-crisis levels within three to five years."As managers focus on financially saving companies, helping their suppliers survive and not making risky decisions, most deals take a back seat. It can be a matter of weeks or months depending on the asset and how advanced talks are. "Conversations not yet signed and in the early stages of due diligence tend to fall apart more easily, while a company that has already signed a contract after due diligence but has not yet closed the deal may demand a later deadline," says Daniel Carneiro, a partner in the law firm DC Associados.
Petrobras, for example, told bidders in refineries' auctions that the deadline for binding offers was extended by one month. "But they will certainly be extended again. The process will take place out of the interest both of Petrobras and the buyers, who are still engaged, but in a longer term," says an executive who participates in the process.
Oi is in a similar situation. Selling the mobile business is both essential for the company and strategic for competitors. "One must understand that international buyers are dealing with the crisis in...
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