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Global factors have impacted M&A and investment activity around the world, and Brazil has been no exception.

Latin America in general saw a much lower level of activity in 2022 than the blockbuster year of 2021. However, M&A negotiations recorded from January to December of last year easily surpassed 2019 and 2020, which also indicates a new level of M&As in the country above 2,000 transactions per year according to a recent InfoMoney article.

Bain & Company recently released their report on M&A in Brazil and their take on the country’s M&A landscape in 2023. Their analysis shows that even with the slowdown in deals in 2022, Brazil still saw overall transaction values in line with pre-pandemic levels.

That said, the market expects a resumption of M&A activities at levels close to those seen in 2021. The reasons are twofold: According to Bain, many deals have stowed for 2023 due to elections in Brazil and the economic uncertainties of the government transition period; Secondly, there are serious expectation for the resumption of initial public offerings (IPO), which can increase the cash of newcomers on the Stock Exchange for new acquisitions.

Another interesting phenomenon noted is that M&A transactions carried out in 2022 prioritized the core activity of the companies instead of betting on new segments or advancing in chain of operations.

A good example was Vale’s (B3:VALE3) negotiations to sell Companhia Siderurgica do Pacém in Brazil’s Ceará State to ArcelorMittal for $2 billion in July. The sale reinforced Vale’s strategy of divesting from non-core operations. Another example was health care Rede D’or (B3:RDOR3) purchase of Sul América Seguros in a transaction that involved the exchange of shares of the hospital network with the shareholders of the insurance company in a deal value of $2.5 billion.

Despite the 2022 mega deals in health care, the market’s interest is shifting towards a greater number of deals in the energy and natural resources sectors, and many such deals are now coming to the pipeline of deal makers.

Pre-pandemic, foreign capital was behind 67% of deals in Brazil, but that has shifted due to economic concerns. That number is now 25%. However, it is up from 17% in 2021, and we could see it start to climb even more.

Brazil is making strides with inflation much faster than other nations largely because the country is more experienced in navigating inflationary issues.

Brazil was the first country in the world to notice the economic effects of the pandemic with shortage of components in the supply chain and its effect on inflation. Its Central Bank quickly responded with a series of consecutive hikes in interest rates in 2021/2022 reaching today’s 13.75% level. The result is that inflation in the country is declining much quicker than in any G20 countries.

Additionally, the new government is expected to put forward a much more environmentally friendly agenda, which could also lead to an even greater percentage of foreign investment coming into Brazil.

At the end of the day, there is great opportunity for a resurgence of M&A activity in Brazil as it continues to rein in inflation, economic concerns begin to calm, and new policies are implemented.

As with the United States, we expect to see an uptick in deals in the region this year, as more companies look to M&A to expand and capitalize on lower valuations across the board. 2023 M&A transactions will certainly exceed the number of deals in 2022 and may reach levels seen in the record year of 2021.

As for the size of the checks, it will all depend on the macroeconomic scenario and the return of IPOs in the country. Among the sectors to dominate the negotiating table, health, financial services, technology, agribusiness, produce, and education markets should continue to be the highlights for the year.

Author Andre Thiollier

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