Transactional Impact Monitor: Spain & Portugal – Vol. 2

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Transactional Impact Monitor: Spain & Portugal – Vol. 2

24 April 2020

TTR’s Transactional Impact Monitor (TIM) is a Special Report combining local knowledge and market visibility from top dealmakers developed to address extraordinary situations affecting the macroeconomic stability and M&A outlook in core markets

INDEX

SPAIN
– M&A Outlook
– Private Equity
– Equity Capital Markets
– Handling the Crisis

PORTUGAL
– M&A Outlook
– Private Equity
– Handling the Crisis

– Dealmaker Profiles

SPAIN

Headlines across the world have begun to shift from the threatening global pandemic to the grim economic outlook facing countless countries grappling with the need to lift restrictions on business activities and resuscitate the livelihoods of their citizens. 

Despite a two-week extension of the state of emergency that has kept residents locked inside their homes since mid-March until at least 9 May, Spain faces the same need to get its people back to work without succumbing en masse to SARS-CoV-2. All indications suggest a tough road ahead. The Bank of Spain projects a fall in GDP of between 6% and 13% and a public spending deficit as high as 11% in 2020, with a rapid, V-shaped recovery increasingly unlikely. 

“Six percent is out of the question,” Deloitte Partner and Head of Private Equity Tomás de Heredia told TTR. Though there are some sectors performing quite well, including agriculture and food manufacturing, Spain’s heavy dependence on tourism and construction will slow the recovery, Heredia said. 

If hotels aren’t permitted to open until September, according to the most likely scenario under discussion, Spain will lose a large chunk of its GDP over the next several months as its peak tourism season falls flat, Heredia noted. 

In the construction industry, building already underway will carry on as restrictions are lifted, but investors are not likely to bank on new projects, he added. “I don’t see any real estate developer starting something from scratch now without the certainty that they will be selling in 24 months.” 

In the first few weeks of the crisis, there was a sense that Spain was falling into a black hole just like Italy, said Pérez-Llorca Founding Partner Pedro Pérez-Llorca. Spain transitioned quickly from a growing market nearing the end of the economic cycle into a state of emergency harboring a very serious problem, he said. It was initially seen as a local problem, he noted, but within a few weeks, that emergency spread to the most important markets in world: the UK and the US. 

With 22m newly unemployed in the US, the largest source market for capital under management has its own problems, Pérez-Llorca pointed out. “Strategic investors that had been considering investments in Spain, now have too many problems at home to look at cross-border deals,” he said. Add to that the restrictions on foreign investment passed by the Spanish government to protect the local market and the outlook for inbound deals in the short-term is complicated, he said.

The word, in terms of politics and economics, is uncertainty, said Heredia. As long as you have some certain kind of environment, whether it’s good or bad, people will adjust their investment strategies. The worst thing that we are seeing is that the government is not giving the necessary certainty. “One day they say kids will return to school, the next day they say they won’t,” said Heredia. “They say businesses can reopen, then they say they can’t,” he added. 

Auriga Global Investors Head of Derivatives and Alternative Investments Diego García de la Peña said his clients and portfolio companies were indeed desperate for clarity on the duration of the lockdown. 

“If the confinement lasts only three months, restaurants can recover. It will be three months of write-off, of zero sales, and then we’ll hit bottom with a bad, but more or less manageable, outlook for 2020,” said García. “If the measures are extended, or if there’s another wave in October, anything to do with food and beverage and tourism – those sectors will face restructuring,” García said. “The duration of the confinement and the resolution of the health crisis are key.”

“We hope that over the next two weeks, at a maximum, all this will be cleared up,” Heredia said. “Everyone was expecting that the economy would recover before the summertime. Now everyone factors in that growth will recover after the summer.”

The unemployment rate in Spain, like in many other countries, “is going through the roof”, meanwhile, Heredia noted, and though there’s no official data because the government considers this a temporary situation being contained with public funds, there’s uncertainty over how long this will endure and people are depleting their savings.

Four-to-five months down the road, when people go back to work, a lot of companies will reduce their workforce and people will devote their savings to the most critical needs: education for their children and groceries, he said. “Obviously, there will be a recovery next year, but I don’t see many people buying second homes. That’s going to drive down everything,” he said. 

Tourism will not begin to recover until the fall, and construction will remain sluggish, Heredia said. “Our view is that hotels won’t be reopened until September or October.” Next year, without a doubt, tourism will be good, Heredia said, and as soon as tourism starts flowing, the economy will pick up overall. Companies have stronger balance sheets than they did in the global financial crisis of 2008 and the government is providing liquidity; demand will come back next year, he said. 

The retail industry, meanwhile, will see a contraction once everything opens up again, Heredia noted, and companies will begin cutting costs by closing the last points of sale they opened, which tend to be those secured at higher cost in poorer locations when retail space was scarce. Companies will start scaling down their retail platforms to where they were two years ago, he said, noting that the shift towards e-commerce accelerated by the crisis will further contribute to a scale-back. 

The great winner in Spain is Amazon, Heredia said, noting that within specific niches there were smaller Internet companies, including wine and grocery distributors, capitalizing on the shift to e-commerce. “Those verticals are covered locally, but at a much smaller scale.”

Despite the confounding limbo crippling the country, Heredia said he had a positive outlook for the medium term. “I can only see growth. We are now at the trough; investors already discount this year and there is only one way to go: up. We cannot get worse.”

M&A Outlook
… Click here to access the second issue of Transactional Impact Monitor: Spain & Portugal – Vol. 2

PORTUGAL

On 20 April, Portugal’s prime minister outlined new rules for cautiously reanimating the economy beginning in May with a gradual return to normalcy under restrictions aimed at avoiding a surge in the number of SARS-CoV-2 cases heading into the summer tourism season.

What started out as, and still remains, essentially a health crisis, will create substantial shockwaves in the Portuguese economy, Alantra Portugal Managing Partner Rita Barosa told TTR. The crisis hit Portugal at a particularly bad moment, as the country had a number of vulnerabilities, Barosa said.

Portugal’s public debt stood at 118% of GDP, with the IMF projecting an increase to 135%, noted Oxy Capital Partner Daniel Viana, which does not allow much fiscal space for helping companies emerge from the crisis. Viana described the measures offered by the Portuguese government to address the crisis as “lightweight” compared to what other EU countries have done.

Portugal’s dependence on tourism and aging population also represent vulnerabilities, Viana said, and projections of an 8% contraction in GDP and an increase in unemployment to 14% paint a stark picture for 2020. 

This crisis has an additional risk for Portugal compared to the 2010 crisis because it is much more global, said Barosa. It affects not just Portugal but the whole world in a more severe way at a time when prosperity was very much associated with freedom of movement and global commerce, she added. “In the previous crisis, a big part of the rest of the world wasn’t in the same situation as we were and that was an important force pushing us towards prosperity again. In fact, most transactions then were cross-border.”

Small businesses will be disproportionately impacted and many will probably have to close shop, said Viana. The largest companies are financially prepared to endure three or four months of disruption, but most companies do not have that solidity and strength, Morais Leitão Partner Nuno Galvão Teles agreed.

Rising unemployment and declining purchasing power will impact many businesses across the board, said Viana. “Companies are trying to be prepared for the worst case scenario, while at the same time hoping for the best.”

The economic crisis impacting countries across the world may lead to important structural changes with important implications for trade and commerce and M&A, Barosa noted. “We are living in a time of global distribution chains, but we may see a few countries try to reinforce their own domestic distribution channels since this crisis has caused a disruption.”  

It is now obvious that the crisis will be deeper, longer and tougher than initially thought, which makes following a business plan and managing liquidity a real challenge, she said. Companies that were thinking about corporate acquisitions now have their own internal challenges, be it with their supply and distribution channels, costs related to maintaining sanitary measures in place, or being prepared to have staff working remotely; all that represents costs that were considered fleeting, but are now here to stay, she said.

It is not yet clear what amount of support will be given by the European Commission and how that will be carried out, Barosa added, and if it will result in a deeper asymmetry between EU members. “There is still a lot being discussed. What we have now in terms of information and aid is still insufficient.”

M&A Outlook
… Click here to access the second issue of Transactional Impact Monitor: Spain & Portugal – Vol. 2

Transactional Impact Monitor: Brazil – Vol. 2

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Transactional Impact Monitor: Brazil – Vol. 2

17 April 2020

TTR’s Transactional Impact Monitor (TIM) is a Special Report combining local knowledge and market visibility from top dealmakers developed to address extraordinary situations affecting the macroeconomic stability and M&A outlook in core markets

INDEX
– M&A Outlook
– Private Equity
– Equity Capital Markets
– Handling the Crisis
– Dealmaker Profiles

Latin America’s largest economy has had its share of uncertainty over the past decade, but no previous crisis brought everyday life to such a standstill. Nonetheless, routine fits and starts and two major recessions in the past 10 years tempered the euphoria dealmakers were feeling in early 2020. 

“Things in Brazil tend to be rather volatile,” said Veirano Advogados Partner Carlos Lobo. “You begin each year without really knowing where things are going to go.”

Notwithstanding the characteristic Brazilian nonchalance, spirits were high as prospects looked exceptionally good in early 2020, Lobo said, especially compared to the chaotic start last year that followed the inauguration of President Jair Bolsonaro, which suppressed M&A and capital markets activity in 1H19.

The beginning of 2020 was the opposite, Lobo said. Critical reforms were being pushed through, there was an expectation that Brazil’s GDP would grow by 2%, unemployment was falling and interest rates were low, so there was a positive outlook.

“We were all very optimistic this year in terms of M&A, private equity and equity capital markets,” agreed Reinaldo Grasson, Head of M&A and Debt Advisory at Deloitte in São Paulo. “Companies were delivering good results, they had strong balance sheets, the stock exchange was at an all time high. From all angles it was very, very positive.”

Market conditions in Brazil soured by mid-March however, as the threat of a pandemic prompted state and federal governments to respond by restricting travel outside the home and limiting non-essential business activities. 

March was not bad, all things considered, Grasson said. “Not as good as the previous year, but we didn’t expect this setback.” The transactions being announced now are those that have already been through due diligence, he said. “Our clients, investors are waiting so see what’s going on in the country.”

By mid-April, the federal government had disbursed over BRL 3bn in BRL 600 payments to nearly 5m Brazilians in emergency income support, out of nearly 36m applications received by state bank Caixa Econômica Federal, according to the local press. The support to the country’s most vulnerable population has been matched by a loosening of fiscal targets and labor laws, an extension of tax filing and payment deadlines and specific support to airlines and the tourism industry, among a host of other measures. 

State entities aren’t themselves immune from the downturn facing the country. This reality is most notable in the oil and gas sector, which is reeling from a global price war in addition to depressed demand for refined products. State-owned oil producer Petrobras announced on 15 April it would freeze operations on nearly 50 drilling platforms with some 2,600 direct and another 7,000 indirect jobs at stake. Deal volume in the oil and gas industry is sure to decline precipitously in 2020.

The falling M&A and Equity Capital Markets (ECM) workload is being replaced by matters that have become more pressing for clients at leading M&A law firm Cescon Barrieu, Founding Partner Marcos Flesch said. Litigation consultations, for example, have increased notably, Flesch said, though actual litigation hasn’t picked up yet. Clients are allowing the dust to settle and negotiating amicably with their suppliers and customers in the interim, he said. Cescon Barrieu is also seeing an uptick in consultations related to material adverse change and force majeure issues, Flesch noted.

All areas of Cescon Barrieu are actually working more than what was expected at the beginning of the crisis, noted Managing Partner Joaquim Oliveira. “We were a little bit surprised by the level of activity that we’ve had in the last four weeks.” The firm is bracing for a downturn in the next few months though, Oliveira said, but confidence in a return to normality by late May or June runs high.

M&A Outlook
… Click here to access the second issue of Transactional Impact Monitor: Brazil – Vol. 2.

Transactional Impact Monitor: Andean Region

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Transactional Impact Monitor: Andean Region – Vol. 1

15 April 2020

TTR’s Transactional Impact Monitor (TIM) is a Special Report combining local knowledge and market visibility from top dealmakers developed to address extraordinary situations affecting the macroeconomic stability and M&A outlook in core markets

INDEX

CHILE
– Private Equity
– Equity Capital Markets
– Handling the Crisis

COLOMBIA
– Private Equity
– Equity Capital Markets
– Handling the Crisis

PERU
– Private Equity
– Equity Capital Markets
– Handling the Crisis

– The View from Milan
– Dealmaker Profiles

CHILE

Summer vacation was just coming to an end in Chile when the government ordered the closing of non-essential businesses and told citizens to stay inside their homes for an indefinite period of self-isolation on Sunday 15 March. Schools remained closed the next day and Chileans remained homebound until the quarantine began lifting in certain areas on 13 April. Outings required citizens obtain a permit online wherever stay-at-home orders were in place.

Chile faced the business lockdown from the unique perspective of having hosted a destabilizing social upheaval in late 2019, which Carey Partner Francsico Guzmán likened to the “yellow vest” movement in France, in that it had no apparent leader or organized structure.

The social upheaval led to a plethora of tangible demands, including a review of Chile’s constitution, with labor and water rights among the politically sensitive issues surfacing, Guzmán said. 

Investors were cautious in the face of the economic and political uncertainty in 4Q19, he noted. Nonetheless, a strong dollar and cross-border prospects gave Carey a lot of work at the outset of 2020, he said. “That’s when coronavirus hit, and with it a global change.”

Chile was paralyzed by the social movement, and then by the threat of a pandemic, said Guzmán. “The political focus changed from addressing the demands of the social movement to surviving this as best we can,” he said. 

“Fortunately in our case, what we’ve seen is that there’s still work to be done, only the nature of the work is different; it’s more strategic,” Guzmán said. Clients are calling to consult on how best to proceed and to explore restructuring business units, he said.

Renewable energy transactions Carey was working on have continued and even closed in the midst of travel restrictions, Guzmán said, noting this segment had proved particularly resilient to the impacts the crisis was having on Chile.

Retail transactions were held up though, he said. “It’s not as if they’ve fallen apart, but if there was an MOU, the two parties have said, ‘let’s see what happens.’” Retail and infrastructure deals are still being negotiated, but the pace has slowed, he said. “Nobody wants to make a mistake by committing.” More attention is being paid to MAC and force majeure clauses to protect buyers, he noted.

Private Equity
… Click here to access the first issue of Transactional Impact Monitor: Andean Region

COLOMBIA

In Colombia, 2019 was a strong year for M&A with growth in deal volume in all but the second quarter and significant growth in aggregate value in all but the fourth quarter. The first two months of 2020 began at a similar pace with several transactions underway and a strong pipeline, said Brigard Urrutia Partner Darío Laguado. The energy and health sectors were particularly active, he noted, and in mid-February, the outlook was still good, despite indications of a pandemic on the horizon. Now, there’s absolute uncertainty about the implications of the economic shutdown, and most of all, about the duration of the crisis it has produced, Laguado said. 

On 17 March, the government of Colombia declared a state of emergency and announced a countrywide quarantine beginning on 24 March and extended through 27 April. In Bogotá, the quarantine began on 20 March. “Companies aren’t thinking short-term, they’re thinking immediate-term,” Laguado said. 

Some sectors will take an especially hard hit; in others there will be opportunities, Laguado said. Everything that adapts everyday activities for the virtual world will do well, like food delivery app companies, he noted. On a whole, M&A transactions have been difficult to advance working remotely, however, he said.

There are already cases of airlines filing for bankruptcy protection, with entertainment, hospitality, and restaurants taking the brunt of the impact, and the suppliers to those sectors next in line, Laguado said. Textiles, consumer goods and manufacturing companies are also suffering, while the financial structure of major infrastructure projects has been thrown into question, he added. Roadway and airport infrastructure depends on traffic, and projects could be impacted by such a momentous slowdown, Laguado noted. Other segments haven’t felt such a significant impact yet, but everyone is concerned, he said.

“This caught everybody with their pants down. It’s a very new situation, very unique, and there were no protocols in place,” Laguado said, adding, “The major lesson here is to conserve liquidity.” 

A few of Brigard Urrutia’s deals that were at an advanced stage were signed, including the sale of Electricaribe assets on 30 March. Others have required finessing to protect buyers, Laguado said. A few other deals in industries that were not very affected have also closed, he said, noting transactions that are countercyclical are still moving forward.

The energy sector was hit simultaneously by the oil price war, Laguado noted, which has strained Colombia’s finances. This crisis hits Colombia at a precarious moment in terms of fiscal stability, he noted, which will limit the resources made available for emergency measures. “Everything is in the air with a lot of uncertainty. Clients are putting things on hold,” he said.

“We do see that there will be large M&A deals, but they will be more strategic,” he said, noting the firm was optimistic for a revitalization of the market in 2H20 if the downtime is limited.

Private Equity
… Click here to access the first issue of Transactional Impact Monitor: Andean Region

PERU

Peru had a very active M&A market over the past 12 months; deal volume grew by 8% in 2Q19 and by 20% in 4Q19 with some very large transactions contributing to a 417% increase in aggregate transaction value in 3Q19, according to TTR data. 

Rubio Leguía Normand was working on about six deals of various sizes in sectors ranging from construction to agribusiness to technology, some worth more than USD 100m, with prospective closings between May and August, Partner Carlos Arata told TTR. 

The measures imposed in the face of the public health threat have put all those deals on hold, he said. “I don’t expect to see any large deals wrapping up in the next six months, except those that were already very close to closing.”

Buyers are saying that the funds they had allocated for acquisitions need to be reserved for contingencies while sellers are saying that their numbers have fallen. People on both sides are taking a “wait-and-see” approach, Arata said. The agribusiness and health sectors will remain the most active in M&A, he noted. 

“The year started out very well; we had a really strong pipeline of deals built from last year,” said Ian Fry Cisneros, Founder and CEO of boutique investment bank UNE Asesores Financieros 

Antitrust regulation that was to go into effect in August 2020 was encouraging companies to get deals done beforehand, Fry said. This had accelerated deal flow, with many transactions being finalized in the first two months of the year and many more scheduled to conclude in 1H20 or early 2H20, he noted.

Like Chile and much of the world, Peru has been under mandatory lockdown since 15 March, with outings outside the home permitted only to restock essentials.

The quarantine interrupted the entire chain of payments throughout the economy, and whereas some companies may have sufficient capital to survive for a few months, many Peruvians live day-to-day, Arata pointed out. “The situation over the next six months is going to be complicated.”

Of the eight deals UNE had in its pipeline, one was a sell-side mandate for food and beverage retailer that operated in airports, Fry noted. It was in the eye of the storm and it came as no surprise when the bidder backed out, he said. “They’re still interested, but they’ll want to have another look once the storm has passed.” The firm has been fortunate to put its other deals on ice rather than have them called off, to be reactivated as soon as possible, Fry said.

Depending on the sector, negotiations are more or less impacted, he said. “It’s probable that there will be adjustments; it’s only natural that the buyer would say that the situation has changed, even if they are still interested,” he said.

Tourism, aviation and entertainment are suffering the greatest impact, he said, whereas agro exporters are still attracting interest. Suppliers to the food manufacturing and pharmaceutical industries need to be kept productive to ensure the supply of essential goods, he said, and these segments will continue to garner interest as they have been permitted to carry on with minimal interruption.

In general, M&A will slow down as buyers wait out the crisis, Arata said, unless they’re sitting on a large pile of cash. Deals could continue to close in the most resilient and stable sectors, like energy and construction, he said, but most sectors will face a sharp downturn.

The government of Peru is expected to invest heavily in public infrastructure to help the economy recover over the coming months, and many firms that were impacted by the scandals in the construction industry will be looking for strategic partners in the months ahead, Arata said.

Private Equity
… Click here to access the first issue of Transactional Impact Monitor: Andean Region

Transactional Impact Monitor: Spain & Portugal

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Transactional Impact Monitor: Spain & Portugal – Vol. 1

8 April 2020

TTR’s Transactional Impact Monitor (TIM) is a Special Report combining local knowledge and market visibility from top dealmakers developed to address extraordinary situations affecting the macroeconomic stability and M&A outlook in core markets

INDEX

SPAIN
– M&A Outlook
– Private Equity
– Equity Capital Markets
– Handling the Crisis

PORTUGAL
– M&A Outlook
– Private Equity
– Handling the Crisis

– The View from Milan
– Dealmaker Profiles

SPAIN

As alarm and panic make way for cautious optimism in Spain’s battle with SARS-CoV-2 amid a fall in the daily tally of deaths attributed to the virus, the country’s top dealmakers tell TTR of the unprecedented impact containment measures are having on the economy and the transactional market.

The year kicked off strong, private equity firms had a lot of dry powder, but there was a feeling that we were nearing the end of the cycle, said Latham & Watkins Managing Partner Ignacio Gómez-Sancha. “The situation has now changed dramatically from a growth market to a panorama of shock.”

After nearly a month of confinement, which tightened on 14 March with a royal decree that has since been extended through 25 April, countless companies in Spain are reeling, factories are shuttered, restaurants closed, and the bar culture the country is famous for, conspicuously absent.

Spaniards are demonstrating resolve, absolutely convinced of the prudence of adhering to the royal decree for the common good, despite a generalized lack of trust in government predating the crisis, and morale is improving as the number of reported cases reaching the country’s hospitals stabilizes. Just like the enhanced security screening at airports in place since 2001, measures imposed to safeguard public health have been accepted as the new normal, said Gómez-Sancha.

The Spanish government has approved some EUR 100bn to support corporates impacted by the shutdown, making EUR 20bn available to date, 50% allocated to loan guarantees and for small and medium-size enterprises. “What is still lacking are concrete measures to implement it,” said Gómez-Sancha. 

The funds allocated for businesses impacted by the shutdown form part of a broader pledged package of support worth more than EUR 200bn, or nearly 20% of Spain’s GDP. Measures include a moratorium on evictions and utility interruptions affecting those whose livelihoods have been interrupted, with corresponding subsidies to service providers. The government has also announced concessional micro financing for consumers and the postponement of social security contributions for the self-employed.

M&A Outlook
… Click here to access the first issue of Transactional Impact Monitor: Spain & Portugal

PORTUGAL

The Portuguese government issued a stay at home plea to its citizens on 13 March, the same weekend the royal decree was issued in Spain. A week later, the government declared a state of emergency and ordered all non-essential businesses closed, a measure renewed 3 April for another fortnight. The monetary response to the crisis has been modest by comparison, however, with just EUR 3bn allocated in guarantee schemes for SMEs and midcaps and another EUR 7bn being sought from the European Commission.

SMEs in Portugal will essentially depend on state aid, which at the moment has not matched expectations, according to Vieira de Almeida (VdA) Group Senior Partner and Head of M&A Practice Jorge Bleck. All companies related to tourism in Portugal are having a very rough time, Bleck noted. “It is devastating because it has meant losing almost all revenue in 24 hours. Those activities were effectively providing jobs to many, many people in Portugal.” 

“For the most optimistic in the tourism and commercial aviation sectors, 2020 is a lost year,” said PLMJ Partner and co-head of Corporate M&A Duarte Schmidt. “Those who are most pessimistic are worried this might be the start of a very long recession.”

The timing of this crisis is unfortunate for Portugal, as it hits at a moment of fiscal vulnerability, Bleck said. “People are forgetful, because they were deluded with the increase in GDP and its mathematical effect of reducing the debt-to-GDP ratio,” Bleck said. The overall debt increased, however, he pointed out. “Now that GDP will fall, we will end up with debt levels in the region of 140%,” he said. 

The impacts of the SARS-CoV-2 response in Portugal are very different for industrial versus service companies, noted Atena Equity Partners Chairman João Rodrigo Santos. Most service providers are closed for business, whereas industrial companies, especially those that are export-oriented, are still open but probably experiencing a slowdown in new orders, he said. 

“Most companies are preparing for a very complicated period ahead by reducing costs and securing rescue financing from banks,” Santos said. “We were already late in the cycle, so the pandemic was just the trigger of a recession. As in all recessions, the majority of businesses will suffer one way or the other,” said Santos.

Santos is not optimistic about the prospects for a rapid recovery. The consumer discretionary segment is going to suffer more over the next couple of years, both at services and industrial levels, he said. 

“Besides being traditionally a very cyclical sector, I believe this time the ramp-up is going to be slower given the likely unprecedented drop in GDP, rising unemployment, and the anti-social trauma this pandemic will create,” he warned. 

M&A Outlook
… Click here to access the first issue of Transactional Impact Monitor: Spain & Portugal

Transactional Impact Monitor: Brazil

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Transactional Impact Monitor: Brazil – Vol. 1

3 April 2020

TTR’s Transactional Impact Monitor (TIM) is a Special Report combining local knowledge and market visibility from top dealmakers developed to address extraordinary situations affecting the macroeconomic stability and M&A outlook in core markets

INDEX
– M&A Outlook
– Private Equity
– Equity Capital Markets
– Handling the Crisis
– The View from Milan
– Dealmaker Profiles

As Brazil braced for the spread of severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) in mid-March, Governors across the country called on citizens to remain at home. Most non-essential business operations across São Paulo and Rio de Janeiro were shuttered, with other states quickly following suit, resulting in a precipitous decline in commerce and travel. In the two weeks that followed, a program of support was announced by the federal government, despite dismissive posturing by President Jair Bolsonaro, as a lifeline to the corporate sector and the country’s most vulnerable in the face of the perceived threat.

Brazil’s central bank cut interest rates to 3.75% on 19 March, a record low in the country, and the government has allocated upwards of BRL 800bn (USD 152bn) to support liquidity and increase funding for critical social programs. Other measures under consideration include loan purchase programs like those utilized in the 2008 crisis and the country still has about USD 300bn in international reserves, which it could use to soften the exchange rate turmoil that pushed the Brazilian real from BRL 4 to the USD on 1 January to BRL 5.2 on 31 March. 

The depreciation of the real in itself doesn’t have an impact on M&A in the short term, but it could spur inbound transactions post shutdown, said JK Capital Managing Partner Marcell Portugal. “We have to see how the other factors play out and the uncertainties stabilize, but for sure, in the mid-term, the depressed exchange rate will stimulate foreign investment.”

What began as an upbeat year among Brazil’s top dealmakers quickly transformed into a virtual standstill as the crescendo of the economic cycle hit a wall. From its 52-week and historical high on 23 January 2020, the Ibovespa plummeted some 56,000 points by 23 March amid a barrage of news reports indicating the virus was exacting a heavy toll on Italy and Spain, with the US sure to follow. Trading was interrupted twice on 12 March when the exchange’s circuit breaker was triggered after stocks fell more than 10% over the previous day’s close. The circuit breaker was tripped several more times in the following week, mirroring similar occurrences at the New York Stock Exchange on 9, 12 and 18 March.

Not all is doom and gloom in Brazil, however, and dealmakers are cautiously upbeat, pinning their hopes on a rapid recovery in 2H20 fueled by economic activity postponed from the first half and a barrage of opportunistic M&A deals, provided the stay-at-home guidelines issued by state governments are deemed effective and lifted to allow economic activity to resume by June. 

If the directive issued this week in the US to extend the business shutdowns for the month of April is any indicator, Brazil could impose similar measures, which would jeopardize the finances of countless companies and disrupt the livelihoods of millions, especially those on the wrong side of the digital divide for whom remote work is not an option.


M&A Outlook
… Click here to access the first issue of Transactional Impact Monitor: Brazil.