Politics, Business & Culture in the Americas

Brazil: Up for Sale

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Brazil is up for sale, and bargain-hunters from Sam Zell to Stephen Schwarzman are looking for deals.

If the country’s economy could be spread onto a monopoly board, distressed domestic utilities like Companhia Energética de Minas Gerais S.A. (Cemig) would be selling for a bargain, while infrastructure like airports and railroads would be begging for investment. Meanwhile, any of the dozens of companies implicated in a massive corruption scandal at state-run oil company Petróleo Brasileiro S.A. (Petrobras) might seem impossible to give away amid the ongoing risk of legal liability and financial fallout.

In that context, foreign investors are rolling the dice that Brazil will stage a turnaround. C’mon snake eyes!

It takes a certain type of investor to be drawn to the country right now. The economy is expected to contract more than 1 percent this year. The government is in a state of political paralysis amid calls for President Dilma Rousseff’s resignation and Congress’ refusal to sign off on belt-tightening measures meant to avert a sovereign credit downgrade. Rich Brazilians are fleeing for Miami.

Many companies are struggling to fund operations because of weak domestic consumer demand, high inflation hovering around 8 percent, and government cuts to subsidies on bank loans and fuel prices. Dozens of construction and manufacturing companies have also been implicated in the Petrobras graft probe, which has caused Grupo OAS, Alumini Engenharia S.A., and Galvão Engenharia S.A. to seek bankruptcy protection—with more likely to follow. The scandal has shut Brazil out of international debt markets, leading to a recent six-month lull in issuance from any Brazilian company.

Brazilian companies need cash, so they’re selling assets. Nearly every day, it seems something is being put on the block. Take the other week, for example: on May 4, Energy Minister Eduardo Braga said the government would auction 269 oil and gas development blocks this October. The next day, Bloomberg reported that Singapore’s sovereign wealth fund was in talks to buy a $980 million stake in hospital chain Rede D’Or São Luiz. On May 6, Reuters said power company Centrais Elétricas Brasileiras S.A. (Eletrobras) may sell several power distribution companies. Rumors surfaced the following day that Petrobras is in talks to sell gas pipelines to Mitsui & Co. Cemig’s subsidiary, Light Energia S.A., announced Friday that it is divesting a stake in Renova Energia S.A., just after Renova itself agreed to sell 14 wind farms and three hydropower plants to a unit of SunEdison Inc. for $534 million.

To be sure, Brazil is a big economy—the world’s seventh-largest—and lots of deal-making happens every day. But analysts say the current situation is unprecedented. The government is even considering allowing land sales to foreigners and permitting international firms a larger role in deepwater oil development—both previously considered untenable to Rousseff’s Partido dos Trabalhadores (Workers’ Party—PT), which is looking for any way to boost Brazil’s balance sheet and avoid a sovereign credit downgrade.

“The government is recognizing it will need to raise more funds for the capital investment needs of the country,” Andrew Haynes, partner and co-head of the Brazilian consultancy practice Norton Rose Fulbright, told me in an article last week for Monitor Global Outlook. He called it a “once-in-a-generation opportunity” to invest and said to expect a wave of concessionary auctions. “There will be opportunities to acquire operating interests in many quality assets,” he said.

Buyers are being lured by cheap valuations and the local currency’s plunge to 32 cents on the dollar. Foreign stock investors are dominating activity on the São Paulo stock exchange, driving more than half of all trading value in April and dumping a net $2.5 billion into Brazilian stocks according to data published on May 7. While Brazilian merger and acquisition volume fell 27 percent in the first quarter to $9.2 billion, the number of deals rose 13 percent, according to Dealogic—implying that deal-making is surging on weak sales prices.

Private equity is active. In real estate, Singapore-based firm Global Logistic and New York-based firms Blackstone Group L.P. and Tishman Speyer Properties have, in recent months, poured hundreds of millions of dollars into office buildings and industrial development properties. Last month, Italian wealth manager Azimut purchased a controlling stake in Quest Investimentos for $24 million.

Distressed-debt investors such as Cerberus Capital Management and Brookfield Asset Management are stepping up. New York-based Cerberus said last week it is hiring a Brazilian advisor to make its first acquisition in the country.

Toronto-based Brookfield is on an outright buying spree for real estate, sugar, ethanol, and construction. It already bought a $312 million São Paulo property in September and a portfolio of renewable-energy assets from CPFL Energia S.A. for 1.4 billion reais ($463 million) in November. Brookfield is now in talks to acquire sugar processor Renuka do Brasil S.A. for about $490 million, as well as stakes in distressed sugar and ethanol producers Tonon Bioenergia S.A. and Virgolino de Oliveira S.A.

Brookfield’s property management arm is reportedly raising $1 billion in investment funds to wager on commercial real estate in Brazil, and its infrastructure arm has publicly said that Brazil presents the “best idea for value-based investing” as the firm deploys up to $2 billion over the next six to 18 months, including for the assets of bankrupt construction company OAS.

“In Brazil, converging political and economic factors are creating a capital shortage and market dislocation,” Sam Pollock, chief executive of Brookfield Infrastructure Group L.P., wrote in a February letter to investors. “We are excited by the potential opportunities in Brazil at the moment, given the quality of the assets that are up for sale, or that we expect will soon be put up for sale, and the lack of credible buyers whom we need to compete with.”

Amid it all, Mr. Haynes of Norton Rose said the consultancy has found an active environment for doing business in Brazil—albeit one very different from what was expected when the firm opened its doors in Rio de Janeiro one year ago, before the economy fell into recession and the graft scandal at Petrobras exploded.

“You can do good even in bad times,” he said.

Tags: Brazil, Brazilian Economy, Foreign Investment
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