highlights of brazil 2013-2014 edition - pwc luxembourg · highlights of brazil 2013-2014 edition...

Brazil’s growth in the near-term will continue to be a “hot button” issue.

Highlights of Brazil2013-2014 Edition

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Foto: Chico Audi

Index

Highlights of Brazil 2013/14 .............................. 2

M&A Activity .............................................. 10

Main economic indicators ................................ 14

2Highlights of Brazil

Highlights of Brazil 2013/14

The global economy has still not recovered from the 2008 worldwide economic crisis. Global growth is in a low gear, and the drivers of activity are changing. These dynamics raise new policy challenges for developed and emerging markets, including Brazil. Advanced economies are growing again but must continue to repair the financial sector, pursue fiscal consolidation, and spur job growth. Some emerging market economies face the dual challenges of slowing growth and tighter global financial conditions – and the demands of the middle income classes. Some governments and countries that previously seemed immune from these global crisis, felt the tail of the recession and are now struggling to recover and find sustainable growth. Certain emerging market economies, like Brazil, were able to avoid the classical boom-bust cycle in the face of volatile capital flows during the global financial crisis but now also are challenged to increase potential growth, including, investment in infrastructure, and other macroeconomic challenges (e.g. fiscal discipline, inflation and exchange rate volatility).

Brazil is at the centerstage of this discussion and today faces the familiar challenges of growth - a new middle income class demanding better infrastructure, services and political transformation. 2013 was a year of politicians yielding to the new-found power and demands of the ever more empowered middle class.


Brazil has around

GDP per capita of

More than

And approximately 50 million new consumers over the last 10 years.

200 million inhabitants

US$ 11,340

60% of its population in middle income class

According to IBGE, income distribution in Brazil still has much room for improvement: While the richest 10% of the population receive 42% of all income, the poorest 40% receive only 13.3% of all income.

Brazil GDP


After a decade of fast growth and rising incomes – supported by growing consumer demand (mainly driven by the improvement in the labor market, where the unemployment rate fell from 12% in 2003 to 5.2% in 2013, coupled with increased credit availability), Brazil hit a rough patch that tested the government’s ability to manage the economy and satisfy the growing aspirations of its people. President Dilma Rousseff, who will run for re-election in 2014, will need to push through policy reforms and public investment projects to revive growth and bring inflation under control.

Brazil has made impressive gains under Ms. Rousseff and her predecessors, Luiz Inácio Lula da Silva and Fernando Henrique Cardoso. Social programs, better infrastructure, macroeconomic development and better living conditions have all boosted daily life for the Brazilian people. However, the country’s inflation rate was 6.1 percent in August 2013, according to the central bank who has raised interest rates several times during the last year. Given the focus of the monetary policy much more on growth than on inflation in the last years, the inflation neared the upper limit of the target, driving the central bank to tighten the monetary policy to bring the inflation to lower levels. In 2012, Brazil’s economy grew only 0.9 percent as private investment slowed and in 2013 the growth rate was 2.3%, still far below the 7.5 percent growth the country realized in 2010. The stakes for Brazil are high and the need for decisive policy action is now. Given the time it takes to implement structural measures (something with which Brazil is intimately familiar), the Brazil rebound will not be fast nor easy.

Brazil’s 2008 – 2012 GDP

accumulated growth totaled

16.8 percent.

Growth in 2013 was

2.3 percent, reaching

US$ 2.3 trillion


Brazil achieved investment grade in 2008/2009, and today, a widely accepted measure of the risk of doing business is at near historic lows (around 230 basis points).

The duration and ferocity of the slowdown will depend on the resolution of Brazil’s structural issues, and unfortunately, the country still has a way to go – bottlenecks in infrastructure, productivity issues, regulation, the cost of doing business in Brazil and the tax burn rate (the country’s tax burn rate is around 38 percent-versus an average of 21 percent in similar countries). But Brazil’s growth in the near-term will continue to be a “hot button” issue. Policy makers will need to recognize that the country will grow at lower than expected rates during 2014 and 2015 and reestablish the country’s future growth – again!

The Brazilian government must build enough roads, railways, ports and other infrastructure to keep pace with the economy’s growth – in Brazil only around 1.5 percent of GDP is invested in infrastructure, compared with an average of 4 percent globally. Additionally, the country also needs to reform its education and healthcare systems. Productivity is a key word for Brazilians now and private investors want the government to do its part or privatize key areas, as recently seen with many of Brazil’s ports, highways, and airports.

In June 2013, millions of people joined street protests that were prompted by an increase in public-transit fares in São Paulo city but quickly became a way for Brazilians to air much wider demands about the rising cost of living, weak infrastructure, political corruption, lack of security, and government spending on big sporting events such as the 2014 FIFA World Cup. In response to the protests, politicians demonstrated they would push for political reforms and investments in infrastructure – but, to date, not much has been delivered.

From a long-term perspective, Brazil also needs to address its labor qualifications and a much wider and universally known issue: pension reforms. Today, public pensioners, which represent 20% of the total pensioners, draw some 50 percent of resources, while the remaining 80 percent of pensioners, share the remaining 50% of funds. Additionally, the government spends around 11% of the GDP on pensions while the average in OECD countries is around 8.0%. This is challenging when one considers the proportion of pensioners in the Brazilian population compared to that of other countries.


Emerging markets, Brazil included, can get their groove back. Adjustments in the fiscal and monetary policies along with the deepening of public services concessions are important to get the Brazilian economy on track in the short term. Brazil continues to keep consumption growing at a significant pace, not solely the movement of the population to higher social classes, which reinforces the purchasing power of the middle and high income classes.

Brazil continues to record low rates of unemployment – although the country still seeks qualified, skilled labor.

The government continues to be characterized by more expansionary fiscal policy, industry specific incentives, and a devalued exchange rate (although a devaluation of some 30% percent was observed during the year, with the exchange rate in January at 1 USD$ to R$ 1.80 and in December 2013 at USD$ 1 to R$ 2.3), From a monetary point of view, very low interest rates were observed in 2012 - the benchmark interest rate in real terms (net of inflation) was at around 1.5 percent at the end that year - but given the hike in interest rates since April by the Central Bank, the real interest rate should reach 4.0% by the end of the year.


In response to recent economic developments the Brazilian central bank raised interbank basic interest rates to 10.0% as the country continues to address the fiscal deficit.

It is important to note that the Brazilian Central Bank is actively intervening in the foreign exchange market by selling dollars on a daily basis which began in July 2013 and has continued into 2014.

Market players seem to understand that the Brazilian Central Bank effectively balanced growth and inflation in 2013 (as perceived during 2012 that government was much more focused on growth than inflation). Target inflation in 2013 did not exceed the government’s ceiling of 6.5 percent.

Finally, during 2013, we observed a continuation of many components of the government’s agenda since 2012; the intense use of fiscal policy, as the government pushed to reduce certain taxes in order to boost economic activity - especially for consumption items - while controlling inflation. In the same vein, the government continued to reduce taxes on the purchase of vehicles and household appliances and replaced certain payroll taxes with a sales tax to reduce production costs (all of these are subject to review in early 2014).

Public banks such as the BNDES (Brazilian Development Bank), Caixa Econômica Federal and Banco do Brasil continued to be active in lending money to industry, thus boosting consumption and investments. While BNDES is expected to reduce this trend during 2014, Caixa Econômica Federal and Banco do Brasil shall continue as the largest lenders to the Brazilian housing segment.

In 2014, the government is likely to further pursue a strategy to address long term growth as well as winning the elections. The challenge is to introduce the ambitious investment agenda designed for the infrastructure sector, which totals more than US$ 110 billion (US $45 billion for railroads, US$ 27 billion for ports, US$ 21 billion for highways and US$ 17 billion for airports).


In 2013 Brazil observed important changes in regulations and auctions for the concession of operations in the oil/gas and infrastructure sector (airports, ports and roads). Some highlights include:

• Libra Oil Field (pre-salt) sharing concession (October) will be operated by Petrobras (40% of the consortium), Shell (20%), Total (20%), CNPC (10%) and CNOOC (10%), who agreed to a down payment of US$ 7 billion, plus share in all future profits, with Brazil redistributing these resources to public education and healthcare systems;

• The Rio de Janeiro Galeão International Airport concession was granted to the Aeroportos do Futuro consortium (Odebrecht Group and airport operator Changi of Singapore) with a bid of around US$ 9 billion. The government estimates that an additional US$ 3 billion will be invested in the airport infrastructure;

• The Belo Horizonte Confis International Airport (MG), in Minas Gerais, concession was granted to an AeroBrasil consortium (CCR, Flughafen Zurich and Flughafen Munchen) for US$ 1 billion;

• Brasília International Airport has been operated since the beginning of 2013 by the Inframerica consortium (Infravix and Corporación America). The group bid US$ 2.1 billion and is expected to invest an additional US$1.5 billion in the airport. The concession of Viracopos (Campinas/SP) airport was awarded to Aeroportos Brasil (TPI, UTC and French company EGIS Airport) at a bid of around US$ 2 billion. The consortium started operating the airport in early 2013 and will make new investments of around US$ 4 billion;

• BR-163, one of the most important highways for soy output in Mato Grosso, had a bidding process in November won by CCR;

• Triunfo Participações won the bid to operate 1,177 km of highways (BR-060/153/262) in Goiás, Distrito Federal and Minas Gerais in December. Expected investment totals US$ 4 billion.

• Concession for BR 040 highway (Distrito Federal/Goiás/Minas Gerais) with a total extension of 1 thousand km was won by Invepar in December 2013.



This continues a trend of privatizations/ concessions that started in recent years. In 2012, the Brazilian government awarded the concession of São Paulo International Airport in Guarulhos, for around US$ 8 billion to Invepar e Airports Company, South Africa. In 2011, the concession of São Gonzalo do Amarante (RN) was granted to Inframerica (Infravix and the Argentinean group Corporación America).

2014 should be paramount for President Dilma in her effort to attain greater economic growth given the forthcoming presidential elections. The current political and economic challenges are quite complex. Dilma’s ratings, however, are highly positive, given the low unemployment rate. Nevertheless, Brazil is still struggling to find the path to higher economic growth levels.

The increased numbers of public services concessions given to the private sector provides a unique opportunity to promote and attract investment, leveraging the potential of the country and helping reduce the infrastructure deficit. The realization of mega events like the FIFA World Cup this year and the Olympic Games in 2016 reinforce this opportunity.

Attracting these investments requires a major organizational effort, particularly strong synergy and integration between the various public and private entities, directly or indirectly linked to the sports industry. Currently, a total of US$ 50 billion is estimated to be invested in the infrastructure of all cities involved in both events.


Brazil has, over the last four years, maintained robust levels of M&A activity. With an all-time record of 811 transactions announced in 2013, 2010 to 2013 period had, on average, 783 announced deals.

The level of activity experienced in the Brazilian M&A market is a testament not only to Brazil’s rebound from the global downturn started in 2008, but also to its underlying strength. While international market sentiment around M&A activity in 2012 and 2013 swung between optimism and skepticism, Brazil continues to show good momentum in what looks to be sustained activity. Strategic and financial investors (private equity) have reached historical record levels of deals, supported by a solid macroeconomic scenario and tremendous consolidation opportunities. Middle market M&A activity remains strong and is expected to continue to drive M&A in 2014 – transactions involving up to US$ 100 million lead M&A activity in 2013 with a 69 percent share of the announced deals.

One supporting factor for the high M&A volumes, despite the sluggish economic growth in Brazil, is an observed return to deal multiples more in-line with global markets. While certain industries and growth businesses continue to command premium EBITDA multiples, the greater market understands that the “price to do business in Brazil” has been reset. This presents opportunities for interested buyers to pick up valuable assets at a “discount” as multiples continue to normalize.

Majority stake transactions represent around 55 percent of all announced transactions, while non-controlling positions account for 32 percent, indicating a long-term investment strategy. Strategic and financial investors are both participating aggressively in the fast developing Brazilian economy.

M&A Activity


Private equity activity maintains a high level of activity, being present in almost 45 percent of the deals announced in 2013. This share, which was 15 percent in 2007, reflects aggressive private equity investment strategies and consolidation of various sectors.

Capitalized with some US$ 15bn available for investments, a significant part of private equity activity in Brazil has involved consolidation opportunities in “capital for growth” deals. The largest investments this year are in the segments of food and beverage, retail, consumer goods, IT, education and financial and energy sectors. Additionally, deal size has started to increase from the small-to mid-market transactions that have historically dominated the market.

A multi-sector and multi-region deal profile that was observed in 2012 remained during 2013, with the leading sectors, by deal volume, being IT, Retail, Consumer Products (including Food/Agribusiness & Beverages, Healthcare and Cleaning products), Mining, Services (Healthcare, Education and general services) and Chemicals/Oil & Gas. Next in relevance are Financial Services, Logistics and Infrastructure/Construction. It should be observed that the largest sector holds some 10% of total deal volume with other sectors following close behind.


The Brazilian private equity market has been stimulated by a combination of several factors that have strengthened Brazil’s position as not solely an emerging market alternative to China and India – although other Latin America countries gained momentum during 2013. A combination of factors, such as increasingly sophisticated and liquid capital markets, new financing instruments and existing exit alternatives (such as sale to a strategic player, capital markets/ IPO or sale to another PE or funds), along with the continuing demonstration of political and economic stability have opened the eyes of foreign private equity investors to Brazil, which is now regarded as a serious player in the global market. We expect much more active equity and debt markets in 2014 (after a modest 2013 performance).

The main sectors for investment will continue to be IT, retail, food and consumer goods, healthcare, education, general business services, energy and finance, with consolidation in all these sectors continuing to be a key driver. Infrastructure, given Brazil’s structural deficiencies, and oil & gas are also sectors likely to see improved activity. Companies in Brazil continue to face a transformation period. With better corporate governance and accounting practices in place, most companies are experiencing the challenges of having a local company that is being transformed into a regional, then national and finally international operation.


In addition to record-high M&A levels, foreign multinationals continue to invest in the region via organic expansion as well. In 2013, international large retailers, high end fashion lines, and family-friendly dining chains have all announced plans to open locations in Brazil in 2013/2014. Additionally, automotive production continues to be a large source of foreign direct investment, with four of the world’s largest automotive manufacturers recently announcing plans to each open a local manufacturing presence in 2014/2015.


2013(1) 2012 2011 2010 2009

GDP (US$ billion)(2) 2,239.9 2,252.6 2,475.1 2,143.9 1,625.6

Real GDP growth (% per year) 2.3 0.9 2.7 7.5 (0.3)

Unemployment rate (% of labor force) 4.3 4.6 4.7 5.3 6.8

General price index - IGP-DI (% per year) 5.5 8.1 5.0 11.3 (1.4)

Consumer price index - IPCA (% per year) 5.9 5.8 6.5 5.9 4.3

Year-end exchange rate (R$/US$) 2.34 2.04 1.88 1.67 1.74

Exchange rate change (% per year)(3) 14.7 8.5 12.6 (4.0) (25.6)

Public sector deficit (% of GDP) 3.3 2.5 2.6 2.5 3.3

Public sector debt (% of GDP) 33.8 35.3 36.4 39.1 42.1

(In US$ billion)

Goods exported 242.2 242.6 256.0 201.9 153.0

Goods imported 239.6 223.2 226.2 181.8 127.7

Trade balance 2.6 19.4 29.8 20.3 25.3

Current-account balance (81.4) (54.3) (52.5) (47.3) (24.3)

International reserves 358.8 373.1 352.0 288.6 239.1

Foreign direct investment (4) 64.1 65.3 66.7 48.5 25.9

Total foreign debt 482.8 440.6 404.1 351.9 277.6

Main economic indicators

(1) 2013 figures are based on the most recent published data. (2) At the average annual exchange rate. IBGE.(3) Year-end to year-end.(4) Including intercompany loans.


2013(1) 2012 2011 2010 2009

GDP (US$ billion)(2) 2,239.9 2,252.6 2,475.1 2,143.9 1,625.6

Real GDP growth (% per year) 2.3 0.9 2.7 7.5 (0.3)

Unemployment rate (% of labor force) 4.3 4.6 4.7 5.3 6.8

General price index - IGP-DI (% per year) 5.5 8.1 5.0 11.3 (1.4)

Consumer price index - IPCA (% per year) 5.9 5.8 6.5 5.9 4.3

Year-end exchange rate (R$/US$) 2.34 2.04 1.88 1.67 1.74

Exchange rate change (% per year)(3) 14.7 8.5 12.6 (4.0) (25.6)

Public sector deficit (% of GDP) 3.3 2.5 2.6 2.5 3.3

Public sector debt (% of GDP) 33.8 35.3 36.4 39.1 42.1

(In US$ billion)

Goods exported 242.2 242.6 256.0 201.9 153.0

Goods imported 239.6 223.2 226.2 181.8 127.7

Trade balance 2.6 19.4 29.8 20.3 25.3

Current-account balance (81.4) (54.3) (52.5) (47.3) (24.3)

International reserves 358.8 373.1 352.0 288.6 239.1

Foreign direct investment (4) 64.1 65.3 66.7 48.5 25.9

Total foreign debt 482.8 440.6 404.1 351.9 277.6

© 2014 PricewaterhouseCoopers Brasil Ltda. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Brasil Ltda., which is a member firm of PricewaterhouseCoopers, each member firm of which is a separate legal entity.

“PwC” refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way.

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Contacts:

Alexandre PierantoniCorporate Finance Partner and Private Equity [email protected]: [55](11) 3674 3899

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highlights of brazil 2013-2014 edition - pwc luxembourg · highlights of brazil 2013-2014 edition...

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