High Rates, Fiscal Uncertainty Seen as Frustrating Brazil’s M&A Bounceback

Carlos Lima, partner at the M&A-focused law firm, Pinheiro Neto, told Bloomberg Línea companies are still proceeding with caution and that there are still many distressed operations

High Rates, Fiscal Uncertainty Seen as Frustrating Brazil’s M&A Bounceback
May 13, 2024 | 02:31 PM

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Sao Paulo — In 2024, the appetite of companies for mergers and acquisitions (M&A) remains low, casting doubt on the expectation of a market recovery following a decline in 2023. This insight comes from Carlos Lima, a partner at Pinheiro Neto and head of the law firm’s M&A division, who provided legal counsel for such operations in the country during 2023.

In an interview with Bloomberg Línea, Lima remarked that 2024 is shaping up to be quite similar to 2023, a year that yielded results below those of previous years. Lima highlighted several factors contributing to companies’ cautious stance in 2024.

These factors include the continued expectation of high interest rates in the United States, a less-than-anticipated decrease in the Selic rate, and the likelihood that the federal government will not achieve its goal of eliminating the fiscal deficit. These circumstances are expected to maintain pressure on interest rates and inflation.

“Potential Brazilian sellers, when they look at this scenario, have less of an appetite to make transactions,” he said.


According to the Pinheiro Neto partner, despite the large transactions that have been announced this year, such as the mergers between Grupo Soma (SOMA3) and Arezzo, Petz (PETZ3) and Cobasi, and Enauta (ENAT3) and 3R (RRRP3), the total volume of deals has remained low, especially transactions between privately-held companies - which attract less attention and make up the majority of M&As in Brazil.

“The agenda is not that optimistic agenda of companies looking for opportunities, with competitive and very fierce processes,” said Lima, who has worked at the firm for 40 years and acted as legal advisor in operations such as the purchase of Amil by UnitedHealth and then the sale of the company to businessman José Seripieri Filho, or Júnior, last year.

“There are a lot of distress operations. The capital market is closed. We haven’t had any IPOs for several months. The few follow-ons we’ve had, apart from Eletrobras, have almost all been from the point of view of companies with unbalanced capital structures and needing to raise funds in order to survive.”


M&As tick down in 2024

In 2024, there were 327 M&A transactions in Brazil, totaling US$10.6 billion according to Bloomberg data up to May 8. These figures mark an 11.2% decrease in value and a 6.2% reduction in the number of operations compared to the same period last year. The data encompasses proposed, completed, or pending approval transactions, including mergers, acquisitions, private equity, and venture capital investments for minority stakes.

Throughout 2023, there were 905 operations totaling US$43.9 billion, indicating a yearly drop of 26.1%. Pinheiro Neto led among law firms providing legal counsel for these deals, handling 65 operations worth US$10 billion (23% of the total), as reported by Bloomberg.

The Pinheiro Neto partner noted that the major mergers in retail and oil and gas announced in 2024 were not typical, typically involving publicly traded companies with complementary businesses aiming to enhance competitiveness by merging rather than operating independently.

Moreover, he mentioned that the merger of businesses could lead to savings in tax payments. “We may have other operations with this profile, but it’s a minority of the M&A universe. If we have three or four of these a year, it will already be a ‘coup’,” he said. Pinheiro Neto is currently serving as Enauta’s legal advisor in the proposed merger with 3R.


He also pointed out that one of the obstacles to increasing the number of deals is the discrepancy between sellers and buyers regarding pricing. According to Lima, many sellers anchor their price expectations on past transaction multiples, which may no longer be accurate. Conversely, buyers are reluctant to pay high prices in a high-interest-rate environment, despite attractive returns on fixed income.

“Nowadays, the rate of operations that start but don’t reach completion is much higher than it was three, four, or five years ago,” he remarked.

Hot sectors: from health to finance

In hot sectors like health and finance, Lima noted that despite a more constrained environment, there are still promising operations on the horizon. This includes the privatization of Sabesp (SBSP3), a project in which the firm is actively involved.


Negotiations are ongoing in sectors such as energy, payment methods, education, and healthcare. Lima anticipates continued consolidation and acquisition of small and medium-sized companies by major players in the hospitals and clinics segment.

Another area witnessing consolidation is financial services, including asset managers, family offices, and advisors, with firms like BTG Pactual, XP, Bradesco, and others playing key roles as consolidators. Lima expects significant activity in this sector in 2024 and beyond, with medium-sized asset managers and family offices likely to be acquired.

Regarding the “Bets” segment, Lima mentioned the potential for business following government regulation. Foreign companies seeking to enter this sector will need operational bases in Brazil and at least a 20% stake held by Brazilian partners. Many national and foreign players are preparing for this, organizing their structures to operate in Brazil once regulations are finalized.

Despite these potential deals, Pinheiro Neto has taken a cautious approach, avoiding significant expansion of its team. Lima mentioned that around 40 partners currently work in mergers and acquisitions at the firm, reflecting a conservative hiring strategy.