The election of Luiz Inácio Lula da Silva —widely known as Lula— for a third term as president of Brazil foreshadows a slowdown in the South American country’s privatization push.
During Lula’s first two terms in office from 2003 to 2010 Brazil recorded six privatization deals (excluding oil-and-gas lease auctions) worth USD 3.4bn, according to Dealogic data. That is nearly 6x less than the privatizations struck during the single-term administration of incumbent Jair Bolsonaro and more than 3x less the value.
On the campaign trail ahead of the October run-off second round vote against Bolsonaro, Lula pledged not to pursue major privatizations. Indeed, the union leader-turned-politician is unlikely to shed large government-owned companies as in the past he has viewed them as policy-making tools, said Mario Braga, Control Risks’ lead analyst for Brazil.
During the administration of Lula’s protégé Dilma Rouseff, for example, state-run oil company Petroleo Brasileiro (Petrobras) [BVMF:PETR4] lost billion of dollars selling imported fuel at a loss to keep fuel prices artificially low and help cap inflation.
Verde Amarela are (M&A) champions
But despite the likelihood of fewer privatizations, Brazil will continue to lead Latin America’s M&A market, said Luis Motta, lead partner of mergers and acquisitions at KPMG Brazil.
Last year, the South American country signed 71% of the entire region’s transactions and 64% of all deal value, notably higher than the 45% of deals and 51% of value it has averaged since 1995, according to Dealogic data. Brazil has continued its dominance in 2022 too, accounting for two-thirds of Latin America’s transactions and 55% of the region’s deal value in the year to date (YTD).
Brazil’s share of M&A deal value, which last year totaled USD 90.1bn, could grow even more as the country sees more private equity investments than venture capital funding, resulting in “bigger checks,” said Piero Minardi, president of the Brazilian Private Equity and Venture Capital Association (ABVCAP). Internal corporate restructuring and the overall drop in valuations have been driving this trend, he noted.
Sustainability poster child
Brazil’s utilities and energy sector, which attracted nearly 20% of the country’s total deal value in YTD 2022, is expected to continue playing a prominent role, Braga said. The renewable energy industry, in particular, could grow even faster if Lula raises Brazil’s climate commitments or implements new incentives, Camila Ramos, founder and managing director of Clean Energy Latin America, said earlier this month during an online event.
Last year, 77% of new power additions in Brazil came from solar and wind, Ramos noted.
Unlike during his first two presidential terms, when Lula focused on building up national champions like mining giant Vale [B3:VALE3], meat processor JBS [BVMF:JBSS3], and aircraft manufacturer Embraer [B3:EMBR3], he has now vowed to turn Brazil into a sustainability poster child, Braga noted.
Lula, who earlier this month received a superstar welcome at the COP27 summit in Egypt, has pledged to tackle the climate crisis. “There is no climate security for the world without a protected Amazon,” he said. “We will spare no efforts to have zero deforestation and [stop] the degradation of our biomass by 2030.”
Exit candidates
Dealogic’s Likely to Issue (LTI) algorithm predicts the likelihood of a liquidity event for private equity-owned companies based on key criteria such as holding behavior, management history, and deal flow. Brazil-based companies with the highest likelihood of seeing a liquidity event in the next 12 months-plus, according to the LTI algorithm, include Aegea Saneamento e Participacoes, Americanet and CLI.
