There is a wide spread consensus among economists that the Brazilian economy will be in recession in 2016 with a potential reduction of 3% of its GDP[1]. The slowdown of the economy is mostly felt by industrial sectors. The agribusiness sector has reduced its growth rate mostly by the downside of world commodity prices but remains an important pillar to support the Brazilian economy with a 22% share in the GDP[2] and 46.5% share of Brazilian exports in 2015[3]. Despite such negative economic outlook, as we have already seen in 2015, a few growth drivers, including the devaluation of the Brazilian currency and the need for rebalancing of certain industries point to continued strong M&A activity in 2016. This context presents opportunities for deals being made in a "buyer's market" but also presents legal risks to be properly addressed.

In 2015, M&A activity remained strong compared to 2014 with an 86.82% growth in value of transactions, according to Transactional Track Record (TTR). Transactions were once again seen in many different sectors of the economy, with a remarkable presence in IT, Internet, finance, insurance, supply chain and retail.

The devaluation of the Brazilian currency has been an important factor to bring competitiveness to the local industry. For many years, Brazilian industry has suffered from the lack of competitiveness which could now find support from the new level of the currency. It also points to a need for the country to address the high cost of energy and improve the country's lacking and inefficient infrastructure. All of these together are important tools to put certain industries back on a successful route in the long run. At the same time, the devaluation of the Brazilian currency has had a significant impact on prices of local assets. Many international investors say that Brazilian assets are now "on sale" like, with large acquisitions being made by private equity investors (for example, acquisition of Rede D'Or São Luiz by GIC and Carlyle, Carlyle's public takeover offer to Tempo Participações, acquisition of Carrefour Brasil by GIC, Netshoes by Riverwood Capital, Uniasselvi by Vinci Partners and Carlyle, among others).

The other side of devaluating the Brazilian currency is the impact on the level of indebtedness by certain industries. High leveraging or increasing cash requirements due to industry failures are also experienced by those that were affected by corruption scandals or by the Brazilian or Chinese's lower pace. A lot of these sectors will have to sell non-core assets to raise capital and rebalance their businesses. A few examples of large transactions along these lines in 2015 include the sale of OAS and Camargo Correa assets or the announced sales of assets by certain mining and steel industries.

In highly stressed scenarios, transactions will require investors to deal with the Brazilian Bankruptcy and Recovery Law that allows assets or business portions be sold in the context of a financial restructuring with full insolation of successor liabilities. At the same time that these type of mechanisms may serve as an important protection for investors, the context for these transactions requires more scrutiny and due diligence. 

Transactions involving assets being sold in the midst of corruption scandals will require a high level of compliance analysis. It is very clear that the legal compliance framework and the legal interpretation standard by the judicial and other government authorities are int the process of change. Compliance due diligence on these matters became mandatory for any asset acquisition with regulatory or governmental involvement.

Since the political outlook does not favour deeper and so long expected reforms on the Brazilian tax and labour systems, the risks that arise in doing business in the current environment represent an additional layer of complexity. As a result, more than in other years, Brazil will offer in 2016 several opportunities for good and profitable investments but the risks at stake will be higher. A word of caution is recommended, especially for investors which are not familiarized on how to navigate the Brazilian business and regulatory environments.

[1] source: IMF - International Monetary Fund on October 6, 2015

[2] source: Applied Economics Study Center from Esalq/USP

[3] source: Ministry of Agriculture

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