P00 M&A Brazil Souza Cescon.Indd

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have a need for immediate cash, which an unprecedented willingness to dig reporting mechanism, the company has SOWING THE SEEDS OF creates increasing opportunities for deep into the companies and to remove the obligation to investigate and, if the & investors. all kinds of corruption. For example, wrongdoing is confirmed, the company Q A Petrobras – we don’t know the full extent should come forward to the relevant M&A IN BRAZIL WHY ARE BRAZIL’S MERGERS AND of the damage; the papers are saying authorities and benefit from immunity REPORTER ACQUISITIONS SLOW? that it spent about R$80 million on its systems in place. HOWARD STOCK Souza Cescon partner Fernanda Bastos explains how lawyers Bastos: It is because of the political and internal corruption investigation. About PUTS THE in Brazil are helping companies prepare for the recovery of its economic deadlock. Also, we have seen 1.000 employees are expected to be HOW HAVE THE SCANDALS QUESTIONS TO several large institutions in Brazil involved involved. But companies are effectively AFFECTED THE ECONOMY? SOUZA CESCON M&A market. in the corruption scandal, such as large looking internally to learn what their Bastos: The scandals froze the Brazilian construction companies. We also have problems are, and are implementing government that has not been able strict compliance programs. Otherwise, Despite encouraging signs, Brazil has yet to Many times it’s hard for someone who is not BTG, which is one of the main Brazilian to react to the economic depression escape the clutches of a recession, which, if used to the Brazilian system to come to Brazil in banks, and Petrobras, which used to be that is increasing each quarter. For it persists, will be the longest in its history. the midst of all the current uncertainty. Usually heavily involved in the investment sector. example, there is a primary fiscal Coupled with political unease and the lingering what we see is that the foreign investors taking It’s very hard to know exactly what the deficit of over R$110 billion that must future holds for these entities, but the be reduced immediately, but the contagion from a series of high-profile advantage of these opportunities are the ones Foreign investors who are corruption scandals, it’s no wonder Brazil’s fact that they are in distress also creates Brazilian government is unable to take mergers and acquisitions (M&A) market appears business opportunities. taking advantage of these the necessary measures to adjust its expenses and revenues. to be at a slower pace this year. For example, Petrobras is involved in opportunities are those FERNANDA Journalist Howard Stock spoke to Fernanda Banks, especially public banks, a large-scale divestment plan that experienced in doing business Now that the chairman of the lower BASTOS Bastos, a partner in the Corporate Governance, includes the sale of up to 180 fully house of Congress has accepted a PARTNER are restricting financing leaving in Brazil. They are familiarized M&A and Private Equity areas at Souza, Cescon, operational oil fields and of part of its petition seeking the president’s removal Barrieu & Flesch Advogados, about how law companies in need of immediate stake in BR Distribuidora (the biggest with the environment and are from office, the market seems more fuel distribution company in Brazil) optimistic about recovery, but the truth firms should build long-term relationships by cash, a scenario that has created willing to take the risk, so they preparing clients for when the market awakens – and it is also looking for partners for is that the government may now focus opportunities for investors, and build a lucrative pipeline of business in the investments required to complete will be much better positioned even more on defending its position the process. even though we are yet to see the COMPERJ project (its national-size when the market returns to a than guaranteeing a strong economic petrochemical complex located in Rio de package to improve the economy. We transactions being concluded. healthier position. WHAT DOES BRAZIL’S M&A MARKET LOOK Janeiro). need the government to take strong and effective measures to regain LIKE NOW? We think as soon as the economy and credibility and redirect the country to the Bastos: M&A in Brazil is not in its best the political scenario start to get more that already have experience of doing business expansion route. moment, but we believe the country remains predictable, the divestment plan will if they don’t investigate and are caught in Brazil. They already know the environment institutionally solid. We have the compliance of attract more competitors. For instance, by surprise by any of the authorities, the and are willing to take the risk. These investors HOW ARE YOU ADVISING CLIENTS the rule of law and we have an unprecedented the downgrade of Brazil’s credit rating damage will be worse, so companies will be much better positioned when the assets ON CONDUCTING TRANSACTIONS mobilization to eliminate corruption. We believe has a significant impact on investments, must have a damage plan, as part of a reach their best purchase scenario. IN THIS ENVIRONMENT? that it all comes back to a potential business so we do need to have more information preventive approach. Bastos: We have different advice for recovery, but right now, M&A in Brazil is pretty With the current foreign exchange rate, Brazilian on how the economy and the political different deal profiles. For deals involving much based on distressed M&A and other companies are much cheaper now, but what sector will behave in the next months, WHAT SHOULD A COMPANY’S companies in judicial recovery, for opportunities created by the currency exchange we’re hearing from clients is that assets are which should indicate how the country’s DAMAGE PLAN LOOK LIKE? example, we need to carefully analyze rates favorable to foreign investors. In other still not as cheap as they could be, so many rating and investments will react. Bastos: Prevention is the key to any the risks but the acquisition must be fast cases, we don’t see transactions closing very investments are pretty much on hold. We need successful damage plan. A real and enough to avoid further detriment to often. We see several investors preparing for to wait sellers’ and buyers’ expectations to match. HOW WIDESPREAD ARE THE effective compliance program is a assets. In other deals, such as those in M&A, conducting due diligence, negotiating However, the unavailability of funds for Brazilian CORRUPTION SCANDALS? starting point, with some basic pillars: activities involving significant acquisition agreements, but they are pretty much on hold companies will compel these targets to bring Bastos: They are very widespread, but communication, training and audit. If of foreign materials or equipment, the waiting to see how the scenario will change over in new investors. With banks (especially public the good news is that we have seen any wrongdoing pops up, through a self- purchaser may want to take more time the next few months. banks) restricting financing, many companies

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to consider the effects of the currency Brookfield Investment of the OAS stake and looking for our services to establish a judicial credit reorganization. It’s not The companies with outbound deals economic and political measures for volatility in the business plan. in Invepar (a company holding several compliance programs and to train easy to find these lawyers, so quite often this year are mainly from the food recovery must start immediately. In the public concessions). Brookfield and OAS their employees. So although the law what we do is to train our associates sector. More than three-quarters of the meantime, lawyers have to find ways to HOW LARGE IS BRAZIL’S M&A are negotiating one of the first and most is two years old, due to all the current to navigate in both areas. They don’t outbound deal value in 2015 came from provide creative solutions at low cost MARKET? important DIP financings in Brazil. If corruption scandals, companies are now necessarily need to be experts in judicial global acquisitions made by JBS, a listed and stick with clients even if they can’t Bastos: With the country’s slowdown, creditors and the Brazilian courts accept much more worried about this aspect, reorganizations, as we do have experts in meat processing company. Another engage lawyers on the same terms Brazil accumulated less deals in 2015, it, OAS may successfully conclude its especially international investors. For our team who can help in more complex food company, BRF, invested over they used to. We have clients we’ve approximately 712 deals valued at court-supervised reorganization. example, we have clients who are willing matters, but they need to be prepared US$900 million abroad for purchasing been advising for over 10 years who approximately R$178 million until to waive their rights to appoint members to give safe and immediate solutions to now find themselves in a complicated We also see opportunities for companies September. Unfortunately, this seems to to the board of directors, because the client. You cannot have a 50-person situation. We want to be in a long-term interested in delisting, especially if they be the lowest deal count and the lowest they don’t have full control over the team to solve one client’s challenges partnership with them, help them have foreign controlling shareholders deal value of the last years. company’s activities and they are afraid anymore. overcome the challenges and be well that can take advantage of the currency of potential liabilities. positioned when they prepare for better exchange ratio. One of the largest The country needs infrastructure WHAT TRENDS ARE YOU SEEING WHERE DO YOU SEE FURTHER times ahead. inbound transactions in Brazil in 2015 IN TERMS OF M&A TRENDS WHAT FURTHER REFORMS ARE GROWTH AND HOW ARE YOU – roads, airports, ports, railways was the tender offer for the acquisition FOR SMALL, MID AND LARGE NEEDED TO FOSTER MORE M&A POSITIONING FOR IT? ABOUT THE AUTHOR of the free float of Souza Cruz by its – so we believe the main flow COMPANIES? IN BRAZIL? Bastos: We see opportunities controlling shareholder British American Fernanda Bastos is a partner in the Bastos: We see the possibility of Bastos: The measures here are not especially in the infrastructure sector for M&A in the coming years Tobacco for over US$2.7billion. Corporate Governance, Mergers and primary and secondary investments exactly related to M&A. For M&A for investments. For some clients, it’s will be from foreign agents Acquisitions and Private Equity areas for companies and shareholders with Small and medium deals are harder to improvement, the government needs not their best moment, but we’re at Souza, Cescon, Barrieu & Flesch liquidity problems. For example, BTG coming to Brazil to invest in cite – they are going through the same to pass stronger acts that can improve building long-term relationships with Advogados. Ms. Bastos advises domestic has just sold its stake in Rede D’Or (a problems and investment opportunities. the economy, and make business them, getting to know their businesses these opportunities. and foreign clients in local and cross- healthcare company in Brazil) to GIC We have reports mentioning over more predictable. If they improve the better so we’re prepared for when a border mergers, acquisitions, asset sales, (the sovereign fund of Singapore) for 230 deals involving small and middle economy and the political scenario capital market or M&A move comes. joint ventures and other corporate over R$2 billion. The bank needs cash companies but they usually are becomes more stable, we are sure M&A We also praisebuilding long and close transactions in a variety of industries. and it is willing to sell good assets not public. activities will be back in full force. relationships with international law companies, creating joint ventures firms. We can assist them with practical and buying food brands since April Ms. Bastos earned her Bachelor of Laws (LL.B.) degree from the Law School of WHAT IMPACT HAVE RECENT IN WHAT NEW WAYS CAN LAW knowledge of the Brazilian business 2014. In the future, when construction REFORMS HAD? FIRMS ADD VALUE FOR CLIENTS IN culture and they can refer our firm when companies are able to reorganize the Universidade do Estado do Rio de TODAY’S M&A MARKET? Janeiro (UERJ) in 2001 and her Master Bastos: About two years ago, we their clients are doing business in Brazil. their activities, they will probably be of Laws (LL.M.) degree from Columbia We have traditional clients saw the enactment of the new Bastos: The first thing is that all clients interested in seeking investments abroad University School of Law in 2007. She who are now in a complicated anticorruption law, which regulates are cutting costs, so law firms must be ARE YOU SEEING ANY OUTBOUND again, especially if they face restrictions M&A? also earned a Postgraduate degree in crimes and penalties for companies prepared to provide services that are to engage with the public sector in situation. We aim to build long- Business Law from Instituto Brasileiro de and management. This is having a huge more cost-effective. High-quality, but Bastos: BTG, the construction Brazil. Mercado de Capitais (IBMEC/RJ) in 2005. term partnerships with impact right now on all transactions, reasonably priced. This is one of the companies and the mining company things that is absolutely necessary at this our clients, to assist them because companies are much more Vale were some of the companies WHERE DO YOU SEE THE BRAZILIAN Souza Cescon is one of Brazil’s leading worried about proceeding with moment. traditionally investing abroad. They M&A MARKET HEADED? law firms. Their lawyers stand out through these challenging anticorruption due diligence and Another thing is to have experience in are now at a slower pace because of Bastos: The country needs infrastructure for their strong commitment to the scenarios, as well as to prepare obtaining anticorruption representations such transactions and knowledge about the corruption investigations, liquidity – roads, airports, ports, railways – so representation of the clients’ interests and warrants. Investors also want to problems and, in the case of Vale, we believe the main flow for M&A in and for their work in highly sophisticated, for better times ahead. Brazilian business culture to provide make sure that corruption acts involving creative solutions. because of the environmental accident the coming years will be from foreign groundbreaking matters. other companies of the same group in Minas Gerais involving its subsidiary agents coming to Brazil to invest in these Also, having multi-disciplinary lawyers The firm’s goal is to be the clients’ law won’t impact the acquirer or the target Samarco. Brazilian companies don’t have opportunities. who can deal both with the M&A firm of choice for their most complex on its portfolio. We also see several of the M&A. any restriction to invest abroad, but they We were expecting to see signs of legal matters and most strategic opportunities to purchase assets from transaction and the reorganization and also don’t have a culture to do so and recovery by the end 2016 or beginning transactions and disputes. companies in judicial reorganization. An Another impact we see is that several recovery of the company is very valuable. the unfavorable exchange rate is not clients are creating compliance teams of 2017, but for that to happen the example is the potential acquisition by Many M&A’s are being structured within helping to change that. souzacescon.com.br

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