July 6, 2020 / 10:02 AM / a month ago

Brazil capital markets boom despite pandemic, M&A hits 20-year low

SAO PAULO, July 6 (Reuters) - Brazilian capital markets stormed back in the second quarter, powered by domestic investors seeking alternatives to meager fixed-income returns even as the COVID-19 pandemic wreaked havoc on the economy.

Equity sales by Brazilian companies grew 10% in the first half to $9.9 billion, according to Refinitiv data, surprising many bankers given the weak first quarter and in sharp contrast with a swoon in deals.

Other large Latin American markets stayed on the sidelines, with Panamanian airline Copa Holdings the only non-Brazilian company to conclude a share sale. Equity sales in the region fell 13% to $10.2 billion.

The first wave of transactions consisted of follow-on offerings providing "rescue capital", said Eduardo Mendez, head of Latin America Equity Capital Markets at Morgan Stanley, which led ECM rankings in Brazil and Latin America.

That was the case of appliance and electronics retailer Via Varejo SA, which saw high demand for a $846 million share offering last month, even with most of its 1,000 brick and mortar stores closed. Grupo SBF, owner of sports goods retailer Centauro that also was sharply affected, raised $176 million in June.

"Now the dynamic has changed and companies are seeking incremental capital in order to expand investments", Mendez said, adding that retail, healthcare, infrastructure, agribusiness, sanitation and logistics companies planned to access the market in the coming weeks and months. Banco BTG Pactual, Latin America's largest independent investment bank, raised $490 million in late June to expand its retail banking activities.

Listed companies' success in commanding high multiples in secondary offerings revived some IPO plans shelved during Brazil's severest lockdowns. Retailer Via Varejo reached price to earnings ratio of 51 times considering future earnings and 330 times its profit over the last 12 months.

Companies prospering during the pandemic, like waste management and disinfection provider Ambipar, are pursuing stock flotations for the first time as others, such as drugstore chain Pague Menos and homebuilders You and Cury revive earlier plans.

Bankers say up to 50 companies are in talks for new issues, although not all will happen this year.

"We were pleasantly surprised and hadn't expected a rise in activity until September", said Fabio Nazari, partner and head of ECM at Banco BTG Pactual SA.

Benchmark interest rates are at an all-time low of 2.25%, fuelling investors' appetite for the higher potential returns from fresh offerings. Even as foreign investors stay cautiously on the sidelines, many domestic retail investors bought more shares, helping spur a 33% rise in the benchmark Bovespa index in the second quarter.

Morgan Stanley analysts estimate that equities will account for 25% of assets under management in Brazil by 2025, double the current 12%.

DEALS SLUMP

M&A activity plunged throughout the region in the first half, but bankers expect better activity in the coming months. M&A volume fell 72% in Latin America to $10.8 billion, according to Refinitiv data, with Brazil hitting its lowest volume since 1999. Latin America had its lowest volume in 25 years.

One of the largest pending deals in the region, the sale of Embraer's commercial operations to Boeing Co, collapsed in April.

Among advisers seeing a revival is Bank of America, which led regional M&A rankings and worked on the region's largest deal, the $825 million sale of Latin American operations of Japan's Takeda Pharmaceutical Co to Hypera Pharma .

"We expect consolidation movements in many industries, including retail, travel, oil and gas, infrastructure, as companies see deals as a way to deal with the crisis", said Hans Lin, its head of investment banking in Brazil.

Signs of a faster-than-expected Brazilian economic recovery may help speed up M&A deals, said Alessandro Farkuh, head of investment banking at Banco Bradesco SA, which led the Brazilian rankings.

Last week, Petroleo Brasileiro SA received initial binding offers for the first of a series of refineries it plans to sell. Two weeks ago, private equity firm IG4 agreed to buy a stake in one of Brazil's largest grains terminals.

$1 = 5.3596 reais Reporting by Tatiana Bautzer, additional reporting by Carolina Mandl; Editing by Christian Plumb and Chizu Nomiyama

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