SAO PAULO, July 18 (Reuters) - Bankers and lawyers expect the pipeline of big deals in Brazil to shrink in coming months as financial and strategic acquirers avoid taking risks due to market volatility during a presidential campaign and doubts about the economy's recovery.
The total value of deals in the first half of the year fell 26 percent from the same period in 2017, to $26.3 billion, according to Thomson Reuters data.
Less than three months ahead of the October vote, the presidential race is still wide open, with a third or more of voters undecided.
Leading candidates have been vague about their economic proposals, raising concerns about whether the next government will carry on with economic reforms proposed by unpopular President Michel Temer.
Excluding the largest deal of 2017 — the $21 billion conversion of shares of miner Vale SA into a single class of stock — M&A activity rose 84 percent in the period compared to a year earlier.
"Market volatility during most of the first half was not as high as it is now, so it did not have much impact on the level of activity," said Alessandro Zema, Morgan Stanley's head of investment banking in Brazil.
The largest transactions of 2018 so far have been driven by industry consolidation in search of cost savings, Zema added. He cited the acquisition of pulpmaker Fibria Celulose SA by rival Suzano Papel Celulose e Papel SA and the takeover of for-profit education company Somos Educação SA by rival Kroton Educacional SA.
Cross-border deals have also featured Brazilian companies expanding into neighboring countries to avoid harsher antitrust scrutiny at home, where antitrust watchdog Cade blocked recent deals in education and oil and gas.
Raízen Energia SA, a joint venture between Brazil's Cosan SA and Royal Dutch Shell Plc acquired Shell's downstream operations in Argentina, including a network of gas stations and a refinery, for $1 billion.
The investment banking unit of Itaú Unibanco Holding SA was the most active by total value of deals, considering only Brazilian targets. Morgan Stanley, which advised the Raízen acquisition, led the ranking of deals with any Brazilian involvement.
Buyout firms have also moved to the sidelines this year, as volatility in currency markets lowered the odds of obtaining strong returns in dollars on new investments.
According to data by Brazilian capital markets industry association Anbima, the percentage of deals in which buyout firms participated in the first quarter was around 3 percent, well below the 15 percent of the total deals last year.
"It's much harder to predict investment returns when the exchange rate is so volatile," said Itaú BBA's M&A managing director Eduardo Guimarães.
Mario Malta, a board member of the Brazilian private equity group AbvCap who represents buyout firms, said volatile markets are also curbing initial public offerings, which are the most common exit strategy for investment firms. As a result, some 28 billion reais ($7.3 billion) are tied up in these funds.
The only large deal announced last quarter by a private equity firm was Advent International's acquisition of the Brazilian unit of Walmart Inc. Although Advent did not pay Walmart, it committed to millions of dollars of investments in the stores.
Bankers expect other large deals, such as the acquisition of petrochemical producer Braskem SA by LyondellBasell Industries NV, to close this year.
"Some of the largest deals are progressing well, we see a larger effect of the volatility on global deal value next year," said Bruno Amaral, head of mergers and acquisitions at Banco BTG Pactual SA, which got the most mandates in the first half of the year.
($1 = 3.86 reais)
Reporting by Tatiana Bautzer Editing by Leslie Adler