BRAZIL-Get ready for...

...the Great Brazilian Yard Sale

No one can even think of arguing that the Brazilian economy and its private companies are in anything approaching “good shape”. 

Three things now conspire to put many of Brazil’s best private companies on the block:

• The political situation: Political gridlock brought about by the War of the Kleptocrats and a plethora of opportunistic political parties with no discernible ideologies other than confiscating the economic rents of the country;
• The financial situation of many private companies: When the administration foolishly reduced interest rates to historic lows in 2012, numerous companies rushed to the trough. Since then the rate has doubled while sales have slumped and inflation has increased. Banks have increased their loan loss reserves (Itaú from a historical average of R$400 million to a current R$5 billion!);
• The Lava-Jato investigation: Endemic corruption continues to provide one case after another of some shady dealings. Until this plays itself out, it is unlikely that many investors will rush to buy a company that could suddenly turn out to have had the “wrong friends” in government.

It is estimated that some R$90 billion of corporate assets are being offered on the market. Everything from highway and airport concessions, to entire divisions, office buildings and factories are available.

Nevertheless, last year M&A activity fell 20% to US$69 billion. While this might seem to be a paradox, it’s simply due to the uncertainty in the market right now. Things could get worse and no one likes to buy a company that will continue to decrease in value in the short term. Buyers are lining up and reportedly have deep pockets, but they will wait until things seem a little more certain before acting.

The one thing that is certain is that there are some realbargains out there. Many good companies are thoroughlystrapped. It won’t be long before the game begins. Get ready.