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BRAZIL

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Russia

China

India

Brazil
Main Drivers for doing deals in Brazil

• Brazil is the fifth largest country in the world in area,


• It has the tenth largest economy and a population of 180 million
• Many local companies are undervalued and in need of restructuring, capital and
technology
• Growth potential and consumer market
• Broad industrial base and infrastructure, and a diversified economy
• Creativity and flexibility of labor force, coupled with its competitive cost basis
• Abundant agricultural, mineral and energy resources and potential
• Established transportation networks (railways, highways, ports) and
distribution channels in most industrialized areas
• Privatization in late stages and follow-on transactions still in development
• Inflation under control in the last 10 years
• Increasing globalization and international trade, with Government policies
favoring exports
• Foreign investors are eligible for most available fiscal incentives
• Goodwill generally tax deductible
• New regulations favoring minority shareholders
• Improvement in local capital and debt markets
Main Challenges of doing Deals in Brazil

• Complex tax and employee related regulatory environment, with high taxes and
social charges on payroll, sales and income
• Multiple taxes with fast changing legislation affecting business plans and
increasing risks of contingencies
• Economic environment still considered volatile as compared to more stable
economies
• Fast-changing business conditions
• Lack of local financing coupled with high real interest rates
• Quality of historical financial information affected by fluctuations in exchange
rates and GAAP differences
• Complex transfer pricing and foreign capital registration rules
• Difficulties in reorganizing companies quickly, including high costs for
employee terminations
• Important cultural peculiarities, including a different perception of the due
diligence process
• Sometimes the “know-who” is more important than the know-how in the local
market
• Considerable bureaucratic rules and regulations for certain businesses and
industries
• High demand for investments in the distribution channels and infrastructure
• Semi-skilled and unskilled labor in certain developing areas
• Social extremes with unequal distribution of wealth - a significant portion of the
population not participating in the consumer market
Economic Environment
• After three years in a row of
stagnation, the Brazilian economy
grew roughly 5% in 2004.
• This recovery has been led primarily
by the extraordinary growth of
exports.
• It is estimated that the industrial
sector grew 6% in 2004, a record high
in the last 10 years.
Overview Of Brazil
• Population : 179 million
(2004)26 states and 1 federal
district
• GDP in 2004 estimated at
US$600 billion
• Language: Portuguese
• The largest economy in South
America and the 12th in the
world
• Primary economic sectors are:
agriculture, automobile, utilities,
transport, industry, mining and
energy.
• Main economic regions are: São
Paulo, Rio de Janeiro, Minas
Gerais and Paraná.
OVERVIEW OF BRAZIL(CONT.)

Regional participation in GDP formation

13%

5%
South East
7% South
Central West
57% North
18% North East
Principal Economic Indicators

2001 2002 2003 2004

Exports 58.2 60.4 73.1 94.5

Imports 55.6 47.2 48.3 61.5

Trade balance 2.6 13.2 24.8 33

International Reserves 35.9 37.8 47.7 49.7

Foreign Direct Investment 24.7 16.6 10.1 16.5

Total ratio of Foreign Debt/Exports 3.6 3.5 3.1 2.3


0
10
20
30
40
50
60
70
80
90
Exports 100

Imports

Trade
balance

Internation
Reserves

Foreign
Principal Economic Indicators

Direct
Investment

Total ratio of
Foreign
Debt/Exports
2004
2003
2002
2001
Industrial Production and Raw Material

automobile million units

1.62 1.6
1.6
1.58
1.56
1.54
units
1.52 1.5 1.5
1.5
1.48
1.46
1.44
2001 2002 2003
years
Industrial Production and Raw Material

Trucks(Thousnads)

90
77
80 70
70 59
60
50
Units
40
30
20
10
0
2001 2002 2003
Years
Industrial Production and Raw Material

Petroleum million c.m.

95
89.4
90 86.9

85
Units
80 77.3

75

70
2001 2002 2003
Years
Industrial Production and Raw Material

Natural gas Billion c.m.

10.5

10

9.5

9 Units

8.5

7.5
2001 2002 2003
Years
Industrial Production and Raw Material

Steel Million Tonnes

32
31
30
29
28 Units
27
26
25
24
2001 2002 2003
Years
Industrial Production and Raw Material

Iron(Melt)

33 32
32
31 30
30
29
Units
28 27
27
26
25
24
2001 2002 2003
Years
Industrial Production and Raw Material

Iron Ore Million tonnes

230
225
225 222
220

215 Units
210
210
205

200
2001 2002 2003
Years
Some Facts on iron ore
• CVRD is the no. one producer of iron ore
in the world
• Rio Tinto is the no. 2

All the above companies are Brazilian


companies
• Other materials are:-
Pulp
Packaging Paper
Paper and Cardboard
Agri Business production
• Coffee
• Soybean
• Sugarcane
• Rice
• Wheat
• Orange
• Cotton Nut
• Cocoa in Nut
• Chicken Meat prod.
• Meat Production
Main Exports by country
Main Exports by Brazil

14000 12497
12000
10000
8000
4691 US Mllion $ FOB
6000 3870 3226 2694
4000
2000
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US

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Ch

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th
Ar

G
Ne

Country
Main Imports by Country
Main Imports by Country

8000 7364
7000
US milion$ FOB

6000
5000
4000 3497 3216 US Million$ FOB
3000 2245 2347
2000
1000
0
US Argentina China Germany Nigeria
Country
Main Exports by Product
US Million $ FOB

5000
4500 4294
4000
3500 3075
3000
2279 2135 2124
2500 US Million $ FOB
2000
1500
1000
500
ls

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sa

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D
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M

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Ir

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Products
Profile of the M&A market in Brazil

• Buyers
• −Multinational and local firms
• −Private equity and buy-out funds
• −Government and private pension funds
• −Stressed debt conversions

• Targets
• −Private companies
• −Family owned
• −Privatization (1st and 2nd wave)
• −Carve-out of acquired non-core businesses
• −Non-core or distressed businesses of multinational companies

• Deal Size
• Number of transactions of over US$100 Million in value (ex-Privatization;
disclosed deals and announced amounts only). The year of 2004 was
characterized by a record number of large deals, showing investors confidence
in the country.
• 1996 -14 1997 –18 1998 -32
• 1999 -28 2000 -36 2001 -32
• 2002 –26 2003 –22 2004 -38
Main recurring reasons for unsuccessful deals
in Brazil

• Cultural differences (inadequately factored)


• Insufficient due diligence prior to investing
• Overload of legal formalities/bureaucracy
• Unexpected tax, environmental and labor
issues
• Inefficient exit strategies
• Volatility of market conditions
• Quality of acquired management
• Quality and level of available information
• Overestimated synergy/restructuring gains
• Inefficient post acquisition monitoring
• Partners with financial problems
• Underestimation of deal execution time
Thank You
By
Navin Khaware