Brazil

BRAZIL

B-------R------I-------C 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 South

7%

Central West 57% 18%

North 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

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

3.6

3.5

3.1

2.3

Trade balance

Total ratio of Foreign Debt/Exports

Total ratio of Foreign Debt/Exports

Foreign Direct Investment

Internation Reserves

Trade balance

Imports

Exports

Principal Economic Indicators

100 90 80 70 60 50 40 30 20 10 0 2001

2002

2003

2004

Industrial Production and Raw Material automobile million units 1.62 1.6 1.58 1.56 1.54 1.52 1.5 1.48 1.46 1.44

1.6

1.5

2001

1.5

2002 years

2003

units

Industrial Production and Raw Material

Trucks(Thousnads) 90 80 70 60 50 40 30 20 10 0

77

70 59 Units

2001

2002 Years

2003

Industrial Production and Raw Material Petroleum million c.m. 95 89.4

90

86.9

85 Units 80

77.3

75 70 2001

2002 Years

2003

Industrial Production and Raw Material Natural gas Billion c.m. 10.5 10 9.5 9

Units

8.5 8 7.5 2001

2002 Years

2003

Industrial Production and Raw Material

Steel Million Tonnes 32 31 30 29 28

Units

27 26 25 24 2001

2002 Years

2003

Industrial Production and Raw Material Iron(Melt) 33 32 31 30 29 28 27 26 25 24

32 30 Units

27

2001

2002 Years

2003

Industrial Production and Raw Material Iron Ore Million tonnes 230

225

225

222

220 215 210

Units

210

205 200 2001

2002 Years

2003

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 12497

US Mllion $ FOB 3226

Country

an y

2694

G er m

Ne th er la nd s

na

3870

Ch i

Ar ge nt in a

4691

US

14000 12000 10000 8000 6000 4000 2000 0

Main Imports by Country Main Imports by Country

US milion$ FOB

8000

7364

7000 6000 5000 3497

4000

US Million$ FOB

3216

3000

2245

2347

2000 1000 0 US

Argentina

China Country

Germany Nigeria

Main Exports by Product US Million $ FOB 4294 3075

ile s

2124

Products

A ir

cr a

fts

ob A ut om

as se ng er

O oy be an

S

2135

P

il

o

&

M

in

er al

D is po sa ls

2279

Ir

S

oy be an

5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0

US Million $ FOB

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