Confidence. stakeholders. In so doing, we play a critical role in building a Daniel Serventi

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1 Brazil EY Assurance Tax Transactions Advisory Capital For a conversation about your About EY capital strategy, please contact us EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding Confidence leaders who team to deliver our promises to all of our South America stakeholders. In so doing, we play a critical role in building a Daniel Serventi better working world for our people, for our clients and for South America Transaction Advisory Services our communities. Leader, Pistrelli, Henry Martin y Asociados SRL daniel.serventi@ar.ey.com@ey.com EY refers to the global organization, and may refer to one or Barometer more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Rogerio Villa Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our Transaction Advisory Services Leader organization, please visit ey.com. Ernst & Young Assessoria Empresarial Ltda rogerio.villa@br.ey.com Fabio Guerra Pires Transaction Advisory Services Partner Ernst & Young Assessoria Empresarial Ltda fabio.pires@br.ey.com Economic outlook Local confidence declines Access to capital Credit remains available Growth strategies About EY s Transaction Advisory Services How you manage your capital agenda today will define your competitive position tomorrow. We work with clients to create social and economic value by helping them make better, more informed decisions about strategically managing capital and transactions in fast changing-markets. Whether you re preserving, optimizing, raising or investing capital, EY s Transaction Advisory Services combine a unique set of skills, insight and experience to deliver focused advice. We help you drive competitive advantage and increased returns through improved decisions across all aspects of your capital agenda EYGM Limited. All Rights Reserved. Investing and optimizing top Capital Agenda M&A Slowing deal environment EYG no. CE NY ED 0414 This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com October 2013 ey.com/ccb 9th edition

2 Optimizing for opportunity Brazilian executives seek to optimize their capital structures and improve their operating efficiencies in order to seize growth opportunities from increased foreign direct investment and rebuff local economic and regulatory challenges. Key findings 47% 42% 32% 31% 29% 86% 36% expect local deal volumes to improve see the local economy improving consider growth their primary focus plan to pursue an acquisition have a greater focus on investing in emerging markets view global credit availability as stable or improving plan to use debt and equity as a source of deal funding

3 Companies will be focused on the fundamentals cost control and maximizing operating efficiencies. A note from Fabio Guerra Pires, Partner, Transaction Advisory Services, Ernst & Young Assessoria Empresarial Ltda Our latest Capital Confidence Barometer shows Brazil remains one of the top five global investment destinations, as increasing global confidence and deal fundamentals may signal a return of global deal activity. But Brazilian executives show a fundamental shift in how they view the global economy versus their own. Brazilian respondents are focused on optimizing capital, including maximizing operating efficiency and controlling costs. While Brazilian corporates echo global respondents in seeing improvement in global economic measures, domestic political, economic and regulatory concerns are leading to tempered confidence in the local economy. Fueled by rising concerns around the current regulatory environment and economic growth locally, Brazilian executives report a decline in the number and likelihood of deals closing, which mirror decreased acquisition intentions. They believe global deal volumes to be stable or modestly improving, an opinion shared across global respondents. In April, Brazilian respondents expressed growing M&A appetites and a preferred capital agenda focus around investing. Currently, respondents want to optimize capital structures through debt refinancing, cost reduction and operational efficiency. In reality, this focus on optimizing capital, a cornerstone of Brazilian businesses, is a return to business as usual; focusing on working capital and managing inflationary pressures have long been top boardroom priorities. Reduced local economic confidence, decreased desire to engage in M&A and renewed focus around optimizing point to Brazilians readying themselves to capitalize on growing inbound investment opportunities and improved local deal market conditions. Divestment intentions indicate a maturation of Brazilian boardrooms that are ever-more ready to take advantage of capital raising endeavors to optimize their company structures to prepare for investment opportunities in the future. A note from Pip McCrostie, EY Global Vice Chair, Transaction Advisory Services Confidence in the global economy is at a two-year high. Companies have weathered a prolonged period of uncertainty, during which time they strengthened their balance sheets and optimized their capital structures. Having warehoused cash for a number of years, and with ready access to credit, leading corporates are in a strong financial position to do deals they now have more confidence to pull the trigger. This does not mean we will see a return to boom-time dealmaking. That was unsustainable but so is the M&A recession we have experienced since For many companies, operational efficiencies and a focus on cost-cutting can no longer meet growth mandates. As a result, the signs are that M&A will once again be a preferred route to achieve growth. 1

4 Economic outlook local confidence declines The number of Brazilian executives who believe the global economy is improving grew to 56% from 50% a year ago, while local sentiment declines. During recent years of significant economic growth, Brazilian respondents reported higher confidence in the local economy, and declining sentiment globally. As local growth has leveled off, boardroom attentions have shifted toward economic issues within the Brazilian economy, including infrastructure, inflationary concerns and social and political uncertainty; these have led to a drop in reported local economic confidence. Meanwhile, improvement across the global economy has not gone unnoticed. Brazilian companies increasingly see positives in the global economy, a brighter outlook in Europe and improved global credit access. If Brazil implements effective programs to address systemic concerns within the local economy, corporate confidence in the local economy has the potential to match global levels. Local economic confidence falling Brazilian executives confidence in the local economy has been falling over the past year. Although 36% feel the local economy is stable, only 42% of Brazilian respondents see the economy improving, compared with 67% last year. Twenty-two percent now see the local economy as declining due to overall lower confidence in economic indicators. Economic growth expectations continue to rise A majority of Brazilian executives anticipate growth in both the global and local economies, even if not at the levels reported six months ago. Respondents cite improving macroeconomic fundamentals as the primary reason for growing global confidence, while positive local growth expectations are fueled by Brazil s continuing status as one of the world s top five global investment destinations. 2

5 What is your perspective on the state of the economy today? Global economy Improving Stable 32% 30% 31% 38% 56% 50% Brazil economy Improving Stable 25% 21% 36% 42% 60% 67% 42% of executives believe the Brazilian economy is improving Declining 12% 20% 31% Declining 22% 15% 12% By how much do you think/expect the economy to grow in the next 12 months? Global economy More than 5% 3% 5% 1% 3% Zero growth 0% 8% 10% 14% 8% 11% 62% 79% Brazil economy More than 5% 3% 5% 1% 3% Zero growth 0% 9% 14% 18% 14% 8% 62% 67% 81% of executives expect the Brazilian economy to grow in the next 12 months Negative growth 3% 5% Negative growth 5% 3% 3

6 Economic outlook, cont d. Commitment to maintain current workforce underscores focus on risk and optimization Brazilian companies job creation intentions have decreased during the past year, while plans to maintain current workforce levels have risen. These movements support respondents shifting capital agenda priorities, and suggest optimization of human capital resources is a priority. Global political instability outweighs slow growth Global political instability is believed to pose the greatest near-term risk for growth. Among Brazilian companies, continued slow growth in China is another principal concern; the country is one of Brazil s major trading partners. Confidence drops across leading economic indicators Compared with last October, Brazilian companies are less optimistic across major economic metrics. Locally, Brazilian respondents have less local confidence across all leading economic indicators, except short-term market stability, which is up to 29% from 17% a year ago. 4

7 With regard to employment, which of the following does your organization expect to do in the next 12 months? 17% 63% 20% 11% 55% 34% 13% 42% 45% Reduce workforce numbers Keep current workforce size Create jobs/hire talent What do you believe to be the greatest economic risk to your business over the next 6 12 months? Increased global political instability Continued slow growth in China Continuation of the Eurozone crisis Failure to manage the withdrawal of US quantitative easing 16% 10% 29% 45% 63% of executives expect to keep their current workforce size 45% of executives perceive global political instability to be the greatest economic risk to their business Please indicate your level of confidence in the following: Economic growth Credit availability Employment growth Corporate earnings Global economy 27% 26% 23% 30% 48% 49% 43% 52% 43% 51% 65% 63% Economic growth Employment growth Brazil economy Credit availability Short-term market stability 32% 30% 29% 34% 17% 42% 44% 50% 59% 65% 54% 55% 42% of executives have confidence in Brazilian economic growth Equity valuations/ stock market outlook 29% 34% 21% Corporate earnings 22% 33% 47% Short-term market stability 15% 21% 32% Equity valuations/ stock market outlook 20% 42% 37% 5

8 Access to capital credit remains available Over the last year, Brazilian executives report their access to global credit has increased, as has their willingness to refinance current debt. Despite having a clear perception that credit is widely available, Brazilian boardrooms are more focused on optimizing capital structures by paying down debt or refinancing. As companies continue to feel the challenges of operating in tougher economic environment, financial institutions will look for strong cash flow generating companies to lend to, potentially with more favorable terms. Large cap companies might be in the best position to capitalize on these opportunities to refinance or increase leverage to fund an optimizing focused capital agenda. Credit availability enables capital structure optimization The vast majority of Brazilian executives are confident that credit availability is stable or improving. Furthermore, the percentage of respondents who believe credit is declining has dropped during the past year. These rising credit availability sentiments suggest Brazilian executives could leverage improved financing options, as boardrooms prioritize inorganic growth. Debt-to-capital ratios increasing Over the last year, debt-to-capital ratios have increased, as have respondents expectations to increase their companies debt-to-capital ratios. This signals Brazilian companies are more comfortable accessing credit markets as they seek to engage larger transaction targets. A disciplined use of leverage ensures companies will have the capacity to undertake larger transactions. Use of debt and equity may signal maturing boardrooms Increasing use of debt and equity among traditionally debt-averse Brazilian boardrooms signals a move away from risk aversion and smaller, cash-based transactions. This is especially true in active M&A sectors in the Brazilian economy, including power and utilities, retail, automotive and consumer products. 6

9 Modest shift toward leverage Please indicate your level of confidence in credit 14% 51% 35% 28% 35% Declining Stable Improving 37% availability at the global level 86% of executives now consider credit either stable or improving, compared with 72% a year ago What is your company s current debt-to-capital ratio? Less than 25% 25% 49.9% 50% 74.9% 75% 100% 24% 15% 19% 14% 12% 2% 38% 41% 42% 24% 32% 37% 62% of companies have a debt-to-capital ratio above 25% What is the likely primary source of your company s deal financing in the next 12 months? 14% 12% 22% Equity Debt Cash 17% 22% 55% 71% 64% 23% 36% of executives say they will use more debt and equity to finance deals 7

10 Growth strategies investing and optimizing top Capital Agenda Cost reduction, operational efficiency and maintaining stability are the top boardroom concerns. After periods of sustained, rapid growth, Brazilian companies have mirrored global respondents in strengthening their balance sheets, stabilizing operating processes and optimizing capital structures. A closer examination of Brazilian responses further substantiates this increased conservatism. A strong desire to reduce costs and increase efficiencies is likely driven by perceptions around stabilized debt markets. As the focus on growth declines among Brazilian companies Capital Agendas, divestments are likely to gain momentum as cash-raising vehicles to further optimize capital structures, shore-up operations and prepare for future growth opportunities. Focus on operational efficiency In the next year, only 32% of Brazilian companies say growth is their primary focus. Cost reduction and operational efficiency (34%) and maintaining stability (27%) have come to occupy a larger share of boardrooms attention. Excess cash used to reward stakeholders, retire debt Brazilian companies say they will use excess cash to pay dividends and pay down debt. These actions help boardrooms increase investor confidence and optimize their capital structures. Fifty-three percent of companies plan to use excess cash to fund growth, with the majority (48%) preferring organic strategies. Organic growth strategies will center on both lower- and higher-risk growth strategies While boardroom conservatism tempers large-scale growth pursuits, Brazilian companies will use a mix of lower- and higher-risk organic growth platforms. This blend allows companies to extract maximum value in growth activities, while also pursuing cost reductions, operational efficiencies and capital optimization. 8

11 Optimization efforts continue Which statement best describes your organization s focus over the next 12 months? 7% 6% 15% 2% 15% 27% 42% 50% 34% 37% Survival Maintain stability Cost reduction and operational efficiency Growth 33% 32% 34% of executives say their focus is on cost reduction and operational efficiency over the next 12 months If your company has excess cash to deploy, which of the following will be your company s focus over the next 12 months? Organic growth (e.g., investing in products capex, talent retention, R&D) Inorganic growth (e.g., acquisitions, alliances and JVs) Invest in growth 48% 43% 36% Return to stakeholders Pay dividends 8% 8% Paying debt 5% 16% 13% 8% Buy back stock 3% 8% 22% 17% 30% 35% 48% of companies with excess cash plan to invest in organic growth over the next 12 months What is the primary focus of your company s organic growth over the next 12 months? More rigorous focus on core products/ existing markets New sales channels Lower risk 21% 14% 30% 23% Investing in new geographies/markets Changing mix of existing products and services Exploiting technology to develop new markets/products Increase R&D/ product introductions Higher risk 14% 5% 7% 9% 7% 18% 21% 31% 30% of executives say their organic growth efforts will focus on core products and existing markets 9

12 Growth strategies, cont d. Optimizing and investing top Agendas Which statement best describes your organization s focus over the next 12 months? Raising: A company s ability to raise capital is integral to achieving its growth imperatives and financial well-being. The decline in focus on capital-raising suggests companies are already well-capitalized. Moreover, with credit increasingly available and more attractive, companies now indicate a desire to take on more leverage, which signals that increased dealmaking may be imminent. 15% 14% 25% Raising Investing The Capital Agenda 12% 20% 4% Preserving Optimizing 10 Preserving: A company s ability to access liquidity, control costs and engage with key stakeholders is essential to preserving capital amid shifting market forces. Since most companies were forced to focus on preservation in order to survive, they are now able to concentrate on other areas of their Capital Agendas.

13 companies Capital Investing: A decrease in executives sentiment mirrors the drop in stated M&A attention. While some capital-intensive domestic industries remain active in dealmaking, many companies will wait to capitalize on improving economic fundamentals. 38% 37% 43% A way of business Brazilian boardrooms are focused on bottomline basics: efficiency and cost control, risk management, growth and corporate governance. 35% 23% 34% Optimizing: A renewed focus on optimization signals a return to traditional Brazilian business practices. Working capital concerns, a result of domestic inflationary concerns, have long been central issues for Brazilian boardrooms. 11

14 Mergers and acquisitions appetites for dealmaking drop While dealmaking remains important, ensuring operational efficiencies and organic growth remain essential. Brazilian respondents expressed increased confidence in global dealmaking fundamentals, in particular global credit availability and confidence, but boardroom attentions remain firmly affixed to efficiency and cost control and capital optimization measures. As a result, M&A expectations among Brazilian companies are declining. Beyond shifting boardroom priorities, executives view the local deal market with increased speculation respondents expressed decreased confidence in the number, quality and likelihood of acquisitions in the coming year. Brazilian respondents are reframing M&A s importance in the growth of their business. While consumer products, life sciences and education sectors are still active in the deal market, Brazilian companies are shifting their Capital Agenda focus and taking a broader view of growth. Deal volumes expected to decrease Uncertainty within local economic indicators is reducing local M&A deal volume expectations. Additionally, Brazilian companies are increasingly interested in operational efficiencies and maintaining organic growth, especially within developing economies. These support an increased Capital Agenda focus around optimizing. Brazilian companies that anticipate M&A (31%) cite gaining share in new markets and access to technology and intellectual property as the two main drivers of activity. During the past year, Brazilian respondents level of confidence at the local level has declined regarding the number, quality and likelihood of closing M&A opportunities. During this same period, M&A expectations have dropped to 31%, an indication of the disconnect between how global and Brazilian respondents view the use of M&A to grow quickly and smartly. Declining M&A deal metrics mirror expectations 12

15 A slowing deal environment 50% 40% 30% 20% 10% What is your expectation to pursue an acquisition and your level of confidence in the following at the local level? 38% 29% Expectation to pursue an acquisition 41% 37% 31% 23% 42% 25% 45% 29% 35% 31% Apr-11 Oct-11 Apr-12 Global Brazil Level of confidence Likelihood of closing acquisitions Quality of acquisition opportunities Number of acquisition opportunities 34% 35% 41% 48% 37% 48% 48% 60% 52% 31% of companies expect to pursue acquisitions in the next 12 months What is your expectation for local M&A/deal volumes in the next 12 months? Improve Remain the same Decline 10% 5% 47% 43% 34% Brazil deal volumes 61% Global deal volumes 47% of executives expect Brazil M&A/deal volumes to improve 13

16 Mergers and acquisitions, cont d. Top investment destinations Which are the top countries (outside your local market) in which your company is most likely to invest? Top investment destinations Mexico Peru Chile Uruguay Argentina 14

17 The interdependency between developed and emerging economies continues to increase. The emerging markets are of continued and growing interest to dealmakers, and they allow for portfolio diversification. Global top five investment destinations India Brazil China Canada US 15

18 EY Assurance Tax Transactions Advisory For a conversation about your capital strategy, please contact us South America Daniel Serventi South America Transaction Advisory Services Leader, Pistrelli, Henry Martin y Asociados SRL daniel.serventi@ar.ey.com@ey.com Rogerio Villa Transaction Advisory Services Leader Ernst & Young Assessoria Empresarial Ltda rogerio.villa@br.ey.com Fabio Guerra Pires Transaction Advisory Services Partner Ernst & Young Assessoria Empresarial Ltda fabio.pires@br.ey.com About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. About EY s Transaction Advisory Services How you manage your capital agenda today will define your competitive position tomorrow. We work with clients to create social and economic value by helping them make better, more informed decisions about strategically managing capital and transactions in fast changing-markets. Whether you re preserving, optimizing, raising or investing capital, EY s Transaction Advisory Services combine a unique set of skills, insight and experience to deliver focused advice. We help you drive competitive advantage and increased returns through improved decisions across all aspects of your capital agenda EYGM Limited. All Rights Reserved. EYG no. CE NY ED 0414 This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com