Infrastructure M&A in Brazil
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José Ribeiro Prado Jr
Machado, Meyer, Sendacz e Opice Advogados, São Paulo
Diana Pacifico Henne
Machado, Meyer, Sendacz e Opice Advogados, São Paulo
Talita Guedes Duarte
Machado, Meyer, Sendacz e Opice Advogados, São Paulo
The recent corruption scandals, as well as the current opportunities in the Brazilian infrastructure sector, particularly due to privatisation efforts, macroeconomic stability and the newly enacted infrastructure framework, have opened the door for different private actors, for example, private equity funds and international investors, to increase their investments in infrastructure projects in Brazil. This change of landscape has also affected the legal framework in connection with this type of transaction, as investors’ concerns shifted to compliance and governance matters.
Given that such a sector tends to involve projects that are large and complex, which usually require medium to long-term commitment, private equity funds and international investors that are new to the Brazilian market tend to be very cautious before making a decision to invest. International players that aim at investing in the infrastructure segment in Brazil usually partner with Brazilian companies because of their knowledge of the market. For such players, their risk-taking capacity depends not only on financial aspects, but also the access they have to information.
In this context, success in structuring M&A infrastructure deals in Brazil, from a legal standpoint, requires a comprehensive analysis and understanding of each investor's main concerns, in addition to other usual legal aspects, such as the regulatory environment and exit strategies.
In this evolving landscape, and as the appetite for infrastructure assets remains strong, most infrastructure transactions in Brazil are being conducted through auction processes. Under these processes, multiple potential buyers simultaneously bid to acquire a target and, to do so, they have to initially proceed with only a limited investigation of the asset. Full due diligence is only allowed when and if they are selected for the next phases of the auction. This process poses several challenges to investors and lawyers, as it adds competition and time pressure.
Hence, investors may not downplay the relevance of taking a proactive approach to conducting a preliminary compliance investigation, even at the early stage of the process, to avoid allocating resources and time to assets that may involve high liability risks. Even in the early stage of the auction process, lawyers should assist potential buyers in the analysis of the target, based on public information and corporate intelligence services, in order to identify public corruption investigations and litigation involving the target.
By anticipating these risks, investors will be better positioned to evaluate whether they wish to proceed to the next phases of the process and, in the event they decide to move forward, to discuss with their advisers the best strategies to mitigate the risks and gain competitive bargaining power in the context of a non-binding or binding proposal. For instance, the deal structure may contemplate negotiation with governmental authorities for the execution of a leniency agreement with respect to corruption matters identified during this early stage investigation, and to avoid succession risk to the buyer.
In the following phases of the process, investors will be able to conduct complete due diligence on the target to verify whether it has consistent management and integrity policies and effective internal control systems, as well as to identify any necessary improvements regarding the target’s compliance and governance practices.
The absence of a comprehensive analysis of the asset and related liabilities can have severe implications: it may not only put the investor in a less favourable competing position when compared with other buyers battling for the same asset, but also make it difficult to risk-adjust returns and assess the value estimation of the asset. Evaluating all the risks and adopting strong compliance and governance practice from the beginning is key for an efficient acquisition process, and an important factor for the exit strategy and to obtain the best return outcome.
The deal structure must also consider the necessary governmental approvals and licensing processes, which are major concerns in investing in infrastructure in Brazil. Each sector requires licences and approvals from different governmental levels, including regulatory and environmental, and the length of time for obtaining such approvals and licences is not standardised and may take several months. This adds a layer of uncertainty to the project, and extensive negotiation by the parties regarding the conduct of business and risk allocation during the period between signing and closing the transaction, as well as termination rights in the case of corruption events that may occur or be discovered in the interim period.
In view of the complex scenario described above and to foster access to forms of investment in the infrastructure segment, it is paramount that the government incentivises and promotes necessary measures for the prevention of compliance and governance standards. In addition to the regulations enacted to strengthen anti-corruption measures, particularly after the Car Wash investigation, there have been recent efforts from the government towards fomenting compliance standards, for instance, the new ‘Infra + Integrity Seal’ that was recently enacted by the Ministry of Infrastructure on 23 July 2020 by means of Ruling (Portaria) No 102, which has the purpose of rewarding companies that adopt a certain level of institutional and public integrity. Such a seal is still limited to a small niche: companies that operate in the land transportation segment that have contracted with the government in the last five years and are involved in major projects. It is premature to try to foresee whether this represents an actual advance in terms of compliance prevention, that is, if it would be effectively implemented, if companies would be incentivised to apply for it, if investors would require such a qualification from companies or if the government would be able to implement it efficiently. However, this type of ‘quality standard’ could be an additional tool for investors in the decision-making process.
To summarise, it seems fair to say that this is a promising moment to invest in the infrastructure sector in Brazil, observing, however, that: (1) conducting meticulous due diligence prior to the transaction; (2) the execution of an agreement that addresses the period between signing and closing, and liability allocation; and (3) the implementation of compliance and governance standards are key factors for improving investors’ chances to meet their expected returns and avoid risk, such as a compliance crisis.
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