NeoFocus-Acquisitions and JV in Brazil: why and how to proceed?

Company confidential - © NeoFocus Strategy & Finance 2014 1CCI Paris IDF - 20140605 - Acquisitions and JV in Brazil

Acquisitions and Joint-Ventures in Brazil: Why and how to proceed ?

Jérôme Kelber

Paris, 05th June 2014

Company confidential - © NeoFocus Strategy & Finance 2014

Disclaimer

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CCI Paris IDF - 20140605 - Acquisitions and JV in Brazil 2


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3CCI Paris IDF - 20140605 - Acquisitions and JV in Brazil

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Agenda Page


1. Why Brazil? 5

2. Why an acquisition or a joint-venture? 26

3. Identify the target 40

4. Conduct the transaction 44

5. Side benefits 48

6. Appendix 53


11/2009 09/2013

Source: The Economist


Brazil has been through 20 years of near-continuous growth

2 000

2 500

3 000

3 500

4 000

4 500

5 000

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013 -1,0%

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

7,0%

8,0%

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

X1,8X1,4

Achievement: sustained and steady growth

+2,8%/yr+3,1%/yr

Real GDP value 2013, 1994-2013 Real GDP growth, 1994-2013

Source: IBGE (Instituto Brasileira de Geografia e Estatísticas)


Brazil today ranks 7th amongst global economies and expects to reach 5th by 2020


Achievement: an economic superpower

Strong nominalgrowth

• 2012: U$ 2,253 bn (x5)R$4,402 bn (x3)

• 2002: U$ 504 bn(R$ 1,478 bn)

• 45% of Latin America• 2014 projection: +1,7%• > Russia #8, >India #10• <UK #6, France #5

Substantial Forex reserves

• Brazil’s Forex reserves:‒ 1999: $36 bn‒ 2013: $376 bn

• EU: $1,356 bn• USA: $135 bn• France: $54 bn

1) FDI: Foreign Direct InvestmentSource: World Bank, IBGE (Instituto Brasileira de Geografia e Estatísticas), Banco central do Brasil, Credit Suisse

Exemplary economic policy

• Inflation target: 5- 6%/y

• Primary surplus• Floating exchange rate

Growing FDI(1)

• 2013: $65 bn foreign direct investments into Brazil (Russia: $94 bn; India: $28 bn)

• 2014e: $70bn

• 2002: $17bn, 2007: $35bn

• #5 destination behind China, USA, UK & France


Achievement: economic and financial stability

Reassuring credit ratings

• Investment grade reached:‒ 2008: Standard &

Poor’s + Fitch: BBB-‒ 2009: Moody’s: Baa3

• 2014:‒ Standard & Poor’s

BBB, then BBB- on 24/03/2014

‒ Moody’s BAA2

Brazil’s macro-economics are sound

Improving “Country risk”

• 2014: EMBI+spread: +245 basis points (2004: +541, 2002: +1445)

• 2013: decreasing public debt (gross: 57,2% of GDP, net 33,8% of GDP)

Tamed inflation

• INPC:− 2014e: 4,5%− 2013: 5,9%− 2012: 5,85% − 1995: 2500%

Early repayment of IMF loans

• 1998: $41 bn IMF loan (Asian financial crisis)

• 2002: $30 bn credit line (pre Lula’s election)

• 2005: $26,3 bn early repayment of the amounts used

• Forex reserves:‒ 1999: $36 bn‒ 2013: $376 bn‒ UE $1,356 bn, USA $135 bn,

France $54 bn

Source: Standard & Poor’s, Moody’s, Fitch, IBGE (Instituto Brasileira de Geografia e Estatisticas), INPC Indice Nacional de Preços ao Consumidor, JP Morgan EMBI Emerging Market Bond Index


Brazilian population’s own views on Brazil’s current economic situation is certainly much more positive than The Economist’s…

IGP-DI ((Indicie Geral de Preços de Mercado-Disponibilidade Interna). De 1989 à 1997, IGP-M (Indicie Geral de Preços de Mercado). Nova República ou Sexta República BrasileiraSource: IPEA (Instituto de Pesquisa Econômica Aplicada), Almanaque Folha,

65%

416%

1038%

1783%

1477%

480%

1158%

2781%

15%0%

500%

1000%

1500%

2000%

2500%

3000%

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 199919% 19% 16% 16% 35% 35% 46% 39% 41% 77% 110% 95% 100% 211% 224% 235% 65% 416% 1038% 1783% 1477% 480% 1158% 2781% 1094% 15% 9% 7% 2% 20%

Cumulative inflation 1970 - 2000: 602 702 873 063 167% (602 trillion %)

Yearly inflation

Cruzeiro novo13/02/1967

Cruzeiro01/11/1942

Real (Portugal)Reis (conto 106)

Successive Brazilian currencies

Between 1985 and 1995: 12 finance ministers

Since 1995: 12 finance ministers

Military régime (01/04/1964 – 15/03/1985) Nova República (15/03/1985 – today)

Real01/07/1994

Cruzeiro real01/08/1993

Cruzeiro16/03/1990

Cruzado novo16/01/1989

Cruzado28/02/1986


Brazil’s economic performance must propel other development components, or else growth may slow down

• Under control, favorable demography• Immediate demographic window of opportunity

• Abundant natural resources

• Fast growing middle class• Strong internal consumption demand

Strengths

• Significant degrading of trade balance• Domestic added value still too limited• Infrastructure must be significantly improved

• Political, administrative and fiscal systems in need of improvements

• Social inequalities remain strong:– education– public health

Challenges/Opportunities

•Economic growth engines are present and sustainable

•Growth relies in part on the domestic market

•Economic growth has exerted extra pressure on the economic, political and social structures

•Deep reforms are necessary to avoid holding up development


Demography makes Brazil a major country, without excessive pressure in the short term

•2013: 199 million inhabitants• 50% of LatAm (404 M), 40% of the European Union (507 M), 3 x France (66 M)

•Urbanization: 86% of total population (France: 85%)•Density: 23 inhabitants / km² (France: 114)

Population

248 million in 2050

• 30% <14 year old, • 62% <30 yo• Mild demographic pressure

Demography

• ~1500: ~5 M inhabitants• 2013: 897,000 indians, inc. 67

uncontacted tribes (World’s #1)

• 1960: 62 M• 1980: 120 M• 2000: 175 M

Strength: under control, favorable demography

Source: IPEA (Instituto de Pesquisa Econômica Aplicada), Motoboy Zona Norte


The strong decrease of Brazil’s birth rate makes it a young country with an immediate but rather short term window of opportunity

Strength: an immediate demographic window of opportunityAge pyramid, by gender, 2000 and 2035e

Source: IPEA (Instituto de Pesquisa Econômica Aplicada),

Male Female


Brazil benefits from abundant natural resources

•“Green gold”: 8% of world’s arable land: 595 M ha, of which only 75 M ha are cultivated (13%)

• 1st exporter of biofuels (2d producer of bioethanol), coffee, orange juice, beef and poultry meat, soya, tobacco…

• n°1 GMO surface in the world

•“Black gold”: 2,6 M barrels/day (=Kuwait)• Should quadruple thanks to the mega pre-salt reserves discovered in 2006 off the shores of the Rio state

• Will make Brazil one of the world’s largest producers (Russia 10,3 Mb/day, Saudi Arabia 10,0 Mb/day)

•“Grey gold”: 3rd world producer of iron, natural resources in bauxite, gold, manganese, nickel, phosphates, platinum,…

•“Blue gold”: 12% of world’s fresh water reserves, producing 93% of Brazil’s electricity

Natural resources

Source: US Energy Information Administration, Jeune Afrique; Le Temps, Index Mundi, FAO

Strength: abundant natural resources


Brazil’s economic development has enabled a fast growth of the middle class, which now constitutes over half of the population

Strength: fast growth of the middle class

2012: 1US$ = 1,90 R$Source: SAE (Serviço de Analises Estatisticas), FGV/CPS (Fundação Getúlio Vargas – Centro de Políticas Sociais), Quest Investimentos

Householdmonthly income(2012)

Min Max

Class R$ US$ R$ US$

A Upper-upper class

4963 2612 14521 7643

B Lower-upper class

1731 911 4963 2612

C Middle class

802 422 1731 911

D Poor 536 282 802 422

E Very poor 0 0 536 282

92,9 83,396,2

63,6

45,6 55,4

65,9105,5

8,8 12,9

13,322,5

0

20

40

60

80

100

120

140

160

180

200

1993 1995 2003 2011

A & B

C

D & E

M people %


B2C: high growth of GDP and income per capita have induced a high growth of domestic demand

Source: IPEA (Instituto de Pesquisa Econômica Aplicada), Motoboy Zona Norte (IPEA), Shopping Cidade Jardim

2 000

4 000

6 000

8 000

10 000

12 000

14 000

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Per capita GDP, US$, 1994-2013

Strength: strong domestic consumer demand

X10


Brazil’s domestic demand development strongly impacts its trade balance

Source: SECEX/MDIC,

2003:‒ Exports $73 bn‒ Imports $48 bn‒ Balance +$25 bn

2013:‒ Exports $242 bn (x3,3 vs 2003)‒ Imports $240 bn (x5 vs 2003)‒ Balance +$2 bn

Challenge: significant degradation of trade balance

Trade balance, 12 months accrued, US bn


B2B: Brazil’s domestic added value must grow

Source: SECEX/MDIC

Exports by category of value addition, %, 2013

Imports by category of value addition, %, 2013

Challenge/opportunity: domestic added value still too limited


Brazil has created the conditions of a $600 bn+ ambitious investment program in infrastructure

• Ports (Paranaguá – PR, Santos – SP, Vitória – ES, Suape – PE)• 2012 Concessions Act – competition between private and public ports

• Airports (Cumbica – SP, Viracopos – SP, Manaus – AM, Fortaleza – CE)• Concessions for Galeão-RJ (Odebrecht), Cumbica-SP (Ivepar/ACSA S. Afr.)

• Road network• Programa de Inv. em Logistica (PIL-PAC), concession of 7,000 km of motorways• Corredor logístico BR-163 – Rio Tapajos (MT >PA, soya, Bunge, Cargill, Hidrovias

do Brasil and Cianport)

• Railway network• Concession of 11,000 km of railways (on a total network of 29 000 km1)

Improving infrastructure

(1) Total railways network length: USA 225 000 km, China 86 000 km, France 30 000 km, Brazil 29 000 kmSource: Layher Scaffolding, LLX, Brasil Econômico, other

Por

to d

o A

çu, R

J

Challenge/opportunity: infrastructure need significant upgrade


Significant progress must still be made on the political, administrative, fiscal fronts …

Challenge: Political, administrative and fiscal systems need improvements

Political, administrative and fiscal complexity Corruption

Source: Veja


… in education as well, as it now slows down the country’s economic development…

Challenge: social inequalities remain strong - Education

Source: MTE-Minstério do Trabalho e Emprego PNAD 2009, blog Leticia Pinheiro

EducationPrivate Public

Literacy map of Brazil (2009) Illiteracy by age and gender (2009)

Total

Female

Male

-


Brazil’s education sector is highly under dimensioned compared to the needs of its economy…

Challenge: social inequalities remain strong - Education

Source: PISA Programme for International Student Assessment 2012, performance of students in mathematics, median, on a selection of countries

•In 2012, Brazil ranked 57 out of 65 participants to PISA (math, reading and science)

• Difference of resources between socio-economically favored and disadvantaged schools was one of the largest: 4th out of 62

• The percentage of students having repeated at least one class was one of the highest: 7th

out of 64

PISA 2012 – Students’ performance in mathematics – selected countries

Brazil

OECD


…and the same applies to public health, a long term instability factor

Challenge: social inequalities remain strong – Public health

SUS: Sistema Único de Saúde – Brazil’s Public Health System, created by the constitution of 1988, on which 80% Brazilians dependSource: Rede Brasil Atual, TopSeguroSaude.com.br, MundiHoje.com.br

Natal (RN) public hospital

•2013: •Health spending: 7,6% of GDP, of which public sector 46%

(USA: 15,2% / 45%, Germany: 11,1% / 78%, LatAm: 6,7% / 54%)•1 nurse per 1000 inhabitants (OECD: 4/1000)

Salvador (BA) public hospital

•Geographic distribution is unequal, some regions receive much less than others, of which the North and North-East are prime examples

- This queue is for those who wait.- And this one for those who don’t need to wait anymore.


Brazil’s impressive economic performance is yet to have a positive impact on other components of development

Source: UNDP (United Ntions Development Programme)

• Index: 0.73•Rank: 85

Brazil’s Human Development Index (HDI) 2012

HDI trend 1980 - 2012

•Health: life expectancy at birth (years) 73,8

•Education: average education (years) 7,2

•Income: GDP per capita (in constant 2005 US$) $10 152

•Inequalities: inequalities-adjusted HDI 0,531

•Poverty: multi-dimensional poverty index 0,011

•Gender: gender inequality index 0,447

Components

0,5000,5500,6000,6500,7000,7500,8000,8500,9000,9501,000

980

985

990

995

2000

2005

2010

2015


France’s Human Development Index (HDI)

Source: UNDP (United Ntions Development Programme)

• Index: 0.893•Rank: 20

France’s Human Development Index (HDI) 2012

HDI trend 1980 - 2012

•Health: life expectancy at birth (years)81,7

•Education: average education (years) 10,6

•Income: GDP per capita (in constant 2005 US$) $30 277

•Inequalities: inequalities-adjusted HDI 0,812

•Poverty: multi-dimensional poverty indexn.d.

•Gender: gender inequality index0,083

Components

0,5000,5500,6000,6500,7000,7500,8000,8500,9000,9501,000

980

985

990

995

2000

2005

2010

2015


Agenda Page


1. Why Brazil? 5




5. Side benefits 48

6. Appendix 53

Company confidential - © NeoFocus Strategy & Finance 2014 27CCI Paris IDF - 20140605 - Acquisitions et JV au Brésil

Brazil’s economic performance must propel other development components, or else growth will slow down

•Multiple import barriers:- Mercosul- Protectionism in Brazil

•Strong labor shortage•Long lasting shortage of skilled labor

•Very high cost of capital •Weak innovation ecosystem

Weaknesses / Risks

•High margins

•Numerous incentives

•Social inequalities remain strong- Education - Public health

Opportunities / Risks

•The combination of protectionist policies and strong recent economic development have multiplied the bottlenecks in Brazil

•Realization of growth potential has therefore been limited

•Brazilian authorities are aware of the need to support local implementation of foreign companies to modernize the economy

•The benefits of a local implantation are many


Brazil is part of Mercosul, a free trade zone with few barriers internally, but with substantial import barriers from outside

Weakness: import barriers

Mercosul•Mercosul

• Created by the treaty of Asunción on 26/03/1991, signed by Brazil, Argentina, Paraguay, Uruguay and 6 “associate members” (Bolivia, Chile, Colombia, Equador, Peru, Venezuela)

• Zero import duties on goods traded within the area (with a few exceptions)• Trade with third party countries is subject to a Common External Tariff (CET), with duty rates of 0 to 20% (14% on average). Each state can also decide unilaterally to impose a temporary rate of up to 35%

• Since 2010, member states can also make exceptions to the CET on up to 100 products• Every 6 months, 20% of the CET tariffs can be modified

Pacific Alliance vs Mercosul

Source: Commission Européenne (http://madb.europa.eu/madb/barriers_result.htm?sectors=none&countries=BR&measures=none) , Wall Street Journal, Quartz qz.com, CommSec


Access to the Brazilian market by exporters is made difficult by a number of measures

Weakness: import barriers

Brazil’s protectionism•Import restrictions

• Import duties (see Mercosul)• Import licenses• Specific domestic standards (e.g. labelling and user guides in Portuguese)• Special regimes (telecoms, insurance, sea shipping, textiles and leather)• FDI limitations or specific conditions on certain sectors (air transport, agriculture, health,

rail/road/sea shipping, cash handling, architecture, postal services,…)

•National preference on 25% of public tenders• The « Buy Brazil Act » n°12.349/10 (15/12/2010) amends public tender regulations (federal,

state and municipal levels): they are open to international bidders provided they have a legal entity in Brazil, and preference is given to goods and services produced in Brazil on 25% of the public tenders

•WTO: • WTO ranks Brazil as n°1 for new protectionist measures enacted in 2013: 39 measures

identified in Brazil out of 407 identified in total (India ranks n°2, USA n°3, Argentina n°4) • The EU which absorbs 20% of Brazil’s exports, formally sued Brazil at the WTO for its vehicle

import duty (30%)

Source: SECEX, European Commission (http://madb.europa.eu/madb/barriers_result.htm?sectors=none&countries=BR&measures=none) , february 2014 WTO report, Reuters

Voitures FIAT à Oliveira (MG)


(1) Taxa de Desemprego (período de referência de 30 dias), das pessoas de 10 anos ou mais de idade, por Regiões Metropolitanas, Frequência: Mensal de 2002.03 até 2014.02, Regiões metropolitanas (RMs): Recife, Salvador, Belo Horizonte, Rio de Janeiro, São Paulo e Porto Alegre. Atualizado em: 27/03/2014Source: IPEA (Instituto de Pesquisa Econômica Aplicada), IBGE

0,0%

2,0%

4,0%

6,0%

8,0%

10,0%

12,0%

14,0%

2002

.03

2002

.09

2003

.03

2003

.09

2004

.03

2004

.09

2005

.03

2005

.09

2006

.03

2006

.09

2007

.03

2007

.09

2008

.03

2008

.09

2009

.03

2009

.09

2010

.03

2010

.09

2011

.03

2011

.09

2012

.03

2012

.09

2013

.03

2013

.09

Unemployment rate(1), metropolitan areas, 2002-2013

Weakness: labor shortage

Brazil’s accelerated development created an “economy of shortage” in many respects, and particularly in terms of workforce


Skilled and experienced workforce is not sufficiently available to cover the needs of the economy

Source: Manpower, MTE-Minstério do Trabalho e Emprego, MBAatlântico, Policia Federal

85%

68%

61%

41%

41%

39%

38%

37%

35%

35%

35%

34%

33%

32%

30%

28%

22%

21%

17%

13%

3% 3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Japa

nB

razi

lIn

dia

Arg

entin

aA

ustri

aU

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Mex

ico

Sw

itzer

land

Ger

man

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Chi

naC

anad

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ance

Pol

and

Col

ombi

aP

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Bel

gium

Nor

way

Italy

UK

Spa

inIre

land

Manpower - Global Talent Survey (2013, extract)% of companies meeting difficulties in recruiting in 42 countries

North Am. South Am. Europe+ME Asia

Year Number2009 42 914

2010 56 006

2011 70 524

2012 73 022

Work permits granted to foreigners, per year

• 88% technical or higher education

• Number of foreigners living in Brazil: 942 000 (+84% since 2000: 510 000)

• Active population 2012: 95,3 million

• 2013: simplification of work permit attribution conditions

Brazil (n°2): 68%World average: 35%France (n°26): 33%

Weakness: lasting shortage of skilled workforce


Weakness: high cost of capital

The high cost of capital favors FDI1 but penalizes the capitalization and growth of Brazilian companies

Very high interest rates.

• Day to day interest rate of the Central Bank: (SELIC): 10,65% (2014)

• => Commercial interest rates (per annum)

•35-45% (for businesses)

•45-100% (for households)

(1) FDI: Foreign Direct Investments(2) (2) The SELIC rate is a day to day rate target fixed by COPOM (Comitê de Politica Monetaria do Banco Central do Brasil). It is the rate on which the Central

Bank of Brazil bases its loans to banks and is used in Brazilian economy as a reference index to determine interest ratesSource: Banco Central do Brasil, Istoe. Illustrations Fundação Amazônia Paraense, charge Cicerex

05

101520253035404550

janv

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96

janv

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janv

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98

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SELIC2 rates (day to day, annual equivalent, 1996-2014)

% Max 45% (11/09/1998)

Today 10,75% ((27/02/2014)


Brazil ranks #64 / 142 countries for its capability to generate innovation

Weakness: a weak innovation ecosystem•The « Global Innovation Index » measures the capacity of a country to innovate through the evaluation of an exhaustive set of components contributing to innovation generation

•Institutions:• Political, legal, « ease of doing business »

•Human capital and research activities• Education, higher education, R&D activities (public and private)

•Infrastructure• Accessibility of IT & communication technologies, other

infrastructure•Market sophistication

• Credit, investment, trade, competition•Business sophistication

• Knowledge workers, university/industry links, knowledge importation

•Innovation production• Knowledge creation, impact and diffusion• Innovation production: immaterial assets, innovative products

and services, online creativity

Source: www.globalinnovationindex.org

Global Innovation Index 2013

North Am. South Am. Europe+ME Asia

0

10

20

30

40

50

60

70

1-S

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Sw

eden

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29-It

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32-M

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46-C

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52-U

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bia

55-G

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Afri

ca60

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-Rus

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64-B

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66-In

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92-M

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Brazil


Due to its history, Brazil developed a very specific culture, making it a complex environment to operate in

Risk: strong and sometimes invisible local specificitiesDifferent contexts and environments…

Source: Geert Hofstede, NeoFocus

Power distance Individualism Assertive

nessUncertaintyavoidance

Long termorientation

Brazil 69 38 49 76 65

France 68 71 43 86 39

0

20

40

60

80

100Power distance

Individualism

AssertivenessUncertaintyavoidance

Long termorientation

Brazil

France

• Geert Hofstede’s cultural profiling model

…result in different cultures

Society

Institutions

Economy

Natural environment

ReligionHistory

Professional circle

Social circle

Family circle


In 2013, Brazil ranked #72 / 177 amongst least corrupted countries, on par with South Africa, Serbia and Bosnia

Risk: corruption still present

Source: Transparency International.

Corruption Perception Index 2013• 2013 ranking (extract):

‒Denmark n°1 (score: 91)‒Canada: n°9 (score: 81)‒Germany: n°12 (score: 78)‒UK: n°14 (score: 76)‒US: n°19 (score: 73)‒ France: n°22 (score: 71)‒ Spain: n°40 (score: 59)‒Cuba: n°63 (score: 46)‒ Italy: n°69 (score: 43)‒China: n°80 (score: 40)‒Morocco: n°91 (score: 37)‒ India, Colombia: n°94 (score: 36)‒ Argentina: n°106 (score: 34)‒Russia: n°127 (score: 28)‒Ukraine, Iran: n°144 (score: 25)‒ Venezuela: n°160 (score: 20)‒ Afghanistan, North Korea, Somalia: n°175 (score:8)

• The « Corruption Perceptions Index » each year measures the perceived level of corruption of 177 countries. 69% of the World’s countries score less than 50 (0=totally corrupt, 100 totally « clean »)

• Corruption is estimated based on the perception of country analysts, members of the business community and members of the public in each country


An efficient and well organized Brazilian company can generate very high margins, protected by high entry barriers

Opportunity: very high marginsBeing on the right side of the entry barriers…

•The cost structures of importers on one hand and local producers on the other are very different, greatly favoring local producers

…provides opportunities for high margins

Selling price

Importer Local producer

Costs

Margin

Taxes

Costs

Margin

Margin

(Source: CommSec, Quartz qz.com, NeoFocus


Brazilian authorities actively support investment projects in their country at federal, state and municipal levels

Source: ApexBrasil (Agência Brasileira de Promoção de Exportações e Investimentos, Brazilian Trade and Investment Promotion Agency)

Example: APEX Brasil - Agência Brasileira de Promoção de Exportações e Investimentos

Opportunity: very significant incentives


The winning entry strategy in Brazil: transform an existing Brazilian company by providing locally rare or expensive resources


Innovative products,

technology

Individual and collective

competencies

Financial resources

•A local entity makes it possible to avoid import barriers

• No discrimination of foreign shareholders• « Be Brazilian » - just like everyone else

•Efficiency• Leverage existing strengths of the target (e.g.

market share, distribution network, suppliers, partners, skills,…)

• Faster than organic growth• Improves chances of success

•Consistent with the necessary modernization of the Brazilian economy

• Will be well received by Brazilian companies• Will be encouraged by Brazilian authorities

•Difficult to replicate by local companies• Brazilian companies often have little experience

abroad

Advantage of the acquisition / partnership strategy


French companies are in a particularly good position to seize these opportunities due to their excellent relationships – past and present

•4 heads of state meetings in 2008 and 2009

•Bilateral strategic partnership signed 12/2008•Economic and trade cooperation•Defense cooperation (€6 bn)•Other partnerships in space, nuclear power, renewable energies, science & education

•Dilma Rousseff visited France in 2012, François Hollande Brazil in 2013

•Launch of the Brazil-France Economic Forum (permanent, public institutions + private companies, meeting in Paris on 20/05/2014)

Brazil is a « priority action country » for France

Source: Ouest France, AFP


Agenda Page


1. Why Brazil? 5




5. Side benefits 48

6. Appendix 53


Brazil’s fast, recent development has generated a “shortage economy”

The target of your dreams does not exist

Consider a transformation process

•Development challenges related to Brazil’s economy‒ Fewer companies‒ Less developed

•Rocky history of Brazil’s economy‒ Fewer companies‒ Very resilient

•Recent success of Brazil’s economy‒ The ideal target has already

been acquired or is being courted by virtually everybody

•Imagine a business model

•Adapt this business model to the specificities of the Brazilian environment

•Identify assets and skills that must be found in Brazil and those that can be brought in at a later stage

•Envisage several acquisitions

•The integration plan is fundamental to the success of the acquisition or partnership


Identifying a suitable Brazilian company for an acquisition or partnership is a long and complex process

Identifying a target is a complex process

Practical solutions exist, although they are

often tedious

•Size and complexity of Brazil

•Numerous criteria to consider:− Business quality− Company governance− Compliance with rules &

regulations (accounts, fiscal, labor…)

− Openness of shareholders to enter into a discussion

•Few formal information sources, often only in Portuguese

•Set realistic goals

•Use time to your advantage:‒ Give yourself time!‒ Examine several targets in

parallel‒ Keep watch of “inaccessible”

targets

•Use local networks (trade associations, personal networks)

•Validate information locally obtained from informal sources (interviews)


Local presence and partners are a must

Brazilian specificities are numerous and often invisible

•Brazil’s history and “melting pot” of populations resulted in Brazil’s very own culture

•Brazilians are patriots and they are extremely proud of their nation

•Nothing moves without direct, personal, frequent, often informal contacts

•The “group”, the “community” are all-important in Brazil: it is paramount to integrate into Brazilian society in order to succeed


Agenda Page


1. Why Brazil? 5




5. Side benefits 48

6. Appendix 53


Conducting a transaction in Brazil requires entering and integrating into the Brazilian business environment

How to succeed in an acquisition or partnership?

Be supported by experienced local

professionals

•In Brazil, everything is possible…

•…the Brazilian way!

•Brazilian companies are mainly family-owned and little accustomed to international business practices

•For the past few years they have often been courted by buyers / partners from all over the World

•Establishing trust is a pre-requisite to entering fruitful discussions

•Motivations and objectives of your Brazilian interlocutors differ from your own:

•They may prove difficult to understand without local assistance

•They may prove difficult to explain to your shareholders, board, other decision-makers

•Local professional assistance will be key in tackling these hurdles


A structured process enables you to keep in control of project steering, improves chances of success and diminishes risks

External due diligence

Initial contacts

Due diligence Negotiation

French buyer often has the advantage of the vision of the future business model, but it needs local adaptation

Establish trust first, aim for cooperationShow advantages for the two parties

Make use of time: allow ample time, scrutinize multiple targets in parallel, keep watch of “inaccessible” targets

Deciphering the target’s environment provides very important keys and cues

Fundamental « Compliance » is often not a key quality of Brazilian businesses

Must include sensitivity analyses to model the possible volatility of economic parameters

Brazilian culture

Identification Business model

Acquisition business

planSignature Integration

Lawyer: Only written words remain

Crucial

Phase 1 Phase 2 Phase 3 Phase 4 Phase 5


The main hurdles associated with realization of an acquisition or partnership can be avoided through careful preparation

Main problems in the due diligence of Brazilian targets

Main causes of failure when investing in Brazil

•Significant fiscal, environment or social risks•A degree of informality in operations (unregistered operations, several books of accounts)

•Significant undocumented transactions by partners / shareholders

• Insufficient internal controls, which cause financial documents to be irrelevant

•Debatable accounting practices, requiring significant adjustments of EBITDA and net assets

•Unforeseen fiscal and social problems•Excessive legal and administrative red tape• Information at hand proves unreliable•Market volatility• Insufficient due diligence prior to investment

•Underestimating time required to complete transaction

•Overestimating synergies or production gains

• Insufficient quality of acquired target’s management

Source: pwc do Brasil, « Doing deals in Brazil », 2011


Agenda Page


1. Why Brazil? 5




5. Side benefits 48

6. Appendix 53


Brazil’s and Europe’s macro-economics are complementary and propitious to fruitful partnerships

Maps to same scale

•Developing economy

•Young population

•Strongly needs investments

•Workforce shortage, particularly skilled workforce

•Innovation and technology shortage

•…

Brazil

•Mature economy

•Growing share of senior citizens

•Slow growth, requiring little investment

•High unemployment, including within highly skilled workforce

•Dense innovation and technology network (R&D, investors, incentives…)

•…

Europe


« France-Brésil: bâtir un avenir économique en commun »par Jean-Charles Naouri – Les Echos, 16 mai 2014

Source: Les Echos - http://www.lesechos.fr/economie-france/conjoncture/0203490661540-france-bresil-batir-un-avenir-economique-en-commun-671239.php

Le 20 mai se tiendra à Paris le Forum économique France-Brésil ouvert par Mauro Borges, ministre du Développement, de l'Industrie et du Commerce du Brésil, et Laurent Fabius, ministre des Affaires étrangères, du Développement international et du Tourisme. Alors même que le partenariat franco-brésilien connaît unephase de développement important, il constitue une chance de renforcer durablement les échanges entre les entrepreneurs des deux pays. Le dynamisme et l'esprit de conquête des entrepreneurs brésiliens pourraient s'exprimer pleinement sur le marché français qui présente toutes les caractéristiques d'une porte d'accès privilégiée au marché européen, premier du monde avec 500 millions de consommateurs, près de 18.000 milliards de dollars de PIB courant et une économie qui renoue avec la croissance. L'attractivité de la France pour les investissements étrangers repose sur un ensemble de facteurs qualitatifs mis en avant par les classements internationaux: des ingénieurs hautement qualifiés et parmi les plus innovants du monde, d'excellentes infrastructures de transport, la sécurité juridique des contrats, un accès au crédit facilité avec des taux d'intérêt particulièrement bas, le crédit impôt-recherche qui place la France en tête des dispositifs d'incitation fiscale à la R&D dans les pays de l'OCDE, enfin des coûts d'implantation et d'exploitation avantageux pour les entreprises étrangères. Grâce aux jeunes issus de l'immigration, la France compte la seconde communauté lusophone d'Europe. Elément non négligeable d'attractivité, elle se situe au 2e rang mondial s'agissant de la qualité de vie selon le classement mondial International living. Afin de prendre toute la place qui leur revient dans la chaîne mondiale de la valeur ajoutée, les entrepreneurs brésiliens trouveront en France les partenaires pour concevoir et mettre en oeuvre les technologies du futur, qu'il s'agisse, entre autres, de l'avion électrique, des infrastructures intelligentes, des énergies durables, de la mobilité urbaine et interurbaine ou des immenses potentialités de la chimie du végétal. Pays continent, 7e économie mondiale, le Brésil exerce une attraction considérable attestée par la forte présence des entreprises étrangères. Les Français sontles 5e investisseurs étrangers avec 600 entreprises présentes employant plus de 600.000 salariés. L'économie brésilienne a bénéficié ces dernières années d'unecroissance soutenue, en dépit des aléas survenus depuis 2008: le PIB a progressé en moyenne de 3,7 % en réel et 11 % en nominal par an au cours des 10 dernières années. Au contraire des précédents cycles, cette croissance n'a pas généré de déséquilibres grâce à une gouvernance économique avisée et à l'action de la banquecentrale: l'hyperinflation a été jugulée ; les finances publiques sont maîtrisées ; le chômage est contenu (5 % à fin mars 2014) ; le secteur bancaire est sain et les réserves en devises représentent plus de 12 mois d'importations de biens et de services. Le mouvement actuel de prévention envers les émergents doit doncêtre, s'agissant du Brésil, largement relativisé. A ces fondamentaux robustes s'ajoutent d'autres facteurs favorables: des ressources naturelles abondantes, un faible coût de l'énergie, une industrie de qualité, une agriculture compétitive et une démographie dynamique. São Paulo est une place financière active dotée d'outils flexibles de financement des entreprises. Enfin, les dirigeants brésiliens ont manifesté leur volonté de continuer les réformes sociales ambitieuses qui ont permis la croissance rapide des classes moyennes et d'accélérer les réformes structurelles. Le Forum économique France-Brésil a été conçu par les deux gouvernements comme un espace de dialogue durable. Il revient aux chefs d'entreprise de nosdeux pays de l'investir et de l'utiliser comme une plate-forme favorisant une croissance rapide et volontariste de nos coopérations.

Jean-Charles Naouri est représentant spécial du ministre des Affaires étrangères pour les relations économiques avec le Brésil, PDG du GroupeCasino et Président de Grupo Pão de Açúcar.


A successful acquisition or partnership in Brazil may also endow the buyer with new, typically Brazilian qualities

•Optimistic« Deus é brasileiro »

•Entrepreneurial spirit« Tchau, e boas vendas ! »

•Voluntary« Tudo é possível », « Jogo de cintura », « Jeitinho »

•Creative« Na pratica, a teoria é outra »

•Cooperative« Uma mão lava outra »

•Cordial« Agua no feijão que chegou mais um »« Mais vale amigo na praça que dinheiro na caixa »

« Beyond Brazilian oil’s potential, the most positive aspect of our acquisitions in Brazil is the impact Brazilian culture has had on our entire group »

Thierry Pilenko, CEO, Technip

A few Brazilian qualities

Source: Popular Brazilian sayings, Technip


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Thank you

Contact:Jérôme [email protected]