(Bloomberg) -- A $4.8 billion joint venture between Boeing (NYSE:BA) Co. and Embraer SA is either a threat to Brazil’s national security, the surrender of a national treasure or a boon that would strengthen both companies. It depends which presidential candidate you ask.
Brazil’s October elections will decide more than just who leads the biggest economy in Latin America. At least $33 billion of mergers, acquisitions, and stock and bond sales hang in the balance as well, according to a tally compiled by Bloomberg. In addition to Boeing and Embraer, corporate giants from Eletrobras to Petrobras to LyondellBasell all have their deals stuck on hold until voters weigh in and clear up prospects for markets and the economy.
“The exchange-rate volatility, economic uncertainty and the difficulty in seeing a clear exit horizon -- all that influences deal timings,” said Roderick Greenlees, who heads investment banking at Banco Itau BBA, the biggest merger adviser in Brazil this year, according to data compiled by Bloomberg. “Activity should pick up after the elections as the market stabilizes.”
Brazil’s currency has lost 10 percent since Aug. 3 as election polls showed a surge in support for former President Luiz Inacio Lula da Silva, whose campaign calls the Boeing-Embraer deal “illegitimate” and promised to block it using the government’s veto power at Embraer. Lula, who’s running even though he’s in jail fighting corruption charges, opposes reforms bankers consider key to improve fiscal accounts. He’s expected to be barred from running, but there are signs he may be able to lift his running mate, Fernando Haddad, into the second round of voting on Oct. 28.
On the other end of the political spectrum, market-favorite candidate Geraldo Alckmin has said the planemakers’ joint venture is a positive for the companies and for Brazil. Alckmin hasn’t gained much traction in the polls, coming in consistently at No. 4 or No. 5.
“The closer we get to the elections without improved visibility on the likely outcome, the harder is gets to agree on deals,” said Eduardo Guimaraes, head of mergers and acquisitions for Itau. “It’s tough to close the valuation gap between buyers and sellers when you can’t narrow down what the base-case scenario is for the next few years.”
Mergers announced since the start of the third quarter fell 37 percent to $4.79 billion from the same period a year ago, according to data compiled by Bloomberg. The $32.8 billion of deals announced this year is 4.5 percent below the same period last year, the data show. Brazil represents about 26 percent of all M&A deals in the Latin America region this year, down from 33 percent last year.
“The elections are completely undefined -- there’s no clear trend at the moment -- and it’ll be difficult for people to make a strategic long-term investment or divestment decisions with little predictability," said Eduardo Mendez, co-head of Latin America equities at Morgan Stanley (NYSE:MS), the top equity underwriter in Brazil so far this year, data compiled by Bloomberg show.
Emerging markets are struggling around the world, and Brazil’s election uncertainty only adds to those tensions, Mendez said. “I think we may see some block-trade transactions, which are quicker and have less risk than a normal equity offering,” he said. “But they might have bigger spreads.”
Brazil’s total equity offerings reached 24.7 billion reais ($6 billion) this year, 7.4 percent less than in the same period last year.
The candidates’ positions on tax policy will affect deals as well, according to Fernanda Ortiz, associate partner at Banco BTG (LON:BTG) Pactual. Taxing company dividends -- an idea many presidential candidates are backing -- could mean lower returns for investors, Ortiz said.
“A big chunk of deals depends on the willingness of the government, from the regulatory point of view or from the seller’s point of view, and that’s getting more difficult as the election approaches,” said Thiago Sandim, a partner at the Brazil law firm Demarest. “The M&A market is getting choked,” Sandim said, adding that the political instability is also creating fertile soil for the nation’s courts to interfere with asset sales.
Petrobras had its divestment program blocked by Supreme Court Judge Ricardo Lewandowski, who ruled in July that any government-owned company sale, including subsidiaries, must be approved by the Congress. The ruling forced postponements for deals such as the selling of a gas-pipeline unit in northeastern Brazil, a transaction that could reach $8 billion.
Eletrobras, the state-owned power company, was trying to sell six distribution units and after many court battles is now auctioning three, while another sale might come Sept. 26.
“There are fewer deals and the ones that are going through are taking longer to close,” said Joao Ricardo de Azevedo Ribeiro, senior partner at Sao Paulo-based Mattos Filho, the top M&A legal adviser in Brazil this year.
The $33 billion in transactions stuck in limbo doesn’t include auctions to sell 12 airports, four railroads and six roads the government has already conceded will be postponed until next year, deals that would add 64 billion reais to the total.
“With all those deals dammed up, we may see a torrent of transactions after the elections," said Pedro Whitaker de Souza Dias, a partner at Mattos Filho.