With the Olympics set to take place in Brazil this summer, construction is a sector which continues to benefit big-time from government investment and incentives for new sports stadiums, purpose-built athlete/spectator facilities and even new airports. So it made sense for one of the biggest mergers in the sector to take place prior to the celebrations kicking off. KPMG’s David Bunce, our Deal of the Year 2015 – Brazil winner, tells us more about it here:

Trying to entice a private equity firm to invest in your client’s sub-sector merger ambitions during a recession isn’t an ideal scenario – but for David Bunce it was the one he found himself facing back in 2009

The senior partner and head of corporate finance at KPMG in Latin America was determined to get the best deal possible for his client Per Nevermann of Danica Corporation – despite a pretty detailed ‘wish list’ of demands. Nevermann’s dream, for instance, was to consolidate the little-known construction materials market in Brazil with the aid of a financial partner – one who had similar ambitions to his client ie they would be in it for the long-term.

Six years later Bunce achieved this by setting up the deal for thermal insulation panel manufacturer Danica (which had grown by 14% a year since 2009) and metal roofing supplier Zipco to merge. The private equity firm involved was Patria, which happily already controlled Zipco so had developed an excellent understanding of the market.

The joint company (and precast segment manufacturers Medabil) now controls a quarter of the construction market in Brazil. It will focus on supplies to warehouses, shopping centres (Danica has built 44 within the past five years), supermarkets, the pharmaceutical industry and storage. Factory outlets number seven in total and are located in Brazil, Chile and Mexico.

The merger ensuring the joint company could provide more extensive ‘tailored solutions’ came at just the right time in a changing market where customers in Brazil are spurning traditional masonry for mass-produced goods.

Meanwhile, the deal was both launched and settled during recessions in Brazil.  KPMG acted as financial advisors for Danica (with Bunce heading up the team). The financial terms of the deal remain confidential but involved substantial equity and debt finance injections into the newly merged business and some cash-out to the pre-existing Danica shareholders.  The plan for the merged business is to double the combined revenue by 2020.  At the current time the joint company, titled DanicaZipco, has an annual turnover of around R $600m.

What role did you play in securing the deal?

Nevermann is a longstanding contact of mine and because of that I was anxious to ensure he achieved his dream deal. It was my job (and my team’s) to conduct a process to identify and select an appropriate financial partner for the Danica business in LATAM and to lead the negotiations for the deal.

It took a while but then the client had specific requirements and preferences. Also, when we were originally contracted it was on the back of the global financial crisis which, of course, wasn’t ideal timing from a market perspective.

Was the deal complex to negotiate? What were the challenges and how did you manage to overcome them?

This did indeed prove to be a complex deal.  One of the biggest hurdles was timing. The main investor community for this model was private equity but we initiated the project in 2009 – a year of slow-down in economic activity in Brazil. As a result there wasn’t much of an appetite from the majority of private equity funds in the country at the time.

To compound this, Danica was in a specialist sub-sector. It was one which wasn’t a priority for many funds in the first place and meant we had to undertake a lot of marketing to explain to potential investors what it was they would be getting involved in.

Given initial difficulties with the PE community, conversations were also opened and maintained with a number of strategic investors.  Such investors had their own predefined strategy – one that was often ‘at odds’ with the ‘dream‘ of our client.

Ultimately, we found a match in this regard with Pátria, a traditional PE house based in São Paulo (currently 50% owned by Blackstone), which already had an investee company (Zipco) in this sub-sector. The deal saw Pátria and Zipco founder Luiz Priori emerge with a 56.5% stake in the new group while the Nevermann family holds the remaining 43.5%.

Further complexity was added to the deal by the fact it was a two-way deal ie the need to simultaneously merge Danica and Zipco and to promote a new subscription into the combined DanicaZipco by Pátria. In effect, it meant we were buying and selling at the same time.

Ultimately though it felt extremely satisfying to get the deal our client had been looking for all along. I’ve been out here in Brazil for more than three decades now and I’d say this was one of my top achievements, especially given my long-term work history with Per Nevermann.

If you were to do it all again would you have altered your strategy /performance in any way?

I might have tried harder to persuade my client more not to consult with strategics, given the low likelihood of their adherence to the desired model.

What does the future of M&A look like for Brazil from 2016?

It’s a great opportunity if you believe in the long-term future of Brazil and you happen to be in bargain-hunting mode. The same drivers are there that existed back when everyone was very pro-Brazil iethe country still has very impressive petroleum and mineral reserves. It is also still one of the very few countries in the world with significant opportunity to expand agricultural production since there is plenty of land which could be converted to arable farming.

Brazil also has a huge population – of more than 200 million individuals – and I would say, the potential to grow the middle class even more in the medium-term future.

We’ll still be in recession by the end of this year but there will be a slow improvement in 2017 and more in 2018 (when there will likely be political change too). I’m optimistic though that this year will result in relatively high volumes of M&A activity and that KPMG Corporate Finance will benefit from this.