Following a global trend that began in the 1980s in the international market with the United States and then Europe, Brazilian forest-based companies have experimented, over the last 20 years, with new strategies for capitalizing their assets. The demobilization (sale) of assets or the search for partnerships for forest expansion are examples of strategies that attracted new investors to the country interested in the potential return of forestry activity in Brazil.
As they are linked to an industrial chain with a consolidated market, forestry assets are currently seen by financial institutions as a possible way of allocating their clients’ investment, which is why they have emerged in mergers and acquisitions.
Investments in forest assets are also an interesting strategy to meet the worldwide demand for environmentally and socially responsible investments. In addition to supplying the global demand for wood in a sustainable way, planted forests generate a series of other benefits, such as reducing the concentration of greenhouse gases in the atmosphere and generating carbon offsets for business groups. It is no wonder that responsible forestry investments are becoming more and more frequent in the investment portfolio of national and international investors.
Commonly known as mergers and acquisitions (M&A), mergers and acquisitions of assets is one of the activities offered by institutions that work with investment banking, a business area that helps companies access capital markets to expand their business or raise funds to cover some operational need.
The main objective of the idea of trading forest assets in M&A operations is precisely to create business structures that solve the particular needs of the companies involved and that leverage their growth, increasing their competitiveness in certain markets. In addition, M&A operations in the forestry sector have been observed in situations where professionalization and efficiency gains in asset management are sought, having on the one hand the holder of an asset and on the other the holder of capital capable of promoting such changes.
Although the term M&A is commonly used to address acquisitions of forest assets, it must be remembered that it encompasses two concepts: acquisitions and mergers. Acquisition is the purchase of a controlling interest in a company by another, where normally the acquiring company will assume the activity of the acquired company. Mergers, on the other hand, are a corporate strategy where companies associate to form a new venture, or even maintain the identity of the company that owns the asset, however, improving its management and efficiency, reducing costs by increasing scale and gaining marketing power through new investments with leveraged capital.
The M&A process of a forest asset usually has six steps, namely:
Data collection: In this step, the aim is to gather the necessary data to start the asset analysis process. As not all forestry companies keep the data on their assets organized and updated, it is often necessary at this stage to gather information primarily by a specialized company, such as carrying out a mapping and forest inventory to know the stock. of current and future forest volume.
Data organization and analysis: After data collection, it is necessary to organize them so that the entire team has access to the same information bank, to conduct the necessary analyses.
Valuation: Valuation of the asset is a necessary step to know its real market value before offering it to a potential investor. Usually sellers and buyers have different perceptions of the asset’s value, which is natural. This step serves precisely to verify that the project owner’s expectations are aligned and are reasonably proportional to the market value.
Structuring: Currently there are several possible business structures for a forest asset, in addition to its simple sale. Investment funds have learned, over the years, that creativity is necessary to offer different options and make a certain structure capable of solving the specific needs of the asset holder. Today, one can talk about transacting land and forest or just forest. One can talk about deals in different time horizons, involving one or more planting rotations. It is possible to sell, buy or even associate through a Joint Venture using different financial structures, such as debt, loans, sales lease back, repurchase and supply agreements, among others.
Marketing: Finally, after “organizing the house” it’s time to take the asset to the window, that is, offer it to potential investors. At this moment it is
necessary to organize a summary of the information in a teaser, which will be sent to potential investors. It is important at this stage to “open doors” through personal relationships and knowledge of the profile and approach of different investors, as well as knowing which ones to offer the asset to, so as not to waste time with investors whose profile does not match the characteristics of the business ;
Due diligence: A due diligence is a verification audit requested by the potential investor and organized and managed by the M&A company to verify that the asset’s conditions are really those informed by the owner. At this stage, investors will confirm whether the wood stock and asset area are in accordance with the owner’s information and whether there are environmental, technical and administrative liabilities that could affect the asset’s value. In parallel, legal and accounting audits are carried out and, in some situations, market surveys are carried out to prove the assumptions used in the valuation. As this is a technical and thorough verification, investors usually hire specialized companies, both in the technical, legal and accounting areas.
The efficient management of this step and all third parties involved by the M&A company is essential for the success of the transaction, as in addition to the entry of third parties in the negotiation, the results can raise new information, increasing the transaction risk for investors and creating needs solutions for resolving potential conflicts between the parties.
Perhaps the absence of an obvious phase in the process stands out in the above steps: negotiation. However, during the M&A process of a forest asset, negotiation takes place from the first contact with the owners of the assets and potential investors, until the closing of the negotiation (closing). Throughout the process, agreements to demonstrate interest and understanding between the parties must be formally established prior to the final agreement, in order to adjust the interests of the parties involved and direct the negotiation towards a closure.
The steps of a forest M&A process require technical knowledge of the forest activity and the asset, cultural knowledge of the nationalities of the groups involved, specific knowledge of the parties and their organizational culture, and the ability to conduct the negotiation in order to make divergent interests converge to the same direction.
In 2019, Grupo Index structured a specific department dedicated to the area of Forest Investment Banking, with a dedicated team with extensive experience in investments in forest lands and contacts with investment funds in Brazil and the United States. The networking and relationships built over the Group’s nearly 50-year history in the forestry sector are fundamental components for the creation of a pipeline of forestry/agricultural asset options and a portfolio of international and national investors interested in investing capital in South America.
In addition, Grupo Index has extensive experience in developing all the services required to support transactions (forest inventory, assessment, mapping, due diligence), which adds agility and technical strength to M&A projects.
