Highlights of BrazilAn overview of Brazil’s performance during the 2008/2009 international financial crisis December 2009

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Index

Foreword 2

Joining the blocks and paving the way for success 4

Macroeconomics 6

Main economic indicators 18

M&A market 20

Private Equity 24

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Foreword

The economic impact of the global financial crisis and demand downturn has been less severe for Brazil then for the USA, Europe and Asia. This is a consequence of successful long term combined public and private effort to growth. A combination of factors such as more than fifteen years of political stability, search for fiscal discipline, strong international reserves, solid macroeconomic indicators (based on a strong focus on inflation control) and strengthening of the middle class consumption power led Brazil to this position.

Also, it need to be said that the government reacted quite promptly with the implemetation of anticyclical measures to sustain consumption level of durable goods and credit flow, particullary for the automotive and construction industries and for households. These measures contributed to lower unemployment rate and for economy recovery.

Brazil has overcome the turbulent international 2008/ 2009 economic scenario and international crisis stronger and more attractive. Brazil is the first Latin American country and, probably one of the first countries worldwide, to emerge from the international recession context.

Albeit the global environment remains difficult and the export sector therefore continues to struggle - also as a result of a strongly appreciated real - the size of Brazil (2009 GDP estimated at US$1.6 trillion) and the strength of its domestic demand (60% of the GDP) has propelled the economy to the start of a recovery.

A high degree of diversification of its economy and trading partners, as well as a solid financial system – leveraged by active regulators and Central Bank, have also helped to mitigate the effect of the crisis in Brazil.

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Vigorous growth before…and after the 2008/2009 international crises

One year after Lehman Brother’s bankruptcy, the start of the international financial crisis, the public awareness grows that Brazil was one of the most successful countries in fighting the crisis. While most of the countries recovered slowly, Brazil appears to be one of the first countries to leave the crisis behind.

Financial and strategic investors are seeing these opportunities and know they have to be in Brazil. Cross border merger and acquisitions and strong capital markets will play an important role.

Brazil was selected as the venue for soccer’s 2014 World Cup. Rio de Janeiro was voted to host the 2016 Olympics. Long term strategies and investments (including pre-salt oil exploration opportunities) are now on top of the agenda. Indeed, Brazil is a tremendous potential economic powerhouse.

The country’s social and economic unbalanced income distribution are also being addressed. The government has made significant progress in attacking poverty.

This effort is expected to bring results in the medium & long term. Some regions, namely the northeast, now have the challenge to reach out to opportunities that are already available for the rest of the country.

Brazil deserves close attention while its preparing itself for the future. The country has huge infrastructure demands, and a need for further public and private investment in education and healthcare. Top priorities on the government’s agenda should include structural tax reforms and tight control on government expenses to spur the country’s economic growth.

PricewaterhouseCoopers is teaming up with the country and its leadership to explore these opportunities. The material presented herein aims to provide the reader with new insights supported by historical statistical data, of why Brazil has performed such way during the crisis, and the implications on the Mergers and Acquisitions market. It presents the country’s “response to the crisis”.

Joining the blocks and paving the way for success

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High/stable foreign exchange reserves

Growth potential and regional leader

Strong internaldemand

(60% of GDP)

Size – US$ 1.6 trillion(2009 estimated GDP)

Solid macroeconomic indicators

Fiscaldiscipline

Massive naturalresources

+15 years of political stability (democracy)

Strong financial system (public and private)

Diversifiedexports base

Active and independent regulators and Central Bank

Credit - Room for expansion

(real estate/consumer)

Critical now for Brazil is to crystalize the fundamentals and pave the way to sustained growth and success

Macroeconomics

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After experiencing a period of vigorous economic growth from 2003 to 2008 and improvement of macroeconomic fundamentals, Brazil acquired the ability to implement macroeconomic policies to fight economic and financial crises

Brazil’s economic recession has proven relatively short following a return to growth in the second quarter of 2009

Brazil endured a relatively short economic recession in 2009, while the developed world is experiencing a wider, harder and longer one. Economic growth already re-bounced in Q2 2009 with 1.9% GDP growth on a quarterly basis, after two consecutive quarters of contraction.

The Government´s anticyclical economic stimulus package, that was promptly implemented by regulators and the Central bank, reduced the impact of the liquidity crunch and its potentially damaging results.

After experiencing a five year period (2003 to 2008) of vigorous economic growth and an improvement of macroeconomic fundamentals, Brazil acquired the ability to implement financial and economic stimulus policies to fight crises.

Expansion of the monetary policy through reduction of compulsory reserve and interest rates as well as the implementation of an aggressive economic stimulus policy involving tax reductions, (reducing taxes on Industrial Products (IPI) such as automobiles, trucks, building construction materials, kitchen appliances and capital goods, among other products), tax

refinancing programs (REFIS), expansion of public investments, housing (“Programa Minha Casa Minha Vida”) and agriculture programs (“Plano Safra”) and active credit expansion to public and private banks are showing results.

Brazil’s recovery was founded on a range of stimulus measures designed to stimulate internal consumption. Credit also has played an important role and achieved some 45% of GDP in 2009. Brazil has created new jobs and unemployment rates have gone down. Public retail sales data indicate consumer spending is recovering.

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Did youknow?

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• Brazil has the fifth largest population after China, India, the United States and Indonesia.

• Its largest city is São Paulo, with some 11 million people in the city and 18 million in the whole São Paulo metropolitan area; 20 other metropolitan areas in the country have more than 1 million inhabitants.

• Population:

• c.190 million people (5th largest populationin the world):

• 70% of the people are concentrated in the Southeast and Northeast regions.

• 80% of the population live in the urban area.

• 30% of the population lives in the ten largest cities.

• 2008 GDP contribution:

• 30% - agriculture and agribusinesses.

• 40% - industrial activity.

• 30% - banking and services.

• Primary economic sectors: agriculture, automotive, utilities, transport, industrial products, mining and energy.

• Brazil trades regularly with over one hundred nations, with 74% of exports represented by manufactured or semi manufactured goods. Its main partners are:

• EEC (representing 26% of the balance).

• US (24%).

• Mercosul/ Latin America (21%).

• Asia (12%).

• Brazil became Investment Grade in 2008/2009 (S&P, Moodys and Fitch). This has attracted long-term investors, particularly big endowments, pension funds, and insurance companies.

• BM&F BOVESPA is the world’s third largest Stock and Futures exchange in terms of market capitalization.

• A new corporate law introduced in the beginning of 2008 is converting local GAAP towards IFRS.

Main economic indicators

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2009(1) 2008 2007 2006 2005 2004 2003

GDP (US$ billion)(2) (Jan/Oct) 1426.7 1573.0 1334.0 1089.0 882.0 664.0 554.0

Real GDP growth (% per year) 5.1 5.7 4.0 3.2 5.7 1.1

Unemployment rate (% of labor force) (Sep) 7.7 6.8 7.5 10.0 9.9 11.5 12.4

General price index - IGP-DI (% per year) (Oct) (1.4) 9.1 7.9 3.8 1.2 12.1 7.7

Consumer price index - IPCA (% per year) (Oct) 3.5 5.9 4.5 3.1 5.7 7.6 9.3

Exchange rate at year’s end (R$/US$) (Oct) 1.75 2.39 1.78 2.18 2.44 2.93 3.08

Exchange rate change (% per year) 34.1 (16.9) (5.9) (15.8) (7.1) (19.3)

Publicsectordeficit (% of GDP) (Aug) 5.6 2.0 2.6 5.2 6.6 2.3 4.6

Public sector debt (% of GDP) (Oct) 44.8 38.8 43.9 45.9 48.0 48.2 53.5

(in US$ billion)

Goods export (Oct) 125.9 197.9 160.6 137.5 118.3 96.5 73.1

Goods import (Oct) 103.3 173.0 120.6 91.4 73.6 62.8 48.3

Trade balance (Oct) 22.6 25.0 40.0 46.1 44.7 33.7 24.8

Current-account balance (Sep) (11.9) (28.3) 1.5 13.6 14.0 11.7 4.1

International reserves (Nov) 237.5 206.8 180.3 85.8 53.8 52.9 49.3

Foreign direct investment(3) (Oct) 19.2 45.0 34.6 18.8 15.1 18.1 10.1

Total foreign debt (Jun) 199.0 262.9 240.5 199.4 188.0 220.2 235.4

(1)2009figuresarebasedonthelastpublisheddata.(2) At the year-average exchange rate. IBGE(3) Including intercompany loans.

M&A market

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The world M&A activity was significantly impacted by the international financial crisis. Uncertainty, liquidity constraints, market losses and uncertainties affected overall investments and economic activity. M&A activity went down 11% in terms of number of deals for the accumulated Q3 2009 (27,000 announced deals) in comparison to accumulated Q3 2008. The value of announced deals totalled US$ 1.46 trillion for the first nine months of 2009, a 38% decrease compared to 2008 levels and the lowest first nine month period for M&A since 2004 (1).

In Brazil, M&A activity went down by 10% in terms of number of announced deals(January to October 2009 against same period in 2008)

Emerging markets M&A activity during the first nine months of 2009 reached US$ 309.8 billion, a 44.3% decline compared to the equivalent period of 2008 (1).In Brazil, M&A activity went down by 10% (January to October 2009 against January to October 2008) in terms of number of announced deals. Mid market activity remains strong and is expected to drive M&A activity in 2010.

In the period between January to October 2009, 509 deals were announced in Brazil. Foreign investors accounted for c.40% of the announced transactions, recovering to levels similar to the pre crisis period. Private equity backboned deals represented 29% of the announced transactions a record level.

Majority stake (purchase of a controlling interest or up till 100% of the voting rights) related transactions accounted for 52% of all announced transactions, while minority stakes accounted for 30%. Strategic and financial investors are participating aggressively in Brazil and bouncing back overall investments in the ‘real’ economy.

Monthly analysis of deal flows demonstrate that M&A activity in Brazil is at high levels. From July to October 2009 the average announced number of deals reached 63 per month, compared to a first and second quarter average in 2009 of 46 deals per month.

(1) Source: Thomson Reuters and PricewaterhouseCoopers reports.

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From January to October 2009, a 10% decrease in the number of announced deals was registered

For the full 12 month 2009 period, we foresee that Brazil will experience a similar level of M&A activity as in 2008

2010 should experience record levels

The second half of 2009 is having a higher average number of announced deals than 2007, which was, worldwide and in Brazil a very active year

(average of 63 announced deals per month in the period between July and October 2009, against 60 in 2007. First half of 2009 has an average number of 46 deals per month)

Announced number of deals - period

Announced number of deals - monthly analysis

Source: PwC Brazil Corporate Finance research/announced transactions; 2002 to 2008: January to December/2009: January to October.

0

100

200

300

400

500

600

700

800

2002 2003 2004 2005 2006 2007 2008 2009

395

337

416389

573

721

643

509

0

10

20

30

40

50

60

70

80

2008

/Jan

2008

/Feb

2008

/Mar

2008

/Apr

2008

/May

2008

/Jun

2008

/Jul

2008

/Aug

2008

/Sep

2008

/Oct

2008

/Nov

2008

/Dec

2009

/Jan

2009

/Feb

2009

/Mar

2009

/Apr

2009

/May

2009

/Jun

2009

/Jul

2009

/Aug

2009

/Sep

2009

/Oct

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Announced number of deals – per sector

January to October 2009

Other sectors totalled 214 deals and include sectors such as education, retail, public services, industrials, healthcare, etc.

Source: PwC Brazil Corporate Finance research/ announced transactions; 2002 to 2008: January to December/ 2009: January to October.

0% 2% 4% 6% 8% 10%

10%

10%

9%

6%

6%

6%

5%

5%

Food/Beverages

IT

Finance

Services

Mining

Chemical/petrochemical

Construction

Logistics

51

51

50

31

31

31

25

25

Announceddeals

Private Equity

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Worldwide, private equity backed M&A activity totaled US$ 38 billion during the first quarter of 2009. With a 67% decrease in comparison with the same period in 2008, the market was strongly affected by reduced availability of credit (affecting leveraged deals) and overall market uncertainty (1).

After the international financial crisis, fundraising will become more competitive which will likely lead to smaller funds, smaller deals and less leveraged transactions. Turbulences also affected investments in the ‘real’ economy and it is possible that investments will become, on a worldwide basis, more difficult.

In Brazil a different context is observed. Private equity activity reached record levels representing 29% of the announced deals in the January to October 2009 period. This share, which was 15% in 2007 and 20% in 2008, reflects aggressive private equity investment strategies and consolidation of various sectors – in terms of number of announced deals, Brazil reached already a new record with 147 transactions in the January to October 2009 period. Important to note is that the private equity players do not rely heavily on financial leverage in Brazil, and therefore, were less affected by the international crisis and liquidity constraints.

Private equity activity has reached record levels in Brazil representing 29% of the announced deals in the January to October 2009 period

Capitalized and with c. US$ 15 billions available for investments, a significant part of private equity activity in Brazil has involved consolidation opportunities. In 2007, 2008 and 2009 the main acquisition targets for funds were the food and beverages industries (which represented some 18% of the investments made in 2009 – for a sector which has an overall 10% share of Brazilian M&A market), real estate/ shopping malls, as well as, companies in the construction, consumer goods, IT, education and financial sectors. Additionally, deal size started to increase from the small- to mid- market transactions that have historically dominated the market.

In the past three years, regulations have also improved, taking into account the sophistication and complexity of private equity transactions. In 2004, the Comissão de Valores Mobiliários (Brazil’s financial regulator) introduced specific regulation for private equity activity requiring higher levels of corporate governance and transparency.

(1) source: Thomson Reuters and PricewaterhouseCoopers reports.

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For the Private Equity industry, differentiation will become critical. Combination of experienced GP’s, country and industry knowledge and transparency will impact fund raising capacity and returns

In this context we believe there are at least 6 hot topics to be considered for the private equity industry:

(1) Differentiation will become critical

(2) Sustainable growth becomes of paramount importance (for LPs, GPs and portfolio companies)

(3) GP’s and portfolio companies will have to build a robust business model

(4) Returns and responsibility will convey

(5) Fair value (portfolio companies valuation) will be in the spotlight

(6) Tax structures will be addressed on a worldwide perspective and may be a differential

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Private Equity – Deals per sector

January to October 2009

Private Equity Deals

(2007 and 2008: January to December; 2009: January to October)

Other sectors totalled 35 deals.

0% 4% 8% 12% 16% 20%

12%

7%

18%

13%

6%

5%

4%

4%

3%

3%

IT

Construction

Food/Beverages

Finance

Healthcare

Services

Education

Logistics

Chemical/petrochemical

Retail

10

7

6

6

5

5

9

18

19

27

Announceddeals

15%

20%

29%

85%80%

71%

11%

89%

63

108

128

147

0

100

200

300

400

500

600

700

800

2006 2007 2008 Jan - Oct/09

Strategic Private Equity

515

362

613

510

Source: PwC Brazil Corporate Finance research/announced transactions; 2002 to 2008: January to December/2009: January to October.

Contacts:

Luís Madasi[55](11) 3674-2651luis.madasi@br.pwc.com

Márcio Vieira[55](11) 3674-3950marcio.vieira@br.pwc.com

Rogério Gollo[55](11) 3674-2333rogerio.gollo@br.pwc.com

Alexandre Pierantoni[55](11) 3674-3666alexandre.pierantoni@br.pwc.com

Antonio Toro[55](11) 3674-2651antonio.toro@br.pwc.com

Fabio Niccheri[55](11) 3674-3603fabio.niccheri@br.pwc.com

pwc.com/br

©2009 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. Version: December/2009