PBR Petroleo Brasileiro ADR

By Jeffrey T. Lewis and Rogerio Jelmayer 

SÃO PAULO -- For investors flush with cash -- and calm -- Brazil's beatdown assets are looking attractive.

Some of the country's most prominent businesses, including oil company Petróleo Brasileiro SA and iron mining giant Vale SA, are selling assets at the cheapest level in years amid an economic and political meltdown.

These and other Brazilian companies are scrambling to cut debt through divestment. Petrobras and Vale alone are looking to dump as much as $20 billion in assets, making Brazil enticing for investors with the right risk profile.

"Private-equity investors see a country that's good for long-term investment," said Fernando Borges, managing director and co-head of private-equity firm The Carlyle Group in Brazil and South America. "Brazil is a big country, which a big young population and a big middle class...now could be a good time to get in."

Vale, the world's biggest iron-ore producer by revenue, has been hit by the drop in the price of the commodity. The mining company said in February it would consider selling even core assets to cut the $25 billion in debt it had at the end of 2015 to $15 billion within 18 months. That is on top of an existing program to sell $4 billion to $5.5 billion of noncore assets.

Petrobras, which has been hobbled by an epic corruption scandal and the steep decline in the price of oil, has said it wants to divest itself of $15 billion in assets by the end of 2016, and another $42 billion by the end of 2018 in an effort to cut its huge debt.

The company has put its Argentine unit on the block, along with some power distribution operations, part of a natural-gas distribution business and various less-prized oil fields, among other assets. The broad range of assets for sale is even attracting some local rivals in better financial shape than the oil company.

"Petrobras has interesting assets that we're going to take a look at," said Rubens Ometto, chairman of Cosan SA, a Brazilian producer of sugar and ethanol. He cited natural gas as an area his company is eyeing. Brazil has the world's biggest fleet of cars that can run on either gasoline or ethanol, and Cosan has a joint venture with Royal Dutch Shell that distributes both fuels around the country.

But it isn't just big companies that are being forced to sell. Brazil's economy contracted by 3.8% in 2015 and is expected to shrink at about the same pace this year.

The brutal downturn has seen a surge of companies seek bankruptcy protection. In the first quarter alone, 409 Brazilian companies sought relief, more than double the figure in the same period a year earlier, according to Serasa Experian.

Companies in financial distress are natural takeover targets. Brazilian investment banks are seeing a lot of interest from international investors looking for potential mergers and acquisitions in Brazil, and activity is likely to accelerate through the end of the year, according to Alberto Fernandes, vice president of Itau BBA, the investment banking arm of giant bank Itau Unibanco Holdings.

The volume of M&A operations in Brazil totaled just 109 billion reais last year, down from 192.7 billion reais in 2014, according to Brazilian Association of Financial and Capital Market Institutions, or Anbima.

Investors looking for quick gains should take heed. Even at today's knockdown prices, many Brazilian assets could take years to turn a profit given the current turmoil.

"Brazil is for investors who are looking for a return in a horizon of 10 years," said Martin Escobari, director of Latin America operations of U.S.-based private-equity firm General Atlantic. "You have to have the capacity to get through this period, because there will be a lot of volatility in the next two years."

The volatility stems from several sources. There is the Operation Car Wash corruption investigation centered on Petrobras, which is far from over and still weighing heavily on the nation's important petroleum and construction sectors.

The economy is foundering, suffering its biggest contraction in 35 years in 2015.

And the impeachment effort against leftist President Dilma Rousseff is a process that markets have cheered, but which is unlikely to lead to a quick economic turnaround.

While regime change is in the air, the government's legacy of meddling in key sectors of Brazil's economy has some investors still waiting on the sidelines to take the measure of a possible post-Rousseff government.

A good example is Brazil's ailing electricity sector. Retail price controls implemented under Ms. Rousseff battered energy distributors and discouraged some generators from making additional investments.

Those controls have been lifted but investors remain wary. On Wednesday, Brazil's government tried to auction 24 concession contracts for transmission lines; it received bids on only 14.

Government interference has created "serious doubts" about the stability of Brazil's regulatory framework, according to Alexandre Furtado, an analyst at Lopes Filho & Associados in Rio de Janeiro.

Write to Jeffrey T. Lewis at jeffrey.lewis@wsj.com and Rogerio Jelmayer at rogerio.jelmayer@wsj.com

(END) Dow Jones Newswires

April 15, 2016 15:35 ET (19:35 GMT)

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