By Guillermo Parra-Bernal and Aluísio Alves

SAO PAULO, July 2 (Reuters) - Mergers and acquisitions in Brazil are expected to gain steam by the year-end as economic and political risks ease, helping companies and private-equity firms scouring for takeover targets focus on tapping the country's long-term potential.

Three years of sub-par economic growth, a weaker currency and declining profits have driven asset prices lower and boosted the appeal of takeover targets. But some acquisition hunters could remain cautious ahead of a presidential election in October, making it harder for bids and offers to converge before then, bankers said.

Companies announced about $28.328 billion worth of deals in Brazil in the first half of the year, up 34 percent from $21.006 billion in the same period in 2013, a quarterly Thomson Reuters report on M&A activity showed on Wednesday. About 221 deals have been announced so far this year, down from 303 a year earlier.

Strategic buyers are brushing caution aside and seeking greater exposure to Brazil, some in search of a specific asset, others to tap the country's massive consumer base and need for infrastructure. Buyout firms are also on the prowl, eyeing targets in sectors such as financial services and technology, while also looking to exit some investments.

"There are sectors in which the only way for some players to grow in Brazil is through M&A," said Fernando Iunes, global managing director for investment banking at Itaú BBA. "Sooner or later, these players will buy assets in Brazil to avoid seeing their cost of opportunity grow."

Michelin & Cie SCA, American Tower Corp and KKR & Co LP were among companies that raced to seal takeovers last quarter. The weakest start for local equity markets in six years is helping fan takeovers, providing capital for firms and shareholders alike, said Patricia Moraes, JPMorgan Chase & Co's head of investment banking in Brazil.

But the flow of deals fell in the second quarter as election uncertainty, slower activity during the World Cup and weak confidence delayed the conclusion of some deals. The number of transactions fell to 104 from 117 in the prior quarter, although total deal value rose 3.3 percent to $14.396 billion.

Luiz Muniz, head of Latin America investment banking for Rothschild, said he is not worried about the slowdown, and is encouraged by increased activity in deals of greater complexity such as inbound cross-border takeovers, de-listings, corporate reorganizations, debt restructurings and spin-offs.

Veteran dealmaker Muniz and peers expect M&A activity to gather steam, especially during the fourth quarter.

An example of this is Banco Santander SA's plan to buy the stake it does not own of Banco Santander Brasil SA for $6.5 billion - this year's biggest deal so far.

 

BALANCE

Deals such as Santander Brasil's reflect a balance between buyers' optimistic perception about Brazil's long-term prospects and attractive M&A valuations in some sectors, said Marco Gonçalves, head of M&A for Grupo BTG Pactual SA.

"With valuations at these levels, people looking at the long run want to take on more risk," Gonçalves said. "Bidders feel they can offer better premiums than equity markets to a seller."

In the first half, Banco Santander and Itaú BBA topped league tables in terms of deal value and number of transactions, respectively. BTG Pactual ranked second in number of deals, while Rothschild took the No. 2 slot in value of deals.

Santander has worked on 14 deals this year worth a combined $15.16 billion, the report showed. Santander and Rothschild are working together on the Santander Brasil deal, which is expected to be concluded in October.

Rothschild, which has advised on some blockbuster deals since setting up shop in Brazil in 1989, worked on nine deals worth $12.96 billion in the first half.

Itaú BBA, which helped Fertilizantes Hering SA with its sale to Morocco's OCP International last month, has advised on 36 transactions this year worth $11.06 billion.

 

IN THE RAIN

Some bankers worry that newcomers lack the conviction that long-standing players have about Brazil's potential. Uncertainty over growth, inflation and future economic policy decisions could cloud the M&A outlook.

"Those who have been in the rain for longer will be more predisposed to venture into new things, unlike those who don't know the risk," said Flavio Valadão, Santander's managing director for M&A and equity capital markets in Brazil.

Valadão foresees M&A flourishing in areas where government intervention tends to be limited.

The economy is cooling abruptly and economists do not see a major rebound next year. While the downturn has had limited impact on the nation's job market, profits are suffering.

Concerns about Brazil's outlook could drive smaller rivals to give in to takeovers, said Venilton Tadini, chief executive of mid-sized Banco Fator SA, which joined the ranks of Brazil's top-10 M&A advisors. Once the election is over, disagreements over price between bidders and sellers will abate further, he added. (Editing by Todd Benson and Andre Grenon)