Q&A: M&A in Latin America

July 2023  |  SPECIAL REPORT: MERGERS & ACQUISITIONS

Financier Worldwide Magazine

July 2023 Issue

FW discusses M&A in Latin America with Pablo Andres Artagaveytia at Marval, O’Farrell & Mairal and Sergio J. Galvis at Sullivan & Cromwell LLP.

FW: Could you provide an overview of some of the major factors currently driving M&A opportunities in Latin America? How would you describe recent deal activity?

Artagaveytia: The Argentine market remains attractive, despite the challenging conditions in the region at present. The country is facing general elections in October 2023, and the expectation is that the next government will open the market up to promote the necessary investments required to develop the Argentine economy. Due to the macroeconomic circumstances and the partial uncertainty of an election year, it is possible to acquire high-potential assets in different areas, including agribusiness, mining, renewable energies and oil & gas, at lower values than those recorded in previous years. Additionally, due to high inflation and foreign exchange regulations that limit the transfer of dividends abroad, local profitable companies are acquiring assets in strategic sectors in order to place their local earnings in hard currency and preserve their value. This situation is currently driving the local M&A market and presents a new scenario of significant opportunities for the acquisition of assets and companies at convenient values. Argentina also has additional potential in terms of energy and oil & gas.

Galvis: Recent deal activity in the region has decreased compared to 2022, due in part to a complex political environment in some of the biggest countries in the region, including Brazil, Argentina and Peru. High interest rates coupled with varying levels of inflation have also dampened M&A activity. M&A opportunities are generally driven by certain sectors and types of assets and do not necessarily follow the trends observed in other geographies.

FW: Which industries or sectors are experiencing higher transaction volumes? Have any recent, notable deals caught your eye?

Galvis: Copper, gold and molybdenum mining in the Andean region continues to attract the attention of mining companies of varying sizes. Increasing interest in lithium mining is likely to result in significant M&A deal flow, given Latin America’s large untapped reserves. The technology and financial services sectors have been growing steadily and attracting the interest of foreign private equity investors, resulting in a significant flow of small and mid-size M&A deals. Significant investor attention in the renewables space has grown in recent years as well, focused primarily on Brazil and Chile.

Artagaveytia: Even though Argentina is considered a very relevant player in the food and agribusiness markets, the technology, media and telecommunications (TMT), energy & resources, food and agribusiness, life science and financial services sectors have accounted for close to 90 percent of M&A activity in Argentina over the past year. In terms of value transacted, most of the investment flow was related to the TMT sector, most notably to IT services and e-commerce, as well as energy and resources, where the most active subsector was lithium, followed by renewable energies. In the food and agribusiness sector, transactions were quite varied, but were mainly related to agribusiness, food and beverages, and the forestry and fishing subsectors. In life sciences, we may see some transactions related to the purchase of pharmaceutical companies. Finally, in the financial services space, there have been transactions related to cryptocurrencies and virtual wallets, among others.

“Increasing interest in lithium mining is likely to result in significant M&A deal flow, given Latin America’s large untapped reserves.”
— Sergio J. Galvis

FW: How would you characterise the impact of the macroeconomic and geopolitical developments on M&A activity in the region? In what ways have buyers and sellers responded?

Artagaveytia: Among the major global macroeconomic and geopolitical events that had a significant impact on M&A activity in the region were the war in Ukraine, the coronavirus (COVID-19) pandemic and looming recession. This has created a complex and uncertain business environment, with supply chain constraints, high inflation and other challenges, which have led to a slight decline in activity as a result of global financial volatility and high levels of risk adversity that caused a lower flow of liquidity to Latin American economies. However, uncertainty can also lead to opportunities for growth and expansion through M&A activity. This is because financially stronger companies may seek to take advantage of the opportunity to acquire distressed businesses at a reduced price. In addition, the current economic situation may lead to a market consolidation as smaller companies may need to merge with or be acquired by larger companies to remain competitive in an uncertain and potentially recessionary environment. In turn, macroeconomic and geopolitical volatility is not expected to affect all market players in the same way, creating advantages for some and challenges for others. Additionally, it is expected that the increase in energy prices generated by the conflict between Russia and Ukraine may motivate transactions in the energy, resources and industrials sectors. Furthermore, the financial services sector is expected to experience solid M&A activity due to strong revenue growth, high profitability and positive macro trends, such as high savings rates and anticipated high inflation. Finally, the life sciences and healthcare sectors are expected to see many M&A transactions as, since the pandemic, consumers have become accustomed to alternative methods of service delivery, so demand for virtual care and automated medication management is expected to continue to grow.

Galvis: Trade competition between the US and China has created M&A opportunities for supply chain sectors, with companies aiming to reduce their dependence on Asian manufacturing. In light of political developments in the region, the US private sector, which traditionally has led foreign investment in the region, is likely to be cautious with new investments for the remainder of 2023. Canadian investment, particularly that of pension funds in infrastructure, continues to grow.

FW: Do you expect greater levels of protectionism and foreign direct investment (FDI) scrutiny across Latin America? If so, how do you see this affecting dealmaking?

Galvis: Protectionism may increase in certain jurisdictions where governments attempt to increase controls on key sectors or assets. This can lead to a more challenging regulatory environment, or more extreme de facto intervention and bans on foreign investment. For dealmakers, regulatory uncertainty and the risk of de facto expropriation risk can be a powerful deterrent. But because these are somewhat customary risks in emerging markets, they are typically priced in and partly offset by the higher returns on investment that some Latin American economies offer.

Artagaveytia: Although the current Argentinian government has certain protectionist tendencies, with its term in office ending this year it is expected that a new government that promotes investment and productive sectors of the country’s economy will take office. It is expected that transactions already underway will continue, regardless of who forms the next government. To promote the development of projects in the lithium and oil & gas sectors, which are highly relevant for the local economy, it is expected that the new government will promote measures that favour investment in assets and companies in these specific sectors.

FW: To what extent have you seen a change in the way deals are executed in the current market? Have acquirers enhanced their approach to risk management and due diligence?

Artagaveytia: A practice that has increased in the local M&A market is the inclusion of different price adjustment clauses, such as earn out and phantom shares clauses. Due to the uncertainty caused by the current political and macroeconomic context, sellers must try to obtain higher incomes for their companies or assets and acquirers must adopt new strategies to reach competitive prices. This type of clause works as a solution to compensate the interests of both parties in an M&A transaction. Through an earn-out clause, the seller and the acquirer will agree that a difference in price will be paid if the acquired company or assets achieve a financial or economic performance within a certain period, which is usually no more than two years. This allows the deal to be completed even if there is a price gap. If the performance is achieved, the acquirer will pay a price difference in favour of the seller.

Galvis: Since the pandemic, there has been increased focus on diligence to better understand the risks inherent to business activity in a particular jurisdiction, as opposed to the risks and challenges presented by the pandemic. Many deals in the region are between privately held businesses without direct market comparables, which can result in increased focus on liability risk allocation and valuation issues in deal documentation.

“The Argentine M&A market is at a delicate point and may experience exponential growth over the coming years.”
— Pablo Andres Artagaveytia

FW: What general advice would you offer to parties on planning, negotiating, structuring, financing and closing successful deals in Latin America? What key issues need to be considered?

Galvis: Overall, it is important for parties to stay true to the key factors they value in their M&A deals. At the same time, they should work with top-notch international and local legal and financial advisers, as well as look for creative commercial solutions to overcome obstacles. Make sure the final agreements stay true to the core objectives and risk allocations that underlie the investment thesis of the transaction.

Artagaveytia: As a first point, we suggest that parties involved in an M&A transaction perform exhaustive due diligence of the target company. Due diligence processes should include corporate, compliance, tax, accounting, financial and regulatory aspects, particularly in those companies with regulated activities, such as mining and telecommunications. It is essential that parties determine the viability of the target company’s business, for which it is important to identify regulatory aspects and specific rules of the target company, as well as the most relevant contracts that the company has entered into with third parties and the public sector. Additionally, a tax planning analysis is fundamental to establish the structure of the transaction. Another key point is to establish the applicable law and jurisdiction in the event of dispute between parties. These are the main topics that must be decided. Finally, we would also suggest that parties assess the possibility of developing the business with a local partner.

FW: How buoyant do you expect M&A activity across Latin America to be through the remainder of 2023, and beyond? Will acquirers need to continue to adapt their M&A strategies to navigate challenges and take advantage of opportunities?

Artagaveytia: The local M&A market in Argentina will hinge on the outcome of the general election and the future of the new government’s macroeconomic policies. The idea that a new government will be open to foreign investments and reluctant to maintain exchange restrictions has created an expectation that the M&A market in Argentina will change for the better. To that end, and regardless of the political situation, we understand that projects of relevance to the Argentine economy will develop quickly, particularly in the short and medium term, which will also have a positive impact on M&A activity. Regarding the transactions that will take place in the second half of 2023, the parties involved in each transaction will have to adopt strategies to carry out deals in uncertain conditions, such as implementing price adjustment clauses, including earn out and phantom shares clauses, to set appropriate price conditions. The Argentine M&A market is at a delicate point and may experience exponential growth over the coming years. For buyers, there will be opportunities to acquire assets and companies at competitive prices and to obtain significant results in the medium and long term.

Galvis: Although it is hard to make a prediction across the region, it is likely that M&A volumes by aggregate dollar value may not increase over last year. From an investor’s perspective, each country in Latin America must be examined separately, as each has a singular economic, political and regulatory environment, and presents varying opportunities and challenges. Unfortunately, political and social instability affecting some countries in Latin America may continue for a while. This can delay the development of strategic resources, including those needed for a successful and timely global transition to cleaner energy. Investors should continue to seek opportunities in strategic sectors with attractive long-term prospects.

 

Pablo A. Artagaveytia joined Marval O’Farrell & Mairal in 1995 and became a partner in the firm in 2000. His area of specialisation is commercial and corporate law. He is a member of the managing board and head of the corporate department. His professional work includes all areas of commercial law, advising on stock purchase agreements, distribution agreements, legal auditing, structuring of local companies, foreign business operations and general legal assistance, particularly focusing on the Mercosur region. He can be contacted on +54 (11) 4310 0100 or by email: paa@marval.com.

Sergio Galvis is a leading corporate lawyer in the US who is known for his cross-border work, especially in Latin America. He joined Sullivan & Cromwell (S&C) after graduating from Harvard Law School and clerking for the Honourable Lawrence W. Pierce, Second Circuit US Court of Appeals, and has been a partner of the firm since 1991. He is a member of S&C’s management committee, oversees the firm’s recruiting function and leads its Latin America practice. He can be contacted on +1 (212) 558 4740 or by email: galviss@sullcrom.com.

© Financier Worldwide

THE PANELLISTS

 

Pablo Andres Artagaveytia

Marval, O’Farrell & Mairal

 

Sergio J. Galvis

Sullivan & Cromwell LLP

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