The purchase, sale, merger, and expansion of Latin companies today is unrecognizable from a quarter century ago. Relative economic stability and growth, tamed inflation and better resistance to global shocks has meant keener foreign buyers, local market consolidators and the creation of LatAm regional and global champions that would have been unimaginable in 1988.
In addition to more – and bigger – deals, many of the trends bankers identify in the region in the past two decades were apparent in 2013: Brazilian institutions continue to consolidate, regional leaders form, and companies hunt for growth.
“There were a lot of multinationals making their first investments in the region,” says Jim Allen, head of LatAm M&A at Morgan Stanley, describing the 1990s. “They would typically enter a joint venture or take a minority stake.” Most bankers were gringos, he says, and they had to be able to talk LatAm to superiors and clients who knew very little about the region. Now, of course, gringos are the exception on teams stocked with LatAm-born professionals.
Privatizations provided ample opportunities in utilities in the early days. US telephone companies used excess cash to buy into Latin America, as did Europeans such as Telefónica. A group of 12 acquirers paid $19 billion for the 12 pieces of Brazil’s Telebrás in 1998. Industrials made moves, too. They joined a handful of consumer-focused companies that had been active in the region through such arrangements for much longer.
“Every large public services company from the US was involved in certain LatAm countries,” says Javier Vargas, co-head of LatAm banking at Credit Suisse. “It was the most important sector at that time.”
The US power sector suffered after Enron collapsed in late 2001. Some foreigners, such as Duke Energy, still have holdings in Latin companies, but many have left.
Soon, Latin American parties became the active agents in driving deals, and privatizations gave way to deals driven by the private sector. The Asian crisis in the late 1990s slowed the pace of deals, but deal flow didn’t really suffer until the early 2000s. Between 1997 and 2000 annual volumes of deals with a LatAm component ranged from $70 billion to $115 billion, according to Dealogic.
In Brazil, concerns over the policies of president Luiz Inácio Lula da Silva after the 2002 election drove down prices, and foreign investment slowed. However, local money filled the gap, and investment in the region would pick up through 2007-2008, lifted by favorable commodity trends.
By 2006, some LatAm companies were large enough to become acquirers themselves. Consolidations increased, and some hunted abroad. Brazil’s Vale turned heads when it paid $18.7 billion for Canadian global miner Inco, transforming itself and the industry.
Mexico’s Cemex followed by taking Australian firm Rinker and others including Bimbo and Gerdau spread into the US. This continues through 2013, in the US and also in Europe, Africa and Asia. In the beverage sector, stock-swap deals have made Latin Americans important holders in global brands, such as Heineken, ABInBev and SABMiller.
Annual volumes of business have hit new highs since 2009, topping those seen in the mid-2000s. Last year’s $161 billion in transactions followed a peak of $221 billion in 2010, according to Dealogic.
“The main events have been a macroeconomic stabilization which resulted in an increase of consumers’ disposable income and enhanced access to long-term funding, accompanied by the development of local capital markets on the back of pension funds and local asset managers,” says Lisandro Miguens, co-head of investment banking for Latin America at JPMorgan. “These factors have been constant and they will continue to shape M&A deals down the road.”
Consolidation by local firms is a clear trend, starting first in areas including telecoms, mining and cement, but now appearing everywhere. Retail, consumer products, and financial institutions make many of the headlines now. The exit of Europeans in banking,
telecoms, utilities, and other sectors has hastened opportunities. This is happening within the Brazilian market, as well as cross-border.
Itaú and Unibanco’s 2009 merger reshaped Brazil’s banking industry. The joining of Lan and Tam in 2012 created one of the world’s biggest airlines.
In financial services, Colombian and Chilean banks have been expanding, as have BTG Pactual and others from Brazil. Colombian Grupo Sura surprised the world’s major financial players (and perhaps even the seller) by winning the bid for ING’s pension assets in the region. As others, like BBVA, Santander and HSBC pull back, the list of regional financial institutions taking advantage seems to get longer every month: GNB Sudameris, Banorte, Corpbanca, Bancolombia.
As European firms exit, Americans keep coming, drawn by LatAm’s growth potential which far exceeds that of their domestic market. For example, United Health paid a hefty premium last year for Brazil’s Amil. AB InBev finally convinced the controllers of Grupo Modelo to part with the remaining half of the iconic Mexican brewer.
Interest is also ramping up from Asia. Investment in mining and oil that has always been there is getting bigger tickets. And financial assets and consumer growth stories are now in play, as with Kirin’s purchase of Brazil’s Schincariol in 2011.
“The actual volume of Asian investment isn’t as large as you might think based on the press coverage it gets, but Asians have provided a big bid for assets in Latin America, particularly in natural resources during the commodity supercycle,” Allen says.
“Across the region flow reversal is expected to continue and become more prevalent,” Miguens says, with multinationals monetizing assets in the region, and regional champions going beyond LatAm. “Local public equity markets will play an increasing role as sponsors of local champions in their expansion. Additionally, in certain sectors, multinationals’ increased spend will continue pressuring mid- and small- tier local players, driving consolidation.”
The private equity industry has also ballooned over the past five years, creating more activity at the middle and lower ends of the market. This is because of more buying opportunities and easier leverage. The perception of currency risk was scary in the old days – now funds are sourced locally.
Private equity firms invested $7.9 billion in LatAm in 2012, a new high, according to the Latin American Private Equity and Venture Capital Association (LAVCA). Fundraising was at $5.6 billion last year, hitting a record of $10.3 billion in 2011. The totals compare with $3.6 billion raised and $5 billion invested in 1998.
“People feel a lot more comfortable and you see a lot more expertise on the legal and regulatory front,” Vargas says. “The process has been expedited. There is much less that is unprecedented and that provided more comfort on both sides of the deal.” LF