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Latin America M&A’s: Strong Outlook

Brazil will continue to be the main driver of mergers and acquisitions in Latin America, experts say.

BY LATIN AMERICA ADVISOR
Inter-American Dialogue   

Latin American takeovers so far this year are at their strongest pace in a decade as recovery in the region takes hold, according to data from Bloomberg News. Acquisitions were led by companies from within the region—the so-called "multilatinas"—concentrated in Mexico and Brazil, but Colombian firms have also been venturing outside their borders in recent years. Which multilatinas will be shopping around the region this year, and what companies/sectors are ripe for acquisitions? Besides the issue of size, what factors have made some countries in the region home to more multilatinas than others?

Santiago Maggi, chief investment officer at Bulltick Capital Markets in Miami: As the global economy recovers and credit markets continue to improve, we expect the M&A activity to increase considerably this year in Latin America, although not to the precrisis levels. During the 2008-2009 crisis, Latin America showed its resilience and has solid fundamentals to continue its growth. We expect Brazil to continue to lead M&A activities as it solidifies its position in the region, followed by Mexico. The rest of the activity we see taking place in Colombia, Chile and Peru. Although we expect to see some big deals, we think the main activity would be in small- and medium-sized companies, especially in Brazil. We see a lot of these companies pursuing IPOs, trying to follow the steps of Banco Santander Brazil's success. At the same time, we expect large and well-established companies in the region to acquire small or family-owned companies in good sectors that are poorly managed but have good fundamentals. Sectors that we are watching closely in the region are: a) beverage and bottling companies; we wouldn't be surprised to see a major deal taking place in the beverage sector in Mexico. We expect bottling companies to continue expanding their operations throughout Latin America; b) developers; we expect to see a continuation of consolidations of developers in Brazil; c) consumer; personal consumption is growing rapidly and is becoming a very important engine of the economy; therefore we expect to see good activity in this sector; d) commodities; we still expect to see large companies acquiring small players in this sector.

Alexis Rovzar, partner with the Latin American Practice of White & Case in New York: The usual suspects in Brazil and Mexico will be shopping. I think it's a good time for those multilatinas that have kept their balance sheet in order. There are quite a few that resisted last-minute acquisitions at top of the market prices in early 2008 who are probably very happy today that they did so. This will be a strong year for them, with plenty of bank financing available to the most-transparent and better-run multilatinas. For instance, Coca-Cola Femsa recently conducted an issuance of 10-year bonds at a yield of 4.69 percent, which is truly admirable. Both Peru and Colombia are attracting serious amounts of money inbound. As far as outbound, multilatinas across the region behave similarly. They start by dominating their domestic markets, then expand carefully into adjoining or correlated countries. All of a sudden, they can almost go anywhere that makes sense, assuming that they have invested enough in human talent to support acquisitions. I would say that human capital is without a doubt the number-one condition. Having the vision and the balance sheet for acquisitions may not necessarily be enough, and developing talent that embraces the culture and values of the company may take time, but clearly there are companies in the region that have been doing this for years, if not decades.

Beatrice Rangel, member of the Advisor board and director of AMLA Consulting in Miami Beach: The U.S. recession and continued growth in Asia, particularly in China and India, have created conditions for multilatinas to execute a buy and build strategy in the region. As sales to the United States dwindle while more households reach middle class status in China and India, cash-rich multilatinas have seen a great opportunity to gain depth while diversifying markets. This is especially true in the case of commodity-based multilatinas that understand that maintaining competitiveness and delivering to China and India demand larger scale and reduced costs. This is also true of many multilatinas focused on infrastructure in large regional markets such as Brazil and Mexico. Odebrecht and ICA come to mind, companies whose expertise in dealing with governments and in recruiting cheap yet effective labor throughout the region have strengthened their financial muscles and allow them to make acquisitions at very low valuations. As more governments resort to infrastructure building as a policy tool to stimulate the economy, construction companies have more and better opportunities to develop regional expansion strategies. Multilatinas specializing in energy will become growth leaders in the region over the next decade. Indeed, they currently enjoy size and credit access, which are two conditions for success. Once the current economic slowdown begins to subside and energy demand begins to grow again, these companies will enjoy a new revenue source springing from alternative energies. Biomass, hydroelectric and wind energy seem to be poised for an extraordinary growth era not only in the region but also in the United States. Products that are manufactured using alternative energies will slowly develop a competitive edge. And this medium- to long-term opportunity to enter the U.S. market with favorable conditions will certainly not be missed by many energy multilatinas.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.

 

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