Transactional Impact Monitor: Mexico – Vol. 2

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Transactional Impact Monitor: Mexico – Vol. 2

24 July 2020

TTR’s Transactional Impact Monitor (TIM) is a Special Report combining local knowledge and market visibility from top dealmakers developed to address extraordinary situations affecting the macroeconomic stability and M&A outlook in core markets

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INDEX

– M&A Outlook
– Private Equity
– Capital Markets
– Handling the Crisis
– Dealmaker Profiles

On 1 July 2020, the United States-Mexico-Canada Agreement (USMCA) went into effect, replacing the North American Free Trade Agreement signed in 1994. The pact reset the commercial relationship between the three North American nations and reaffirmed Mexico’s preferential trade partner status. The visit of Mexican President Andrés Manuel López Obrador, popularly known as AMLO, to Washington a week later to celebrate the signing of the accord demonstrated that the relationship between the two nations isn’t as tenuous as either leader has depicted in their rhetoric, and underscored the co-dependence that unites both countries. 

In their response to the threat of a pandemic, the two leaders have exhibited a remarkably similar attitude: dismissive, contradictory and aloof. Both Mexico and the US have rapidly increased testing for Covid-19 in recent weeks, after initially limiting testing to government labs in March and April. Where the two countries have differed most in their response to the threat of pandemic, is in the release of public funds to shore up liquidity in the markets, with the US distributing trillions of dollars with little oversight or accountability, and Mexico essentially leaving the private sector to fend for itself. Concern over the impact of job losses on the economy is mounting in both countries, alongside a surge in announced Covid-19 cases that puts the US at the top of the chart, followed by Brazil, with Mexico seventh globally, according to official stats. 

The outlook at the beginning of 2020 was good, there was a lot of anticipation associated with the new free trade agreement between Mexico, the US and Canada, but there was also uncertainty, said Greenberg Traurig Shareholder Arturo Pérez-Estrada. The private sector was still jarred after Mexico City’s new airport project was scrapped, but there was cautious optimism after a slow year for M&A leading up to AMLO’s election, and the transactional market had begun to stabilize, with an improving pipeline of deals.

The private sector had a tough time shaking off the jitters after AMLO’s election, agreed fellow Greenberg Traurig Shareholder Víctor Manuel Frías Garcés, as Mexico’s largest companies are accustomed to a cozy relationship with government, and it quickly became apparent that this administration wouldn’t nurture such ties. 

The pipeline of new investments in the country was sparse, as foreign investors remained reserved, but companies that already had a presence in the country were sticking to their plans, Frías said. “We were facing an outlook of slow economic growth. The government’s policies were not directed towards the strata that promotes M&A,” Frías noted.

Since March, the economy has gone from slow to stagnant, overall, similar to what has happened in other markets, particularly in the US, and companies have become very conservative in the face of weak signals of support from the Mexican government, Pérez-Estrada said. The majority of companies have been reorganizing themselves and have put their expansion plans on hold, he added. “The signing of the new free trade agreement was good news, and of course there will be winners in the downturn, from e-commerce to last-mile logistics and manufacturers of health and cleaning products, but almost everybody else is facing obstacles and preserving cash,” Pérez-Estrada said.

M&A Outlook
… Click here to access the second issue of Transactional Impact Monitor: Mexico – Vol. 2

Transactional Impact Monitor: Brazil – Vol. 4

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Transactional Impact Monitor: Brazil – Vol. 4

23 June 2020

TTR’s Transactional Impact Monitor (TIM) is a Special Report combining local knowledge and market visibility from top dealmakers developed to address extraordinary situations affecting the macroeconomic stability and M&A outlook in core markets

INDEX
– M&A Outlook
– Private Equity
– Capital Markets
– Handling the Crisis
– Dealmaker Profiles

Three months after Brazil began to implement its patchwork response to the SARS-CoV-2 threat, dealmakers report widely varying levels of confidence in the strength of an economic recovery as the first half of 2020 draws to a close.

Despite the monumental level of public spending, Brazil has not yet been able to control the spread of SARS-CoV-2 and the death toll continues to mount, noted Lefosse Advogados Partner Carlos Mello. 

It’s been three months since Brazilians were encouraged to self-quarantine, some under more strict guidelines than others, depending on the measures deemed appropriate by state governors, who took the health threat more or less seriously, depending on their individual assessment of the risk and their political alignment with President Jair Bolsonaro. 

The authorities allowed many non-essential businesses to continue operating, including industrial production in São Paulo, Mello noted, which could have contributed to a delay in the number of reported Covid-19 cases tapering off.

Social distancing guidelines could be in effect in Brazil until September, and that will naturally create difficulties for the Brazilian market, said Mello, noting the real economy will suffer for a long time. 

We are still in uncharted territory, noted veteran investor and CIO of GOW Capital, João Tourinho, but Brazil is well positioned for a quick rebound thanks to the private savings accumulated over the past four years, that were channeled to corporates seeking capital, whether via the debt or equity capital markets. These savings, he said, have provided unprecedented levels of liquidity to the market, while financial technology has served as an efficient vector, making funding readily available and affordable to credit worthy enterprises. Combined, these factors represent a disruptive force, transforming the way business is carried out in Brazil, Tourinho said.

There is a clear split between the performance of companies that meet the basic needs of society, on the one hand, and those whose products fall under discretionary spending, according to Vinci Partners Head of Financial Advisory Felipe Bittencourt. Consolidation is very likely in those sectors suffering the most, including tourism, aviation, the auto industry, manufacturing and education, Bittencourt said.

Sectors that continue to perform well, meanwhile, include healthcare, services, food, cleaning products, e-commerce and agriculture, Bittencourt said. Deals in these sectors have been proceeding with minimal disruption, he noted.

Vinci closed two transactions following the mid-March lockdown in Brazil, with a third deal reaching an exclusive phase, he said. In the first deal, Vinci was advising a seller of a financial services company, and there was no need to renegotiate terms, he said. In the second deal, Vinci was advising the buyer and the deal value was renegotiated, he added. In the transaction pending close, Vinci is advising the seller in the sale of a construction materials company to a strategic buyer based in the EU. The seller has a specific use in mind for the cash and will exit the business completely, otherwise it wouldn’t have been a good time to sell, he said.

“As advisors we take a conservative approach, we do a lot of technical analysis,” Bittencourt said. “In a period like this, you run different scenarios, the negotiations take a long time.” For those sectors that are suffering, more analysis is required as there’s more risk involved in an acquisition, especially on the buy side, he said. Vinci has other deals underway in the healthcare space, financial services, cleaning products, tourism, automotive and manufacturing, he noted. 

Vinci is fielding calls related to new deal origination that can be split into two groups, Bittencourt said. On the one hand, local companies are studying partnerships, acquisitions and mergers to gain efficiencies and resolve capital structure weaknesses, he said. The economic fallout from measures imposed to mitigate the SARS-CoV-2 threat has accelerated these types of discussions, he said.

On the other hand, Vinci is fielding interest from international investors that have been looking at opportunities in Brazil for a long time and consider the currency depreciation advantageous, he said. “They believe it’s a good time to buy assets here for a decent price,” he said, noting those initiatives represented a confluence of the long-term view of these international investors and a situational opportunity.

All the firm’s non-strategic mandates with international financial sponsors, on the other hand, have been put on ice, he said. “They’ve frozen their operations in Brazil.”

Local private equity players, including Vinci’s own fund manager, remain active, however, he said. Local funds have been looking at opportunistic acquisitions while reviewing their own portfolios throughout the crisis, he said.

M&A Outlook
… Click here to access the fourth issue of Transactional Impact Monitor: Brazil – Vol. 4.

Transactional Impact Monitor: Andean Region – Vol. 2

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Transactional Impact Monitor: Andean Region – Vol. 2

9 June 2020

TTR’s Transactional Impact Monitor (TIM) is a Special Report combining local knowledge and market visibility from top dealmakers developed to address extraordinary situations affecting the macroeconomic stability and M&A outlook in core markets

INDEX

CHILE
– M&A Outlook
– Handling the Crisis

COLOMBIA
– M&A Outlook
– Handling the Crisis

PERU
– M&A Outlook
– Handling the Crisis

– The View from Milan
– Dealmaker Profiles

CHILE

Nearly a month after Chile tightened the initial restrictions on movement and business activities imposed in mid-March in Santiago, the minister of health announced on 2 June revised figures for the number of active cases under treatment for SARS-CoV-2, resulting in a decrease from 59,100 to 21,325 and an increase in reported recoveries from some 46,000 to just under 86,000. At the same time, health officials announced the deadliest day with 75 deaths attributed to the virus, bringing the total official death toll to just over 1,200 and 114,000 confirmed cases.

The country avoided a total lockdown from the outset by isolating specific districts with tight quarantines based on an aggressive testing program. This strategy allowed much economic activity to carry on uninterrupted, noted DLA Piper Partner Paulo Larrain.

Notwithstanding, there are industries that have been severely affected, Larrain said. “It’s a very bloody process for many.”

The country was still reeling from the social disruption in October 2019, when protests took over the capital calling for a greater focus on programs geared towards reducing persistent income inequality. “These demands are still pending,” Larrain said, noting the plebiscite on social and constitutional reforms has been relegated to October. 

M&A Outlook
… Click here to access the third issue of Transactional Impact Monitor: Andean Region – Vol. 2

COLOMBIA

As May came to a close, hope for a swift return to a normal life was dashed for Colombians as President Iván Duque extended the period of mandatory self-quarantine through the end of June, while extending the public health emergency through to the end of August. The official death toll in the country attributed to Covid-19 stands at just over 1,000 with some 33,000 confirmed cases.

Under Colombia’s new phase of restrictions imposed to face the SARS-CoV-2 threat, 43 exceptions were granted permitting the reopening of several non-essential businesses, including museums, libraries, malls and hair salons, while limiting those venues to 30% occupancy. Residents of Bogotá remain confined to their homes until 15 June.

The rosy prospects of 3.7% GDP growth projected at the beginning of 2020 have long since faded, replaced by apprehension over the health threat, and increasingly, an economic recession likely to persist for the next several years, Inverlink Managing Partner Mauricio Saldarriaga told TTR. 

“It’s a call to a simpler life,” said Saldarriaga. Inverlink presciently began implementing an internationalization in 2015, joining global boutique investment bank network IMAP and establishing its own footprint across the region. The move paid off, Saldarriaga said, noting the firm grew through several tough years, including 2018, when the presidential election featured a leftist candidate and many investments in the country were put on hold.

Despite Iván Duque’s victory, the following year was much slower than most thought it should be, Saldarriaga said. “People thought that within two months, things would be flying.” When the country finally turned the corner in early 2020 with a robust start to the year such as hadn’t been seen in a long time, with real estate and financial services deals booming, “the little meteor” of SARS-CoV-2 hit, he noted, and the situation changed entirely; many deals were put on hold, frozen. “Some will die, others are in the process of being reactivated, but everybody went into survival mode, to preserve cash.” In general, companies began to focus on reducing costs, “trimming the fat”, Saldarriaga said. 

“Many companies will face difficulties, even those with healthy balance sheets,” he said. Restaurants, hotels, retailers, all commerce has been hit hard, and there are few winners, Saldarriaga said, namely personal care products, household cleaning products and food retail. “That’s about 10% of companies. Then there’s the 60% that have been heavily affected, and the rest that will have difficulty surviving.” 

Colombia will now enter a period of repositioning and restructuring, Saldarriaga said. “We’re in discussions with a lot of providers of capital and getting started with the airlines, construction companies and industrial entities, which were already suffering. This was the final straw. We all know this is temporary, but with an undetermined duration, it’s very difficult to make plans.”

The crisis will cause great difficulty in Colombia and across Latin America over the next 24-to-36 months, he said, noting the region will face a slower recovery owing to the heavy dependence on commodities. “These economies are facing a huge setback, with an enormous impact on the middle class and on spending power. This will be a marathon, not a sprint. Resilience and survival is the name of the game.” 

Colombia’s ambitious 4G program designed to develop the country’s airports, seaports, highways and social infrastructure, was already enduring growing pains Saldarriaga attributed to trying to go “from crawling to running from one day to the next”. The government’s capacity to keep these projects on track and make them a countercyclical engine of growth following this crisis is challenging in the context of the country’s fiscal issues, he said. 

“Infrastructure has become a great lesson in all of this,” he said. The sector was seen as low risk, with low transaction costs, but the these assets are facing a grave impact as tolls evaporate along with traffic through airports, both previously considered predictably stable. It may be a hiccup, Saldarriaga said, and traffic will surely recover, but in the short term, the sector faces a liquidity crunch. “The materialization of risks in the sector will lead to much negotiation with the National Infrastructure Agency (ANI) and a lot of litigation, reclamations and negotiations between the government and concession holders as they hash out how to assign risks in the context force majeure, he said.

“This will be an opportunity for Canadian infrastructure funds, the Brookfields of the world, to recycle capital and keep companies afloat,” Saldarriaga said. Pension funds that have liquidity now can also benefit from the tight situation over the next six-to-12 months in which there will undoubtedly be a lot of distressed M&A and assets that change hands by necessity, he added. “Institutional investors are watching to see how this will play out.”

Colombia’s dependence on oil revenue, which represents nearly 50% of the federal budget, has led to a simultaneous shock that amplifies the economic shock brought about by restrictions imposed to contain the spread of SARS-CoV-2, Saldarriaga noted. The oil market is distorted and manipulated, and this dependence will make the recovery more difficult, Saldarriaga said. “It obligates us to seek ways to depend less on raw materials and more on value-added products,” he said. The falling value of the Colombian peso makes labor costs and many products more competitive, Saldarriaga added. “These are countries that don’t just need to bounce back, they need to reinvent themselves and bounce back, and we better do it, because oil is surely not a stable bet for the future.” 

Diversifying its revenues beyond oil is an important goal for Colombia, but it’s rightly a medium-term project, Saldarriaga said, given the country is still heavily dependent on extractive resources to improve the standard of living for its citizens. “If we have natural resource wealth, we need to develop it. In the end, it’s what can bring us all prosperity.” The important contribution of hydropower powering Colombia’s electric grid makes the country unique, Saldarriaga pointed out, and balances out to an extent the dependence on oil for fiscal revenue. While the country has indeed put a growing emphasis on renewable energy development in recent years, incentivizing wind and solar, the debate underway in the US and the EU in which proponents are calling for de-carbonization as an engine of growth out of recession is more a first world dilemma at present, he said.

M&A Outlook
… Click here to access the third issue of Transactional Impact Monitor: Andean Region – Vol. 2

PERU

On 3 June, the government of Peru extended the country’s health emergency for another three months in the face of the highest death toll in the Andean Region attributed to SARS-CoV-2. The official toll stood at nearly 5,000 with more than 178,000 reported cases. The extension of the declared health emergency is in addition to the state of emergency in place until 30 June.

Peru was among the first countries in the region to implement strict health protocols, ground air travel and impose quarantines and curfews, noted APOYO Finanzas Corporativas Partner Eduardo Campos, “but we were already in a precarious situation”.

M&A Outlook
… Click here to access the third issue of Transactional Impact Monitor: Andean Region – Vol. 2

The View from Milan

The Special Report has sections on M&A, Private Equity and Handling the Crisis, as well as a first-hand account from Italy in The View From Milan, featuring EY Italy Managing Partner Tax & Law and Mediterranean Region Accounts Leader Stefania Radoccia.

Transactional Impact Monitor: Andean Region – Vol. 2

Transactional Impact Monitor: Brazil – Vol. 3

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Transactional Impact Monitor: Brazil – Vol. 3

12 May 2020

TTR’s Transactional Impact Monitor (TIM) is a Special Report combining local knowledge and market visibility from top dealmakers developed to address extraordinary situations affecting the macroeconomic stability and M&A outlook in core markets

INDEX
– M&A Outlook
– Private Equity
– Equity Capital Markets
– Handling the Crisis
– Dealmaker Profiles

Seven weeks into the global lockdown, several state governments across Brazil, including Paraná and Santa Catarina, have begun allowing businesses to reopen as the country tiptoes towards normalcy. A phased reopening across the state of São Paulo began on 10 May. 

The official death toll attributed to the SARS-CoV-2 virus continues to mount, meanwhile, surpassing 10,000 in recent days, and along with it pressure against a defiant President Jair Bolsonaro. Bolsonaro sacked his health minister in mid-April following weeks of contradicting each other in public over the gravity of the health threat. Two weeks later Bolsonaro’s minister of justice resigned after the president fired the director general of the federal police, resulting in a legal inquiry that has triggered calls for his impeachment among political opponents.

National development bank, BNDES, continues its efforts to provide short-term liquidity to struggling companies, announcing a process to select fund managers to administer BRL 4bn in loans for small and medium-sized enterprises (SMEs) in a tender closing 3 June. News of the tender comes less than a month after the government announced it would make BRL 40bn available to SMEs impacted by the forced closure of “non-essential” businesses in the face of the SARS-CoV-2 threat. To date, only BRL 666m of the BRL 40bn has been approved in payroll support for some 30,000 businesses, according to local press reports.

“We are having similar problems as in the US,” said Spectra Investments Founder Ricardo Kanitz. “The stimulus was given through banks, and instead of going to the companies that need it most, the banks are giving it to their best clients,” he said, noting that the government was now trying fix the process. 

The Ibovespa gained 2.75% in the first week of May, recovering the week’s losses as blue chips pushed the market higher and the US and China struck a conciliatory tone on trade.

Brazil’s transactional market is also beginning to stabilize, with deal volumes down dramatically over 2019, but plenty of activity keeping advisors occupied as they continue to isolate themselves in home offices. 

Madrona Advogados began 2020 full of confidence, its partners convinced it would be another great year based on their robust pipeline of M&A, capital markets and infrastructure projects, said Founding Partner Ricardo Madrona.

The wave of privatizations, concessions and infrastructure projects was generating a strong flow of funds from abroad, he said. The firm was investing in its internal growth to keep up with the growing workload, securing additional office space and hiring, he said. “We never imagined this would come. Although we had information about what was happening in China, we didn’t expect it would have this kind of impact in Brazil.”

The firm didn’t have remote work infrastructure in place and was caught offguard when the most cautious voices in the federal and state governments began issuing stay-at-home guidelines, he said. By the end of March, however, Madrona had secured the hardware and software required to maintain productivity remotely. “We had to adjust very quickly.”

Today, the firm’s staff is completely “connected and inter-connected”, Madrona said, with video conferencing having become the new normal. “It’s crazy, but at the end of the day, we’re seeing we can work remotely.” This new way of working will remain in place to some degree beyond the immediacy of the crisis, he said.

“From a legal perspective, due diligence efforts under these new circumstances aren’t that different,” said Demarest Advogados Partner José Diaz, “Since we are already very much used to the virtual data rooms.” From a technical point of view, on the other hand, there are usually a few problems, Diaz said. “We are frequently involved in agribusiness and forestry deals and there we find several restrictions regarding access. However, in practice those due diligences are still being carried out, regardless of a few obstacles,” he added.

M&A Outlook
… Click here to access the third issue of Transactional Impact Monitor: Brazil – Vol. 3.

Transactional Impact Monitor: Mexico

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Transactional Impact Monitor: Mexico

30 April 2020

TTR’s Transactional Impact Monitor (TIM) is a Special Report combining local knowledge and market visibility from top dealmakers developed to address extraordinary situations affecting the macroeconomic stability and M&A outlook in core markets

INDEX

– M&A Outlook
– Private Equity
– Equity Capital Markets
– Handling the Crisis
– Dealmaker Profiles

Mexico has taken a somewhat unique approach to combatting the “invisible enemy” of SARS-CoV-2. President Andrés Manuel López Obrador, popularly known as AMLO, actively downplayed the threat posed by the virus , before reluctantly declaring a public health emergency on Tuesday, 31 March. He then advised non-essential workers to stay home, two weeks after much of the world was already locked down. 

“The government was trying to prevent an economic impact, especially on the informal economy, to avoid a social problem,” explained Galicia Abogados Founding Partner Manuel Galicia. 

More recently, AMLO has used his updates to the nation to rail against government bailouts and predatory neoliberal lending practices that only benefit the rich. Mexico’s private sector, he has maintained, shouldn’t hold its breath for a rescue package. 

“We will face the health crisis and the crisis of neoliberalism with a unique approach, one that will protect the majority, especially those in need, the poorest, that will serve everyone,” the president said in his address to the nation on 28 April.

Mexico’s private sector didn’t wait for a bailout. Those able to telecommute did so beginning in mid-March, though schools and restaurants remained open and many went about their daily business as usual until the beginning of April. “There was a situation in which the private sector was behaving one way, and the government another,” said Galicia. Testing was initially only offered in select government labs, before it was extended to private labs, a similar bottleneck faced in the US, noted Serficor IMAP Partner Gabriel Millán.

The Mexican authorities have since issued several decrees granting emergency powers and extended the 31 March quarantine through the end of May. On 23 April health officials announced plans to manufacture ventilators in Mexico in partnership with private entities acting in solidarity in anticipation of a peak in confirmed cases projected for mid-May. 

“The government has been sending strange signals, leaving many perplexed,” said Millán. The slow and dismissive reaction of the president reduced compliance when the stay-at-home orders were finally issued, Millán said, and images of people filling the streets immediately thereafter demonstrated the poor compliance with to “social distancing”, or “sana distancia” as it’s been promoted in Mexico. 

The launch of a super hero character, “Susana Distancia”, by Mexico’s Secretariat of Health didn’t reverse the relaxed attitude held by many, thanks in large part to AMLO’s insistence on greeting supporters with handshakes and hugs as the rest of the world “sheltered in place”, Millán said. “If that’s how people are behaving in Mexico City, the epicenter of contagion in the country, I can assure you that other parts of the country are heeding official health advisories even less.”

M&A Outlook
… Click here to access the first issue of Transactional Impact Monitor: Mexico