1. In 2015, the number of cross-border deals targeting Latin America remained steady at 339 deals, but value fell by 50% from 2014
  2. In the first quarter of 2016, however, inbound deal values rose 70% over the same period last year, to US$8.3bn
  3. EU and US buyers had the biggest appetites for Latin American targets in Q1, particularly in the energy and industrials sectors
  4. Intra-regional dealmaking dropped 71% by value in Q1 2016, while Latin American acquisitions in the EU reached a record US$8.9bn

Despite a recession and political turmoil in key economies, Latin America remains an attractive target for acquirers, particularly from the EU and North America, which were the top bidders by volume and value respectively during FY 2015 and Q1 2016.

Since the region slipped into a recession last year, currencies have reached a 22-year low, according to Bloomberg. Lower exchange rates, along with declining profits that are pushing domestic owners to sell off distressed assets, have made targets cheaper. 

Many companies have also been hit by corruption scandals that have compelled them to divest assets at attractive prices. In Brazil, for example, the ongoing investigation of Petrobras has locked the oil company out of capital markets, forcing it to raise liquidity by selling off US$16bn in assets. 

“These aren’t the drivers you usually want but they have contributed to keeping M&A activity at reasonable levels,” says Jaime Trujillo, Chair of Baker McKenzie’s Latin America M&A Practice. “Many of the decision-makers at the helm of Latin American companies have never experienced this level of volatility. They aren’t used to taking the long view, which is why we believe deals will be driven by investors outside the region.”

Image titleCompliance risk and integration challenges

For investors willing to take the long view, compliance has become a major concern given Latin America’s struggles with corruption. Buyers are placing much greater emphasis on compliance due diligence and the risk of succession liability has scared off some investors altogether. 

“In Brazil, compliance is the name of the game at the moment,” says Anna Mello, an M&A partner at Trench Rossi e Watanabe, a Brazilian firm with a cooperation agreement with Baker McKenzie. “We have to structure deals in a way that mitigates compliance risk, which is not easy to do and makes the transactions more complex.”

Because of these concerns, private equity firms are likely to drive more deals in the coming year, as they are often willing to assume more risk than other acquirers. Many are also accustomed to making investments under less-than-ideal circumstances. 

“We view private equity as a countercyclical factor in Latin America because they are serial dealmakers, with finite investment periods, who are obligated to do deals one way or the other,” Trujillo says. 

Despite the opportunities for outside investors, intra-regional M&A activity totaled just 60 deals worth US$7.1bn during 2015/16 — less than half of the 136 deals worth US$11.5bn pursued by EU buyers and 132 deals worth US$23.8bn from North America. 

Part of the slow intra-regional deal flow is the result of more Brazilian companies sticking closer to home and consolidating with competitors to weather the economic and political crisis. Another factor is the way the countries interact. 

“Latin America is one of the least integrated regions in the world economically,” Trujillo says. “One of the things most of us have in common is our language but then the biggest jurisdiction speaks another language.”

Middle class motivators

Although inbound investment in Latin America dropped 50% in 2015, deal values in the first quarter of this year rose to US$8.3bn, up 70% from Q1 2015. A major draw for foreign investors is Latin America’s fast growing middle class, the result of the commodities boom prior to the recent slump. 

The World Bank estimates that close to half of Latin America’s population will qualify as middle class by 2030, a shift that is already changing the focus of M&A activity. Buyers are not only targeting the region’s energy and infrastructure sectors, but also pharmaceuticals, technology, finance and real estate. In 2015/16, consumer goods and financial services were the top two sectors targeted by investors in Latin America.

Record-breaking real estate deals

In 2015 the number of outbound deals from Latin America remained steady, although values dropped to a six-year low of US$15bn. In the first quarter of this year, however, Latin American acquisitions in the EU reached a record US$8.9bn.

Driven by a weak euro and attractive EU real estate prices, this rise is largely the result of two megadeals pursued by Inversora Carso, the investment vehicle of Mexican business magnate Carlos Slim. Those deals included Inversora Carso’s US$7.4bn acquisition of Spanish construction firm Fomento de Construcciones y Contratas and its US$1.4bn purchase of Realia, a Spanish real estate firm.

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Eye on the future: three key trends to watch

  1. Out of the shadows: While Brazil and Mexico had the highest number of inbound deals in 2015/16, smaller countries like Chile and Colombia were close behind. Much of this activity is driven by growing demand from the region’s expanding middle class for consumer products as well as the business and financial services that provide the means to purchase them.
  2. Long-term perspective: Despite current upheavals, the region is stabilizing as more countries adopt free market policies, starting with Chile 25 years ago and Peru and Colombia more recently. “Now Argentina has changed governments and is going in the same direction,” says Gustavo Boruchowicz, an M&A Partner in Baker McKenzie’s Buenos Aires office. “That allows investors to think about the region in the long term.”
  3. Complex structures: In many transactions, the growing opportunity to buy distressed assets at bargain prices comes with the burden of added complexity. “Structuring a deal to avoid compliance liabilities is crucial for anyone coming to invest in Brazil right now,” Mello says.