Alvarez and Marsal
A&M Global Transaction Advisory Group

Cross Border M&A 2018 Trends: Factors Impacting Latin America

Fabio Pires
Managing Director
fpires@alvarezandmarsal.com

Driven principally by the announcement of a few mega-deals, such as Suzano Papel e Celulose’s US$ 15.3bn acquisition of Fibria Celulose in Brazil , Q1 2018 Latin America’s deal value grew compared to the same period last year. Deal volume, however, decreased versus Q1 2017.

These figures are consistent with our observations of a cautious market amidst uncertain political times within the Latin America region. We are seeing increasing activity and interest from financial sponsors and family offices on businesses that will benefit from operational improvement or capital at this conjuncture.

Here I discuss the challenges and opportunities we’ve observed in our regional M&A as well as what our Alvarez & Marsal Global Transaction Advisory Group Is advising individuals and companies moving forward.

WHat is driving uncertainty in the market?

GEO-POLITICAL CLIMATE

REGIONAL POLITICAL UNPREDICTABILITY:
Political uncertainty is nothing new to Latin America with the region trying to look beyond the corruption issues it has faced historically. However, with upcoming elections in some of the largest Latin American countries, including Brazil, Mexico, and Colombia, there is increased uncertainty affecting the region. If candidates viewed by the markets as “unfavorable” win, increased volatility is expected to impact M&A negatively.

INTERNATIONAL ECONOMIC POLICIES:
President Donald Trump’s economic and tax policies are triggering a significant impact on Latin America. The ongoing renegotiation of NAFTA and newly enacted steel and aluminum tariffs levied by the government are further adding fuel to existing market turbulence in Brazil and Mexico.

CHANGING GLOBAL M&A LANDSCAPE

While Latin America struggles to re-define its own structural foundations, the US and certain European countries are riding booming M&A markets, which are demanding robust capital deployment from investors, which would otherwise, at least in part, be allocated to Latin America. Our clients are being innovative in creating value as there are also increasing opportunities in an uncertain market.

ARE THERE REASONS TO BE OPTIMISTIC?

The answer is yes, and here are several reasons why:

Should the above-mentioned elections have a positive outcome, the broader notion of political instability should temper down. There are no telling signs as of yet, but Europeans may be more prevalent in our region as compared to the Americans – especially considering the nationalistic tone of President Trump’s current policies.

Despite a seemingly initial negative impact of Trump’s policies, the business community is reacting by seeking alternate partners. As the US seeks to impose import tariffs to China, the Chinese could be importing products such as soy bean (one of Brazil’s biggest exports) from Latin America rather than the US. The strengthening of the Pacific Alliance is leading to further interconnectivity within the region as we see evidence of these trends from our clients.

These uncertainties are driving entrepreneurialism and innovation in industry leaders, investment bankers, financial sponsors and advisors. We expect consolidation to occur within a variety of sectors, more specifically, in sub-sectors where regional activity still prevails: food, beverages, health, K-12 education, etc. This may result in increased M&A activity in these sectors.

Among the Latin American economies, Brazil remains the leader in deal activity in the region despite its current political turbulence and period of low economic growth.

  • Domestic M&A still thrives in sectors impervious to the market changes: health, technology, education, financial services, and select consumer good sub-sectors.
  • Brazilian infrastructure will see increased deal activity considering the solid privatization plan and investment commitment from the current government. Pending the election results happening later this year and the new government’s possible agenda, this will play a key role in dealmaking in the coming months,

 

For the oil & gas sector, renewable energy and broader infrastructure through public to private partnerships and other investment venues are expected to have a number of knock-on effects in other sectors – from logistics to transportation and utilities. As it bounces back from its slump and commodity prices stabilize, we also expect this sector to have meaningful deal activity which will affect the entire supply chain.

HOW CAN A&M HELP YOU TO CAPTURE POTENTIAL UPSIDE?

Being a global practice across varied economic landscapes, our Alvarez & Marsal Global Transaction Advisory Group has a deep understanding and strategic viewpoint on cross-border M&A activity in the different global regions. This gives us the opportunity to provide our clients and partners the unique advantage on how to adapt, and even thrive, on what 2018/2019 could mean for the market. Alongside our clients, we are at the forefront in identifying and capitalizing on strategic business opportunities.

Despite being impacted by many factors, there is opportunity in Latin America deal making. It will take:

1. Preparation
Despite the current uncertainty in the private equity market, companies should begin sell-side preparations now, ahead of the potential upcoming economic cycle. If elections result in a favorable outcome, 2019 appears to be a liquidity year in the region – and valuations will arise from higher deal volume. However, companies will need to be prepared to maximize sales effectiveness by increasing proceeds.

2. Sell-side optimization
Utilizing sell-side advisory services is key. Now, companies in Latin America are finally beginning to realize value creation through having a disciplined sell-side due diligence. This is built in our Alvarez & Marsal investment lifecycle – allowing us to be fully equipped to lead you through every stage of a transaction.

Turbulence presents a wealth of opportunities for strategic investors and financial sponsors. Innovation and geographical expansion backed by solid management teams will lead the way to value creation throughout Latin America. As a business leader and M&A practitioner in the region, I am excited by the ocean of opportunities that should come to fruition following this period of geopolitical uncertainty.

For more about our A&M Global Transaction Advisory Group:
https://www.alvarezandmarsal.com/expertise/global-transaction-advisory

Source:

SOURCE: ALM VANGUARD: TRANSACTIONS - ACQUISITIONS CONSULTING JUNE 2019 REPORT

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