Brazil, Mexico, Chile have ‘most favorable conditions’ for M&As next year

A low interest rate combined with economic recovery will put Brazil in the M&A spotlight next year in Latin America.

With the volume of operations expected to grow, oil & gas, along with IT, will lead. 

M&A transactions were up nearly 2% year-over-year from January to November, reaching 2,070 – including venture and private equity transactions, according to consultancy Transactional Track Record (TTR).

Meanwhile, reported deal values reached nearly US$115bn in the period, up 39.5% from the year-ago period. Brazil concentrated over half of the value and number of all operations in the region, followed by Mexico (US$18.3bn), Chile (US$12.6bn), Colombia (US$10.5bn), Peru (US$7.4bn), and Argentina (US$5.06bn).

Wagner Marques Rodrigues (pictured), research and business intelligence director at TTR, talked with BNamericas about the projected M&A scenario in the region for the next year.

BNamericas: What is your forecast for 2020 M&A activity in Latin America? Should the turbulence in Chile and Argentina, among others, impact M&A activity in the region?

Rodrigues: The geopolitical tensions and the economic slowdown that have occurred in major economies in the region such as Mexico, Chile and Argentina, contribute to a more cautious outlook for 2020 compared to 2019. 

Although caution is needed, we predict that operations involving private equity transactions will be on investors' radars.

BNamericas: In which countries should transactions volume increase and in which ones should it decrease?

Rodrigues: Brazil, Mexico and Chile have the most favorable conditions for the dynamics of transactions in the region. On the other hand, significant declines can be predicted in Argentina because the downward trend seen in 2019 is likely to continue in the next year due to the economic and political uncertainty that this market has experienced in recent months. 

BNamericas: In Brazil, the oil and gas sector was among the M&A highlights in terms of volume this year, largely due to Petrobras' divestment plan. Will these effects still be present next year or will activity slow down, as Petrobras has now fewer assets on offer?

Rodrigues: Without doubt the oil and gas sector had an important influence on the numbers of the year, especially measured in transaction values. Not only Petrobras' divestment plan but also its investment plan contribute to the movement in this sector. 

Petrobras is working to direct its focus toward exploration and production, and the recent acquisition of the Buzios field is a great example of this movement. The company recently announced its strategic plan for 2020-2024, which makes it clear the company wants to continue with its divestment plan on several fronts such as refining, thermal plants, offshore pipelines, among others. This is why it is possible to look at 2020 with optimism that it will be a very dynamic year in this sector.

BNamericas: What other sectors will lead the volume of M&A operations in 2020? Do you believe that financial values and volume of operations could exceed the numbers reached in 2019? If so, why?

Rodrigues: It is likely that in terms of volume the technology sector will continue to play a leading role. This has been the case every year and can be explained by the need for optimization in all areas by applying new technologies, which allows the emergence of very potent business models (proptech, fintech, sportstech etc.) that are attractive to investors. 

Given that according to our records the number of transactions has remained relatively stable during years of major political and economic uncertainty (2015, 2016, 2017, 2018), it is possible to predict further growth in 2020 given the current scenario of economic recovery.

BNamericas: Brazil has a record-low interest rate, and many economists expect investors that previously focused their portfolios on government bonds will invest in the real economy to get higher returns. Does this phenomenon generate more M&As, even with more private equity activity? 

Rodrigues: Yes, of course, the search for more return on capital often reflects acquisitions, mergers, leading companies to make strategic decisions to grow through acquisitions. 

In addition, investors can target investments via private equity, which has a longer investment horizon but greater return potential.

BNamericas: China is an important trade partner of Brazil and has been making direct investments in Brazilian infrastructure, but in terms of M&A we still see a large dominance of US players and other countries. Why do you think China is still shy - considering the size of its economy - in the M&A arena?

Rodrigues: Historically we have observed a relatively low number of transactions (by Chinese players) compared to other countries. The economic recovery can be expected to also have an effect on the Chinese mood for mergers and acquisitions in Brazil. 

Although the volume is modest, the values involved are relatively high. The acquisition of Enel’s wind power plants, for example, involved 2.9bn reais (US$710mn). According to our data from January 2014 to December 2018, taking into account transactions with revealed value, those with deal value over 500mn reais predominated.