Chile M&A: ‘We’re in a buyer’s market with good opportunities for investors with capital and cash'

Bullish foreign investors tempted by attractively priced assets helped spur Chile’s M&A market last year.

Indeed, as many local firms went into defensive mode amid heightened economic and political uncertainty stemming from factors including constitutional reform, international players saw a juicy opportunity to snap up assets,  betting on Chile’s long-term prospects.

Against this backdrop, Chile’s electric power sector is expected to continue being a key dealmaking driver this year, a trend that may be strengthened by possible asset divestments linked to curtailment and price decoupling, which is creating financial stress for some renewables generators. 

Chile, where the veil of uncertainty is now thinning, was ranked the No. 2 target for investment in Latin America in 2023 after Brazil. Energy, mining, infrastructure, financial services and technology are attracting the most attention, according to research from the local office of professional services firm Deloitte.  

US-based companies are the most active buyers in the Chilean market by a wide margin, data from research firm TTR Data shows. In 1H23, the UK, Brazil, Spain and Italy completed the top five ranking.

To discuss dealmaking in Chile, BNamericas speaks with Paulo Larrain, M&A specialist and founding partner of Chilean M&A boutique firm NLD Abogados.

Larrain has extensive experience in local and cross-border transactions, representing and advising both buyers and sellers.

BNamericas: Is there a general consensus in the local legal-business world about the M&A outlook for this year?

Larrain: In general, the opinion is that M&A activity during 2023 will be lower than in 2022, when it was exceptionally high. Levels will probably be similar to those in 2021, which was also a year with strong activity. 

They were two years with a lot of M&A, a lot of transactions. There are various factors that may explain this. One of them, and I think it had a big impact, was political uncertainty, which resulted in various Chilean business owners deciding to sell their companies. In turn, good assets became available for investors, mainly foreign.

In general, foreign investors took a different view of Chile than local investors, with less fear and with a medium to long-term vision. There was also quite a lot of liquidity – secured by private equity funds, for instance – resulting in many foreign investors buying companies in Chile during those years.  

BNamericas: What sectors have been the most active recently?

Larrain: In general, there’s been important activity in several sectors, including the industrial sector related to manufacturing exports, renewable energy, insurance, services in general.

We’ve seen more deals in mid-cap companies, rather than large transactions. We also see more foreign buyers rather than local buyers. In summary we are in a buyer’s market with good opportunities for investors with capital and cash. These are favorable times to acquire distressed companies that are undergoing a restructuring process or close to bankruptcy due to the unstable global and local economic circumstances. 

BNamericas: You’ve partially answered our next question, which is about any trends observed in terms of the profile of typical buyers. 

Larrain: Yes, there’s been a lot of M&A in the segment of medium-sized companies. This is probably because, post COVID-19, good assets have been available at lower purchase prices due to the global and local economic conditions. Mid-sized companies are also not subject to the permanent scrutiny of the regulator, which could also explain the high number of transactions of mid-caps. 

BNamericas: There has been much talk recently about the potential for an uptick in electric power sector M&A, given the financial stress some renewables players are experiencing on account of curtailment and price decoupling. Is this actually materializing? 

Larrain: Quite a lot of activity is being observed in the renewable energy sector, in terms of companies in distress or in complex financial circumstances. So, effectively, yes.

The likely reason for this is an excess of generation capacity which, in turn, is impacted by lagging investment in transmission. Capacity to purchase power is lost amid a lack of transmission or storage capacity for this renewable energy. There’s been oversupply. This has probably reduced the ability of these companies to obtain financing or favorable refinancing terms.

BNamericas: In terms of M&A transactions, what is the role of firms like NLD?

Larrain: Ours is considered a boutique M&A firm, heavily focused on this practice for many years. We’ve got a well consolidated team. 

Our role, when advising a buyer, typically starts with helping identify potential targets, or possible buyers if we’re advising a seller. 

In some cases, we work with investment banks in this process.     

Once a target is identified – when we’re representing a buyer – we provide support during the negotiation and contract-signing process, so the M&A transaction is carried out.

Typically the first contract signed is a non-disclosure agreement that will allow the buyer to review, in a preliminary manner, some basic information in order to make a initial evaluation of the company.  

We usually carry out due diligence of the target to identify potential contingencies that could impair the valuation of the target business, and we support the client in obtaining mandatory authorizations – for example, regulatory approvals – to close the deal. 

In some cases, our role is not only to act as lawyers in Chile but also as regional lawyers, such as being the lead counsel in regional transactions concerning various countries. This then involves the coordination of the lawyers responsible for the due diligence processes in the different countries, for example, and we lead the negotiations of the transaction documents.

BNamericas: How does new legislation, such as the economic crimes bill, impact the likes of M&A transaction due diligence?   

Larrain: There’s definitely an impact. There are important new bills, such as the one you mention, which could be soon enacted if it passes a review by the constitutional court. That bill establishes an enormous number of new offenses that can result in criminal liability on the part of companies as well as their directors or even of administrators. 

There will certainly be important repercussions for M&A processes since it will be necessary to verify, with more intensity, compliance programs of the targets to ensure that they are not exposed to situations of corruption or situations, for example, that may imply sanctions for infringement of different rules.

It will lead to an expansion of the scope of due diligence to all situations generated under this new law. And this will also likely impact on stock purchase agreements, in terms of allocation of responsibility between buyer and seller. 

There are other bills being debated, such as one on data protection. It is also going to have consequences on the reach of due diligence since target companies will have to comply with higher standards. 

BNamericas: Any final thoughts?

Larrain: Chilean companies face important challenges due to very moderate economic growth expected for the coming years and stricter regulation that will produce an increase in production costs. Companies that will be attractive to potential buyers will be those that are more efficient and capable of adding more value. 

BNamericas: We’re talking about foreign firms?

Larrain: Yes. There are several funds with regional expansion plans. Although foreign investors still consider Chile to be a good place to invest and it stands out in Latin America, it is key to keep the country a safe and predictable place to invest where the rule of law applies with no exceptions.