Energy, tech sectors remain strong amid LatAm M&A slowdown

M&A activity continues to decline in Latin America, as trade tensions combine with growing investor concern about a slowdown in global growth.  

According to Transactional Track Record (TTR), in July total disclosed M&A activity fell to US$51.5bn for Latin America, a decline of 3.85% since January. The overall number of M&A deals January-July was 1,202, down 5.65% over the previous year. 

However, certain sectors, such as energy and internet and technology, continue to draw investor interest in the region, despite the mounting economic concerns for emerging markets.  

“Energy and renewable energy have supported the significant dynamism of M&A activity in Latin America throughout 2019,” Marcela Chacón, TTR research and business intelligence analyst for Latin America, told BNamericas.

The largest deals in July were in Brazil’s oil and gas sector. According to TTR data, Trident Energy do Brasil acquired Polo Pompo and Polo Enchova from state-run Petrobras in a combined deal valued at US$8.51bn, while Karoon Brasil acquired Campo Petrolifero Bauna from Petrobras for US$6.65bn. 

M&A research firm Mergermarket, in a 1H19 report, said that while the energy, mining and utilities (EMU) sector “continued to buttress deal-making in Latin America” with 36 deals worth a combined US$15.5bn, “technology saw record-level activity.”

The firm reported 36 tech-related transactions in Latin America worth US$2.3bn, nearly doubling the US$1.2bn in disclosed deal value for 15 deals (21 in total deals, including those with undisclosed values).

“Activity in the sector was led by deals in the consumer technology space, highlighting a growing consumer base in the region,” Mergermarket wrote.

TTR data also indicates that internet and technology M&A deals are accelerating. 

In its July report, the firm reported that Latin America saw 28 M&A deals in the internet sector in the first seven months of 2019, a 56% rise over the same period in 2018. There were 25 technology deals, a 92% rise.   

Chacón said M&A appealed as a “mechanism for gaining synergies” among companies, and that firms of late were using “M&A in order to realize changes in business models.” 

Market and regional dynamics

Mexico and Argentina, which saw significant drops in M&A activity, weighed heavily on sagging regional investment figures. 

Mexico experienced a decline of over 25% in M&A disclosed deal value in January-July, to US$7.95bn. Meanwhile, disclosed deal value in Argentina amounted to only US$2.61bn, a more than 50% decline. 

The number of transactions in the first seven months of the year were also significantly down in both countries, by over 23% and 35% in Mexico and Argentina, respectively. 

Private capital in play

In July, private equity investment in Latin America fell 21% y-o-y to US$4.81bn, sourced mainly from the US, Brazil and Canada. Partly offsetting this, venture capital activity surged 58% to US$2.36bn last month.

“Private capital investments will play a significant role in this behavior in the short term,” Chacón added. 

Looking at Latin America’s largest market, Brazil, Petrobras looks to further divest its assets. Meanwhile, in the coming months, the Brazilian government is planning to carry out a series of roadshows to draw US investment into infrastructure projects. 

Against this, key industries in the region – including mining, manufacturing and the tech sector – are exposed to escalating US-China trade tensions.   

And M&A in Argentina may decline further in light of the victory of the left of center opposition candidate in Argentina’s first round of presidential primaries on August 11. 

Increasingly, TTR notes that politics and macroeconomic stability may weigh on M&A activity. “Several macroeconomic and financial factors will be determinants in generating a change in the trend in the short term,” said Chacón. 

But, come 2020, she said that drivers of M&A in Latin America “will depend in large part on stabilization of important political and economic risks.”