The Rise of Multilatinas and the Implications for M&A Deals in the Region and Beyond

Introduction

What do we think of when we hear the term ‘multilatinas’? This novel term was first coined by Álvaro Cuervo-Carruza in 2010 to refer to companies in countries formerly colonised by Spain, Portugal or France that have added-value operations outside their country of origin.^[2]They not only export products but have regional operations that represent a significant part of their balance sheet. Studies have shown that multilatinas are generally family-owned groups^[3] or companies with a privately held controlling shareholder or group of shareholders (e.g., Telmex, Camargo Corrêa Cimientos, Aje Group, Cencosud, Falabella, Grupo Gloria), which have a presence in countries other than that of their origin.^[4]

Multilatinas were forged during the economic and political ups and downs of the region. For one part, the legal particularities of Latin America favoured the development of highly concentrated family-owned businesses, as civil law institutions (highly influenced by the Napoleonic system of French civil law) offered less protection for minority shareholders and creditors (which, in turn, inhibited the development of capital markets and debt tapping by Latin American companies).^[5] On the other hand, the import substitution policy between the 1940s and 1980s – characterised by high levels of governmental regulation and intervention, as well as debt crisis, high inflation rates, closed markets and political instability^[6] – protected local companies from foreign competition and thwarted international development strategies, which forced companies to expand on their domestic markets.^[7], ^[8]

Upon the introduction of free market measures in the late 1980s-to-early 1990s, local companies were forced to restructure, redefine strategies and improve their competitive capacities through the acquisition of technology and through alliances with foreign companies.^[9] Many of them, upon waves of privatisation, acquired assets at discounted prices and set up dominant positions.^[10]

Chilean companies were the first to expand and become multilatinas, due to Chile’s open economy, mainly through investments in Argentina, capitalising on the benefits of high copper prices and available financing at low interest rates. During the corralito,^[11] Argentina’s currency was devaluated and investors fled the country. Chilean companies, willing to assume the risk, swept in and invested heavily, mainly in retail and agribusiness. During this time, Cencosud became one of the first multilatinas,^[12] and in the past two decades more companies have become multilatinas owing, among other things, to economic reforms that affected their country of origin, the saturation of local markets compounded with the lower amount of domestic opportunities, and the need to diversify the risk portfolio and access new sources of capital.^[13]

Role of multilatinas in M&A in the region

Outbound M&A by multilatinas

Historical and market circumstances (as detailed above) gave multilatinas the opportunity to expand throughout the region. Although there is no unique pattern to the internationalisation of multilatinas, certain common characteristics include their flexibility and ability to make quick decisions, their strong and dynamic leadership that can successfully guide the organisation through new challenges and their offering of products or services to low-income markets.^[14], ^[15]

Outbound transactions by multilatinas not only increase their regional presence but also their share price. According to a study published by the Boston Consulting Group, the share price of multilatinas that are serial acquirers appreciated by almost 70 per cent from 2010 to 2018, as a result of their cross-border M&A activity. In this sense, the valuation of multilatinas has been aided significantly by acquisitions throughout the region.

In the past decade, the volume of outbound M&A by multilatinas has been positively affected by divestitures in the region by their European counterparts,^[16] particularly in the banking industry, as evidenced by the volume of transactions undertaken by Colombian and Chilean companies, including the following:

• Grupo Sura (Colombia) acquired ING’s pension and investment funds assets in Chile, Mexico, Peru, Uruguay and Colombia;
• Grupo Gilinsky (Colombia) acquired HSBC’s operations in Colombia, Uruguay and Paraguay;
• Corpbanca (Chile) acquired Grupo Santander’s and Helm Bank’s operations in Colombia; and
• Grupo Aval (Colombia) acquired Banco Centroamericano BAC Credomatic, owned by General Electric; purchased Horizonte from BBVA, Davivienda (Colombia); and expanded in Central America, by purchasing HSBC’s assets in Costa Rica, Honduras and El Salvador.

Until a few years ago, transactions such as those listed above were almost only within the realm of North American or European companies. However, the growth of multilatinas, their capacity to adapt and their ability to transform their resources have allowed them to successfully compete regionally.^[17] For example, Grupo Nutresa adapted its products to each country in the region to meet the needs and preferences of the local customers;^[18] Cemex started to expand in the 1990s throughout the region to hedge against market uncertainties in Mexico, which allowed it to consolidate its cash flows and be less dependent on the Mexican market;^[19] and the merger of TAM and Lan Chile in 2012 – which formed Latam Airlines – allowed it to enter new markets and increase the destinations offered. As the number of M&A transactions in the region increases, so do transactions related to transactional services companies. For example, Credicorp Capital, BTG Pactual and Larrain Vial have expanded their presence and services throughout Latin America owing largely to the investment and trading appetite in the region.

In the future, as multilatinas successfully conquer local markets more companies may seek to expand outside the continent and compete at a global level (becoming a ‘Global Latina’), following the steps of Companhia Vale do Rio Doce (Grupo Vale from Brazil) and Grupo Bimbo and Cemex (from Mexico), which expanded their presence outside of Latin America and became industry leaders after international acquisitions.

Divestitures by multilatinas

Over-leveraging, a sustained lack of profitability, adjustment to market conditions, shareholder decisions, an alignment of the core business and regulatory orders are some of the many reasons a company can decide to partially or fully divest an asset or business unit. In this respect, multilatinas are similar to any other multinational corporation: they buy, build and expand their business, but also sometimes need to sell and downscale.

Some multilatinas may look at divestitures to sharpen their strategic focus on their core business to create more value to shareholders, increase synergies and reduce costs,^[20] while others may seek to divest assets in order to clean their balance sheet, present better ratios, improve financial positions and obtain liquidity.^[21]

When considering a divestiture, an issue to be addressed early on by a multilatina that consolidates financial statements throughout several jurisdictions is whether the transaction’s value can be enhanced by preparing carve-out financial statements for the business or assets being sold. This is not only a strategic decision, but a time-consuming one: the assets, liabilities and operations to be included in such financial statements must be clearly identified, and the document is then generally certified by an independent accounting firm. As the carved-out business or assets are part of a much larger operation, challenges usually arise in preparing the pro-forma financials when the carved-out business or assets are not organised separately within the company or when there are assets, liabilities and operations that are shared with other business units within the same group. Other issues to consider in divestitures are the termination of intercompany agreements and the execution of transitional services agreements to ensure business continuity.

Multilatinas usually have an interconnected business with people, processes and systems deeply integrated within their business or services and infrastructure shared across multiple business units. Before executing a transaction, a time-consuming process for any multilatina will be identifying and carving out the pieces, business processes and applications that have to be sold with or separated from the divested asset. For this reason, the need for, and terms of, the termination of any intercompany agreement, and the rendering of any necessary transitional services agreement must be determined in the early stages of the transaction. A transitional services agreement may cause the parties to require a longer than expected pre-closing or integration period and can jeopardise seamless transitions for the business, its customers and employees. It is advisable to carefully consider costs, standards of service and competitive concerns, as well as data-sharing restrictions.

Contractually, multilatinas have the same objectives as any other seller when executing a divestiture, including obtaining certainty of closing. Therefore, all else being equal, a multilatina will look favourably at a purchaser that requires few closing conditions and does not require regulatory approvals, including antitrust clearance. In this sense, potential purchasers that have limited or no presence in the jurisdictions in which the assets or business lines sold are located may be preferred. Similarly, a purchaser will seek to optimise the returns of the business or assets acquired at closing by, among others, ensuring that the seller abides by a post-closing non-compete obligation. For corporate entities, such as multilatinas, such clauses may be acceptable, provided that they do not impose material restrictions on the retained business and that the non-compete is subject to appropriate carve-outs covering potential overlapping activities with existing businesses and potential expansion thereof, as well as expected business plans and growth in other business lines and jurisdictions. However, the most important concern when negotiating a non-compete clause is how to successfully navigate local law restrictions on the enforceability of such clauses. In general, most Latin American jurisdictions accept that for such a clause to be enforceable it must clearly set out the activities to which it applies and have a temporal and geographical limitation that passes a reasonableness test.

Impact of multilatinas entering private auctions on the buy-side

Multilatinas have dynamised private M&A auction processes in many ways. Importantly, their acute knowledge of the risks of the region and a willingness to assume them gives them an edge in certain competitive processes. New entrants to the region, on the other hand, have to familiarise themselves (and become comfortable) with local authorities, regulatory approvals, currency fluctuation, market and industry risks. In this sense, for a seller in a private auction, the pre-signing transaction timeline can be shorter and the transaction agreements can reflect reduced pre-closing risk if the buyer is a multilatina as compared to global or foreign bidders. To the extent the multilatina is already in that market, due diligence timelines can also be reduced.

Another aspect that can differentiate multilatinas from other bidders in a private auction is their corporate governance. In our experience, multilatinas tend to have a more highly developed corporate governance structure than smaller local family-owned companies, because, among other reasons, they often have already tapped the capital markets, which helps them to operate in several countries simultaneously as well as to secure financing to execute acquisitions. This improved corporate governance structure does not prevent multilatinas from being agile and flexible when taking strategic decisions. The strong and dynamic leadership of multilatinas is also a success factor when competing for a target in an auction. In fact, the corporate governance structures implemented by multilatinas can also assist them in their growth.^[22]

Regulatory and political challenges for multilatinas

Regulatory matters involving publicly traded multilatinas

Capital is essential in order to become a multilatina. To this end, a number of multilatinas have looked towards capital markets for liquidity. This is evidenced by the fact that of the 30 largest multilatinas in 2021, as ranked by America Economía, less than five are privately held in their entirety. Once listed, companies can raise additional capital through the issuance of equity and are more likely to be able to execute stock-for-stock transactions, allowing them to expand without significantly affecting their balance sheet. For example, between 2015 and 2017, Grupo Argos executed a two-part acquisition of Odinsa, a company dedicated to the structuring, promotion, management and development of infrastructure projects in Colombia, which was partly paid in stock. By using its own equity, Grupo Argos minimised cash disbursements and limited the impact of the transaction on the company’s balance sheet. Listed companies have also become subject to greater scrutiny and more regulation, and therefore must adopt a sophisticated corporate governance structure. Such a corporate governance structure usually engenders the trust of investors, the public and financial institutions, increasing their profile and, more importantly, providing them with more access to local and international financing sources.

Most Latin American countries have adopted securities regulations that, in the context of a purchase by a listed company, can affect the disclosure of the transaction, and in the case of the sale of a listed company can affect the due diligence, disclosure and structure of a transaction. Specifically, securities regulations in the region provide disclosure obligations, in light of which parties must provide exceptions to non-disclosure and confidentiality agreements and public announcement clauses that allow the listed party to make public disclosures, and respond to inquiries by a competent authority. When executing transactions with respect to listed stock, securities regulations in Latin America usually include some type of mandatory tender offer rule once a certain threshold or triggering event is met. These requirements present challenges that must be addressed by the parties in the early stages of the transaction, but in no way limit the ability of multilatinas to undertake transactions and be active participants in the M&A field.

Merger control challenges

As the number of cross-border transactions increases throughout the region, so do the number of transactions that have a merger control component in several countries at once. For example, in 2019, Walmart announced its intention to purchase Cornershop, the largest home delivery platform in Mexico and Chile, a transaction that was subject to antitrust approval in both countries and that was opposed by the Mexican antitrust regulator. In 2020, Cornershop was acquired by Uber Technologies, a transaction also subject to regulatory approval in both countries.

Most Latin American jurisdictions have adopted some type of merger control regime, with the Dominican Republic, Guatemala, Guyana and Bolivia being the notable exceptions. As multilatinas expand throughout the region, the different laws and levels of experience of the regulations in each jurisdiction and the lack of mandatory cooperation between regulators have added a degree of complexity to transactions in which multilatinas participate. This includes changes in the application of antitrust laws and the existence of new statutes.

Peru recently enacted a new merger control regulation (Law No. 31112), which came into force on 14 June 2021. As with any new regulation, there is uncertainty regarding its application by the Peruvian Antitrust Authority (INDECOPI). Among its most important characteristics are:

• all economic concentrations (i.e., change or transfer of control) require authorisation if they meet the following thresholds:
  • the total value of either the assets or the annual sales (or gross revenue) of the companies in Peru in the previous financial year equals or exceeds 118,000 UIT; and
  • the total value of the assets or the annual sales (or gross revenue) in Peru of at least two of the companies involved in the transaction in the previous financial year equals or exceeds 18,000 UIT;
• INDECOPI may review ex officio, up to one year after closing, any transaction that does not meet the thresholds if it creates a dominant position or affects competition;
• the procedure for obtaining clearance can take up to 30 business days in Phase I and up to 120 business days in Phase II; and
• INDECOPI will enforce gun-jumping rules from day one.

In addition, Chile has a very well established and respected merger control regime, with its antitrust agency (the National Economic Prosecutor – FNE) conducting reviews of different types of merger transactions. A recent development is that the FNE is using a very powerful tool that provides them with the ability to open investigations into certain mergers that fall below the thresholds and therefore were not previously reviewed. Specifically, Chilean regulation establishes that the FNE is entitled to review such a deal within one year of the deal closing, which the FNE has done in connection with certain mergers that it has considered might have potential effects on the market. In addition, the merger control regulation has been adapting to be more transaction-friendly, incorporating fast-track approval mechanisms for transactions with no overlap between the parties' activities; strengthening and providing greater certainty at the pre-notification stage; diminishing the documentation requirements to fulfil the agency’s checklist; and advancing risk analysis to earlier stages to enable the parties to offer adequate remedies for the agency antitrust concerns.

While in Colombia there have not been any recent major changes to the current merger control regulation, filing fees for merger control review processes were recently implemented. The fee depends on the specific type of merger control procedure applicable to the proposed transaction, and potentially on the combined revenues of the parties to the transaction (for Phase II cases). In terms of enforcement practices, the Colombian competition authority has modified its position regarding the participation of interested third parties in merger control proceedings. While previously a third party that was able to demonstrate a direct interest in the result of the review process could be allowed to act in the proceedings with the ability to submit arguments, request evidence and file appeals, this is no longer a possibility under the current position of the competition authority. Indeed, based on recent decisions, the Superintendency of Industry and Commerce changed its initial interpretation, concluding that interested third parties are not allowed in merger control proceedings, since they are not provided for in the law.

From a contract standpoint, while parties typically default to a ‘hell or high water’ clause on antitrust matters, an obligation to divest up to a limit or a reasonable efforts clause without specific obligation to remedies, multilatinas are acquainted and familiar with the authorities and the regulatory issues of the region. Therefore, they may be amenable to an equitable distribution of risk between the parties, or may accept a more seller-friendly provision, provided that its obligations are not excessively burdensome and do not have an economic impact that materially affects the value of the transaction, the business or its current operation.

Regarding public policy, there have been regional integration efforts to unify the process for cross-border mergers and acquisitions.^[23] On 29 April 2020, the members of the Andean Community approved a regulatory framework to formulate and harmonise regulatory policies for merger control. This framework seeks to promote in its member states the formulation and implementation of public policies related to antitrust matters. On a more regional level, differences in the merger control undertaken by each country, the level of development of their laws, restrictions relating to the sharing of information and the lack of mandatory information sharing practices are some of the barriers the region must overcome to implement regional merger control practices. However, this in no way is a material obstacle to the growth and expansion of multilatinas, and in some cases can even prove to be an advantage for them.

The pandemic and M&A throughout the region

Although Latin America has had a degree of political and economic stability (at least regarding the Pacific Alliance countries) for the past two decades, the governments’ reaction to the covid-19 pandemic through prolonged – and in some cases, draconian – lockdowns have generated severe economic consequences, and have led to severe political crisis and prolonged social protests throughout the region. In some cases, this is manifesting in potential changes to the very structures that allowed multilatinas to thrive and expand.

As such, some multilatinas have chosen to restructure their activities and exit certain markets. Falabella, for example, chose to progressively wind up its activities in Argentina due to (1) the hard devaluation of the currency and the impact in its balance sheet; (2) the lack of interest of any retailer in acquiring the activities in Argentina or being a strategic partner; and (3) the impact of prolonged lockdown on physical retail stores.^[24] Its last physical retail stores were closed in April 2021. While the group planned to keep an online retail presence, it finally closed down its online retail operation in May 2021.^[25]

Grupo Salinas (the Group), however, wound up its operations in Peru as the result of a series of different factors. On the one hand, it sold off its banking arm – operating under the Banco Azteca brand – to a small group of Peruvian investors.^[26] The Group mentioned it would be focusing its efforts on Mexico, the United States and Central America.^[27] On the other, the Group closed all of its stores under the ‘Elektra’ brand in Peru due to the effect of the prolonged lockdown in Peru (one of the longest and strictest in the region), as well as a diminished financial position after the sale of Banco Azteca’s operation.^[28]

The pandemic also generated opportunities for certain investors. Brazilian private equity firm IG4 acquired Peruvian multilatina Aenza (previously Graña & Montero) in 2021, through a tender offer for the company’s shares and ADR, as well as a syndication agreement,^[29] and after a prolonged negotiation that included the company reaching certain agreements with the Peruvian state regarding the company’s involvement in the Lava Jato scandal. The fund also announced its intention to spin off the construction, real estate and oil and gas operations of the company and focus solely on infrastructure.^[30]

In August 2021, Camil Alimentos took the opportunity to acquire Alicorp’s asset in Brazil, Pastificio Santa Amalia SA, in order to expand its geographical footprint in Brazil and expand into new categories of products while Alicorp refocuses its efforts in other markets.^[31]

Future trends and final thoughts

While the covid-19 pandemic caused an impact economically in Latin America, and political instability resulted in defensive measures from certain economic groups, the market is ripe with opportunities for multilatinas. On the one hand, economic groups in countries going through political upheaval are conservatively creating significant cash reserves abroad and have a certain amount of liquidity to invest in jurisdictions other than their original ones, whether looking for stability or diversification. On the other, businesses affected by the pandemic will be looking to divest certain assets, where multilatinas that have a solid cash position and cultural affinity will be able to acquire opportunistic M&A, most likely at a discount.

If recent transactions are any indicator, deals related to healthcare, public utilities (particularly energy) and fintech are also likely to increase. Finally, in response to the covid-19 crisis, governments in the region have increased their relief and stimulus spending, which is likely to increase the fiscal deficit. As the deficit mounts, governments will consider a wide range of options, including the privatisation of public companies. For example, the Colombian government has already announced its intention to privatise its assets in the energy sector in an effort to reduce its deficit.

An interesting trend related to the rise of multilatinas is the increasing appeal of venture capital, where established firms are collaborating with innovative start-ups in what is called corporate venture capital. According to Global Corporate Venturing Analytics, in 2018 there were 1,620 active corporate venture operations, in comparison to the 375 that existed in 2011. The volume of venture capital operations in Latin America is much lower than that in Asia and the United States, but in the first three quarters of 2019 the venture capital activity in the region grew 151.2 per cent from US$700 to US$1,600 million, and has been steadily growing ever since, reaching a record-breaking year in 2021 with US$14,800 million. Multilatinas such as Grupo Sura, Grupo Crédito, Petrobras, Grupo Bimbo and Falabella have already embarked on corporate venture capital through corporate incubators and accelerators, scouters, venture builders and start-up acquisitions, and are likely to continue investing in all sorts of industries, particularly fintechs and companies that have undergone multiple financing rounds, such as Colombia’s Rappi, Mexico’s Clip and Brazil’s Creditas. These corporate activities, together with government programmes such as Ruta N, StartUp Peru, 500 Startups, Startup Farm, Corfo and other external factors have increased venture activity in the region, as evidenced by the number of unicorns that emerged in Latin America in the past decade.^[32] As the market matures and funding increases, venture capital deals will increase and start-ups will consolidate and become the future multilatinas. Japanese conglomerate Softbank announced the creation of a US$5 billion investment fund for Latin America and has already invested US$1 billion in Rappi, a Colombian unicorn.^[33]

On a final note, Latin America and its people are known for their creativity, grit and resilience, and in many ways for growing in spite of their governments. While covid-19 has certainly generated challenges for the region, let us not forget that multilatinas have been forged through the ups and downs of the region, and certainly know how to navigate difficult environments, diversify and make the best of the opportunities presented. In addition, new generations of entrepreneurs are contributing to the growth of a variety of enterprises and industries in the region, even in current market conditions. For example, Peruvian startup Crehana recently raised the Largest Series B round of financing for an Edtech in Latin America.^[34] Latin American democracies have been forged through crisis and the current unrest in the region will result in more robust institutions and the growth of its people.

Notes