Latin American M&A and Distress Outlook: Post-Pandemic Effects, Market Dynamics, Trends and Opportunities

Introduction

Merger and acquisition (M&A) activity has been volatile in recent years, although in 2020, the volume and value of transactions decreased as a result of the covid-19 pandemic. Most were put on hold because of the uncertainty caused by the unpredictable behaviour of the markets. The M&A landscape also changed during 2021. Government aid in certain countries, low interest rates, new macro trends and the possibility to invest in businesses in distress created the optimal environment for a record year. There were more than 700 transactions and an approximate deal value of US$98 billion in Latin American countries, which represents growth of 24 per cent and 66 per cent, respectively, as compared with 2020.[2]

A change in trends was seen during 2021 and 2022. Whereas in 2019 and 2020 the financial services, energy and other services sectors were ahead, in subsequent years, data indicates that they have been displaced by the technology and medical sectors, in which momentum was greater, in line with the trends seen in North America.

Although the outlook for 2022 remains uncertain, there are nevertheless opportunities for M&A activity. The global dynamics are further adjusting because of multiple factors, including conflicts in Europe and the relationship between the United States and China, putting additional strain on an environment that is already facing inflationary pressures, high interest rates, effects on supply chains (supply chain crunches affecting products and commodities across different sectors) in different countries. Furthermore, there is a rising interest in environmental, social and governance (ESG) investments and a shift to remote working. Moreover, the stress derived from a looming recession in the largest economies brings additional challenges to growth and stability. Companies and institutional investors are reassessing their strategies around the acquisition of new capabilities, or divestitures in non-core assets to reinvest in strategic capabilities and to strengthen their balance sheets, and looking for transformative projects or opportunistic deals, taking advantage of macroeconomic conditions.[3]

Looking forward, 2022 might be a year that is hard to read. The combination of the recent pandemic-based behaviours and macroeconomic trends are accelerating the obsolescence of traditional business models, bringing investment to technology companies and simultaneously demanding better performance. For instance, with the migration to remote working, companies have largely accelerated investment in cybersecurity to maintain resilience and continuity; some technology companies are considering shifting from the use of heavy-emitting data centres towards cloud computing services, while others are transitioning to new business models with innovations in energy storage or solutions for a sustainable circular economy.[4]

Restructuring activity is expected to continue, with turnaround processes, divestitures and spin-offs; the most common causes are debt resizing from restructured businesses resulting from contractions, higher rates, digital transformation, process simplification, automation, focus on core business and distress in the global supply chains, among others.

On a global scale, there have been increases in the levels of inflation and interest rates, conservative forecasts for gross domestic product (GDP), and political and regulatory changes. In addition, recent international conflicts have caused volatility in the markets and throughout the global supply chain, which raises two questions: how different regions and sectors will be affected and what the outlook is for M&A transactions (non-distressed and distressed).

Latin American M&A activity in numbers

The trend in Latin American M&A activity suggests a relative comeback following the pandemic, which has its corresponding challenges, ranging from local government policies concerning economic rescue or reactivation packages, the shutting down of activities, vaccination rollouts, pandemic-related public behaviour, corporations’ capacity to access additional capital to navigate or even capitalise on existing business opportunities, and global dynamics, to name a few. There is a certain optimism in the investment community about their prospects in Latin America since 2021 was a record year for M&A transactions, despite the challenges faced.

Taking the lead in M&A transactions is Brazil (with 56 per cent of closed transactions), followed by Mexico (8 per cent), Colombia (8 per cent), Chile (6 per cent) and Argentina (5 per cent). The statistics in Table 1, below, are based on an average of transactions closed between 2018 and 2022, and the breakdown has remained similar each year. Brazil has historically driven the bulk of trans­actions (even showing a year-on-year growth of 43 per cent comparing 2020 with 2021). Although most countries showed signs of recovery, Argentina still remains behind pre-pandemic levels.

Table 1. Completed transactions by target country (2018–2022 YTD)[5]

Number of transactions (as percentage of total for the year)
Country20182019202020212022 YTDTotal
(Average)
Brazil293
(46%)
360
(49%)
308
(53%)
440
(61%)
191
(62%)
1,592
(56%)
Mexico63
(10%)
60
(8%)
52
(9%)
58
(8%)
17
(6%)
250
(8%)
Colombia34
(5%)
65
(9%)
40
(7%)
50
(7%)
28
(9%)
217
(8%)
Chile53
(8%)
60
(8%)
27
(5%)
45
(6%)
21
(7%)
206
(6%)
Argentina50
(8%)
43
(6%)
27
(5%)
27
(4%)
14
(5%)
161
(5%)
Others142
(22%)
154
(21%)
129
(22%)
101
(14%)
35
(11%)
561
(17%)
Total6357425837213062,987

When comparing the percentage change from 2020 to 2021, the region shows 24 per cent year-on-year growth, mainly driven by Chile, Brazil and Colombia. On the other hand, Mexico presented a modest year-on-year growth of 12 per cent and Argentina shows no change. Although there is a significant year-on-year growth in 2021 as compared with 2020, just a few countries in the region (Brazil and Mexico) have equalled (or even exceeded) the pre-pandemic levels of 2019.

Table 2. Percentage change in volume of completed transactions by target country year-on-year (2019–2021)

Country201920202021
Brazil23%-14%43%
Mexico-5%-13%12%
Colombia91%-38%25%
Chile13%-55%67%
Argentina-14%-37%0%
Others8%-16%-22%
Total17%-21%24%

If data is considered from a different perspective, for example by deal value range, statistics show that all ranges were significantly affected by the global pandemic in 2020, but by 2021 there was a significant increase in Mexico, Colombia and Chile, exceeding pre-pandemic levels to some extent.

Table 3. Deals’ value for completed transactions by target country (2018–2022 YTD)[6]

US$ million (as percentage of total for the year)
Country20182019202020212022 YTDTotal
(Average)
Brazil19,765
(26%)
51,830
(53%)
18,589
(31%)
48,263
(49%)
18,364
(42%)
137,047
Chile10,019
(13%)
9,295
(10%)
3,549
(6%)
11,999
(12%)
4,940
(11%)
29,783
Colombia1,892
(2%)
8,024
(8%)
2,708
(5%)
12,092
(12%)
4,464
(10%)
27,287
Mexico2,773
(4%)
4,943
(5%)
9,674
(16%)
6,497
(7%)
3,721
(9%)
24,834
Argentina2,642
(3%)
4,259
(4%)
831
(1%)
693
(1%)
1,115
(3%)
6,898
Others39,552
(52%)
18,647
(19%)
24,136
(41%)
18,569
(19%)
11,067
(25%)
111,971
Total76,643 96,998 59,486 98,112 43,671337,819

On the other hand, from the perspective of the range of ticket size (see Table 4, below),[7] Colombia and Chile show the highest amount when compared with the other countries in the region. Although there was no growth in trans­action volume, the higher ticket size was mainly driven by high-value deals in the following sectors: energy; consumer: retail, internet and e-commerce; financial services; and consumer: foods. In terms of location of investors, statistics show a greater trend of investors from within the region (60 per cent) as compared with those from outside the region (40 per cent).

Table 4. Ticket size for completed transactions by target country (2018–2022 YTD)[8]

US$ millions
Country20182019202020212022 YTDTotal
Chile189155131267235145
Colombia5612368242159126
Mexico448218611221999
Brazil67144601109686
Argentina539931268043
Others279121187184316200
Total121 131 102 136 143 113

Table 5. Completed transactions by bidder country (2018–2022 YTD)[9]

Number of transactions (as percentage of total for the year)
Country20182019202020212022 YTDTotal
Within Latin America339
(53%)
383
(52%)
321
(55%)
432
(60%)
169
(55%)
1,644
Outside region296
(47%)
359
(48%)
262
(45%)
289
(40%)
137
(45%)
1,343
Total6357425837213062,987

There was no significant change during 2020 in reported transactions involving insolvency, recapitalisations, divestments and auctions as compared with prior years. However, the trend changed in 2021 and 2022, where transactions in special situations increased in Brazil, Mexico and Chile, suggesting that the business climate did not improve completely for some companies, and investors are embracing the opportunities this presents.

Table 6. Completed transactions in distress by target county (2018–2022 YTD)[10]

Number of transactions (as percentage of total for the year)
Country20182019202020212022 YTDTotal
Brazil24
(46%)
17
(49%)
19
(53%)
60
(61%)
50
(62%)
170
(56%)
Chile5
(10%)
3
(8%)
4
(9%)
9
(8%)
14
(6%)
35
(8%)
Mexico2
(5%)
5
(9%)
3
(7%)
8
(7%)
10
(9%)
28
(8%)
Argentina5
(8%)
4
(8%)
3
(5%)
4
(6%)
6
(7%)
22
(6%)
Colombia2
(8%)
0
(6%)
2
(5%)
4
(4%)
6
(5%)
14
(5%)
Others3
(22%)
4
(21%)
4
(22%)
12
(14%)
18
(11%)
41
(17%)
Total41333597104310

Despite the levels of volatility, the M&A landscape in Latin America appears to have recovered fully, showing the highest volume and deal value since 2019, and taking into account a number of factors, such as supported regions receiving government aid, lower interest rates, geographical location, changes in consumer behaviour and distress M&A opportunities. According to some investment bankers, to maintain momentum, investors need to understand the key macroeconomic factors that will drive the business landscape for the rest of 2022, and beyond, and adopt a hands-on approach in their portfolios to ensure prompt and efficient adjustments and exits.

Latin American M&A challenges for 2022

The global political situation has affected companies in different ways. Financial markets have become highly volatile, causing irreparable losses to investors. Furthermore, shortages in supplies have led to a surge in the prices of gas and raw materials, inflation and lower economic growth.[11]

Going forward, companies will have to deal with higher inflation and disrupted supply chains, leaving behind the hampered production already caused by the covid-19 pandemic. It is expected that transportation and logistics will face increased costs in addition to the spike in prices of raw materials and will take time to adjust the situation to one that will be considered more amenable for all participants – from consumers to investors. These are just some of the factors that have influenced the record high inflation experienced by some countries.[12]

In recent years, working remotely has become the new normal, although this is yet to be proven or fully understood. One of the current strategies is hybrid working. However, the lack of hybrid working models or flexibility has further driven the ‘Great Resignation’ in the United States, and in some parts of Latin America. The implementation of this strategy can result in companies incurring extra expenses, as they may need to improve the technological solutions and display tools needed to maintain team productivity and collaboration.[13]

ESG initiatives have gained traction in developed economies and top-tier companies. Many companies have become more sensitive to the advantages in new forms of funding that fit in with ESG standards. Eventually, ESG will be a game changer for organisations in both the public and the private sectors. They will stand to gain a competitive advantage by embracing ESG as part of their in-house culture.

Changes in habits and the market have presented agile investors with opportunities to deploy capital into sectors that have benefited and grown despite the pandemic. The following sections give a broader insight into the most targeted sectors in Latin America.

Dissecting the top sectors driving M&A transactions

Preliminary data suggests that the pandemic caused changes in the leading transaction sectors comparing 2020 and 2021. Those that benefited most were computer software, medical, energy, internet and e-commerce, which make up 60 per cent of transactional volume in Latin America.

Table 7A. Completed transactions by sector (2018–2022 YTD)[14]

Number of transactions (as percentage of total for the year)
Sector20182019202020212022 YTDTotal
(Average)
Energy76
(12%)
79
(11%)
71
(12%)
64
(9%)
32
(10%)
322
(11%)
Computer software30
(5%)
40
(5%)
54
(9%)
110
(15%)
71
(23%)
305
(9%)
Financial services55
(9%)
80
(11%)
61
(10%)
68
(9%)
38
(12%)
302
(10%)
Services (other)62
(10%)
81
(11%)
66
(11%)
70
(10%)
20
(7%)
299
(10%)
Medical55
(9%)
58
(8%)
42
(7%)
67
(9%)
14
(5%)
236
(8%)
Internet/E-commerce13
(2%)
30
(4%)
32
(5%)
55
(8%)
11
(4%)
141
(5%)
Transportation28
(4%)
31
(4%)
31
(5%)
32
(4%)
12
(4%)
134
(5%)
Consumer: Foods31
(5%)
40
(5%)
21
(4%)
27
(4%)
7
(2%)
126
(4%)
Industrial products and services27
(4%)
26
(4%)
17
(3%)
30
(4%)
9
(3%)
109
(4%)
Consumer: Retail25
(4%)
29
(4%)
9
(2%)
20
(3%)
10
(3%)
93
(3%)
Chemicals and materials25
(4%)
19
(3%)
16
(3%)
13
(2%)
14
(5%)
87
(3%)
Leisure25
(4%)
34
(5%)
10
(2%)
12
(2%)
4
(1%)
85
(3%)
Others183
(29%)
195
(26%)
153
(26%)
153
(21%)
64
(21%)
748
(26%)
Total6357425837213062,987

Table 7B. Top sectors

Number of transactions (as percentage of total for the year)
Sector20182019202020212022 YTDTotal
(Average)
Top six sectors291
(46%)
368
(63%)
326
(69%)
434
(75%)
186
(74%)
1,605
(63%)
Others344
(54%)
214
(37%)
149
(31%)
148
(25%)
67
(26%)
922
(37%)
Total6355824755822532,527

Leading sectors before and during the pandemic had few changes. The aforementioned global trends (particularly in financial services, computer software, internet and e-commerce, and services) were already in the eye of corporations and institutional investors, with an expanding appetite for transformative M&A to add scale, capabilities and access to new markets, as well as other sectors with solid fundamentals, such as energy, medical, consumer (foods), agriculture, transportation and construction.

Table 8. Completed transactions in distress by sector (2018–2022 YTD)[15]

Number of transactions (as percentage of total for the year)
Sector20182019202020212022 YTDTotal
(Average)
Energy18
(44%)
9
(27%)
7
(20%)
25
(26%)
18
(17%)
77
(29%)
Financial services0
(0%)
4
(12%)
1
(3%)
8
(8%)
10
(10%)
23
(6%)
Telecommunications: Carriers4
(10%)
1
(3%)
1
(3%)
9
(9%)
6
(6%)
21
(6%)
Computer software0
(0%)
0
(0%)
2
(6%)
6
(6%)
9
(9%)
17
(3%)
Transportation3
(7%)
2
(6%)
0
(0%)
6
(6%)
5
(5%)
16
(5%)
Services (other)0
(0%)
4
(12%)
1
(3%)
2
(2%)
8
(8%)
15
(4%)
Chemicals and materials4
(10%)
1
(3%)
1
(3%)
3
(3%)
4
(4%)
13
(5%)
Mining2
(5%)
0
(0%)
1
(3%)
3
(3%)
7
(7%)
13
(3%)
Industrial products and services4
(10%)
0
(0%)
3
(9%)
3
(3%)
3
(3%)
13
(5%)
Consumer: Retail0
(0%)
3
(9%)
0
(0%)
4
(4%)
5
(5%)
12
(3%)
Utilities (other)1
(2%)
0
(0%)
5
(14%)
3
(3%)
3
(3%)
12
(5%)
Construction1
(2%)
0
(0%)
3
(9%)
5
(5%)
1
(1%)
10
4(%)
Others4
(10%)
9
(27%)
10
(2%)
20
(21%)
25
(24%)
68
(22%)
Total41333597104310

Latin America macro outlook

The year 2020 ended with the greatest economic downturn of the last two centuries in Latin America, damaging both the economy and society. Social costs have been severe in terms of inequalities and poverty – the effects of the crisis have affected the most vulnerable groups in particular. Latin American economies regained some ground in 2021, as shown in Table 9, below, but uncertainty remains regarding the strength of the recovery.[16]

Table 9. Latin America macro outlook (2019–2022 forecast)[17]

KPIs[18]2019202020212022f
GDP level0.8%-6.4%6.7%2.5%
Fixed investment-0.6%-11.1%16.3%1.5%
Inflation, GDP deflator (annual percentage)2.7%2.4%N/AN/A

Mexico

The recovery in Mexico has been slower than in other comparable countries and economic activity remains slightly below that of 2019. Two years after the start of the first lockdown, the labour market continued to show signs of weakness and worsening conditions. Covid-19 and its variants still pose a risk to the labour market, and continue to hamper economic activity. Another factor is the relatively lower level of foreign investment, which is key to job creation. The country could further benefit from its geographical proximity to the United States and trade deals in place, where companies continue to near-shore production facilities. The sectors in which significant M&A activity is expected in Mexico are agriculture, transportation and logistics, which are the backbone of the primary sector, and the industrial sectors, leveraging proximity to the United States.[19]

Table 10. Mexico macro outlook (2019–2022 forecast)[20]

KPIs2019202020212022f
1 GDP growth (annual percentage)-0.2%-8.2%5.7%3.0%
2 Foreign direct investment (US$ billions)34.427.931.629.4
3 Lending8.4%6.3%4.9%8.25%
4 Inflation, consumer prices (annual percentage)3.6%3.4%5.7%7.3%

Table 11. Top five targeted sectors – Mexico (2018–2022 YTD)[21]

Number of transactions
Sector20182019202020212022 YTDTotal
Energy9854127
Services (other)5758126
Financial services8625223
Industrial products and services6541117
Internet/E-commerce1148014
Others3433323217148
Total63605258221,255

The most recent retail trends in the country include the digitalisation of retailers and how they adapt their core business, exploring digital products and experiences, and exploring the metaverse. Consumers are seeking frictionless, contactless and checkout-free stores, and ultra-fast and autonomous deliveries are rapidly becoming mainstream. In addition, consumers are taking sustainability and traceability more into account when making a purchase.[22]

The growth of fintech businesses continues to make up a sizeable proportion of the non-banked population, although the continuing risk of limitations on banking fees must be a consideration. Small and medium-sized enterprises are still struggling to access additional and competitive financing needs, and are reliant on high-interest credit lines, which imposes further pressure while considering ongoing increments in interest rates, leaving an opportunity breach.

Access to traditional financing and structured finance could boost the M&A market significantly, as well as opportunities to invest in distressed assets in the energy, consumer, industrial and leisure sectors. Data on completed transactions in distress by sector shows that there was an increase in 2021 and 2022 driven by the energy, computer software, financial services, transportation and mining sectors.

Table 12. Completed transactions in distress by sector (2018–2022 YTD)[23]

Number of transactions (as percentage of total for the year)
Sector20182019202020212022 YTDTotal
(Average)
Energy0
(0%)
2
(40%)
0
(0%)
3
(38%)
2
(20%)
7
(19%)
Transportation0
(0%)
0
(0%)
0
(0%)
1
(13%)
2
(20%)
3
(3%)
Telecommunications: Carriers1
(50%)
1
(20%)
0
(0%)
0
(0%)
0
(0%)
2
(18%)
Financial services0
(0%)
1
(20%)
0
(0%)
0
(0%)
1
(10%)
2
(5%)
Industrial products and services1
(50%)
0
(0%)
1
(33%)
0
(0%)
0
(0%)
2
(21%)
Computer software0
(0%)
0
(0%)
0
(0%)
0
(0%)
1
(10%)
1
(0%)
Chemicals and materials0
(0%)
0
(0%)
0
(0%)
1
(13%)
0
(0%)
1
(3%)
Mining0
(0%)
0
(0%)
0
(0%)
0
(0%)
1
(10%)
1
(0%)
Utilities (other)0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
Computer services0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
Consumer: Retail0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
Construction0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
Others0
(0%)
1
(20%)
2
(67%)
3
(38%)
3
(30%)
9
(31%)
Total25381028

Travel and hospitality investments are expected to increase the volume and type of tourist services on offer. The post-pandemic tourism dynamics are creating opportunities across these sectors. The vaccine rollout in the United States, and globally, has boosted tourists’ return to Mexico.

Mexico’s energy sector still has significant potential, which could serve as an anchor for future economic growth given the continued demand for energy to support production and general growth in the economy.[24] However, upward revisions to the forecast for Mexico’s oil and gas downstream sector and the forecast for crude production remain below government targets. In addition, indications to market players from the administration and actions it has taken have created a degree of uncertainty.

The drop in vehicle production worldwide as a result of supply shortages, especially semiconductors and raw materials, presents investors with the opportunity to deploy capital in a strategic sector during this downturn. The country will still benefit from companies focusing on near-shoring and reactivation of the automotive supply chain going forward.

Brazil

The World Bank forecasts growth in GDP by the end of 2022 of 1.4 per cent (3.5 percentage points below 2021). Additionally, the country is affected by rising inflation, interest rates and declining retail sales. Inflation is not only proving detrimental to consumers’ purchasing power but also adding a weak consumer sentiment restulting from the deep shock to the economy in 2020–2021. Consumer spending grew by only 0.7 per cent quarter-on-quarter in Q4 2021, and it is unlikely that growth will pick up sharply and sustainably in the short term.[25]

Table 13. Brazil macro outlook (2019–2022 forecast)[26]

KPIs2019202020212022f
1 GDP growth (annual percentage)1.2%-3.9%4.9%1.4%
2 Foreign direct investment (US$ billions)69.237.846.455.0
3 Lending interest rate (percentage)37.5%29%30%48.14%
4 Inflation, consumer prices (annual percentage)3.7%3.2%8.3%6.7%

Driven by continuing social distancing policies and employees working from home, computer software, financial services and e-commerce are now the best-performing industries.[27] Brazil is no exception, therefore, in showing a clear preference for the global trends. The largest players (apart from technology-related sectors) are medical, services, energy and consumer (foods), all of which have been driven by continuing solid fundamentals or pandemic-related needs. The medical and services sectors have both evolved and adapted as needed during the pandemic, directly or indirectly. For example, there were a significant number of transactions in Brazil during the pandemic involving acquisitions of health institutions, healthcare-related supply chains and hospital management. In the services sector, the bulk of the transactions were education-related, followed by distributors and business support services.

Table 14. Top five targeted sectors – Brazil (2018–2022 YTD)

Number of transactions
Sector20182019202020212022 YTDTotal
Computer software2130388252223
Medical4552315611195
Services (other)3742434414180
Financial services1729284623143
Energy2735322620140
Others14617213618671711
Total2933603084401911,592

Completed transactions in distress by sector show that there was an increase in 2021 and 2022 driven by the energy, computer software, financial services, telecommunications and mining sectors.

Table 15. Completed transactions in distress by sector (2018–2022 YTD)[28]

Number of transactions (as percentage of total for the year)
Sector20182019202020212022 YTDTotal
Energy13
(54%)
5
(29%)
4
(21%)
15
(25%)
11
(22%)
48
(32%)
Telecommunications: Carriers2
(8%)
0
(0%)
1
(5%)
9
(15%)
4
(8%)
16
(7%)
Computer software0
(0%)
0
(0%)
2
(11%)
5
(8%)
6
(12%)
13
(5%)
Chemicals and materials2
(8%)
1
(6%)
1
(5%)
2
(3%)
2
(4%)
8
(6%)
Financial services0
(0%)
0
(0%)
0
(0%)
5
(8%)
2
(4%)
7
(2%)
Transportation3
(13%)
2
(12%)
0
(0%)
1
(2%)
1
(2%)
7
(6%)
Utilities (other)1
(4%)
0
(0%)
2
(11%)
2
(3%)
2
(4%)
7
(5%)
Industrial products and services2
(8%)
0
(0%)
1
(5%)
2
(3%)
1
(2%)
6
(4%)
Computer services0
(0%)
0
(0%)
0
(0%)
5
(8%)
0
(0%)
5
(2%)
Consumer: Retail0
(0%)
2
(12%)
0
(0%)
2
(3%)
1
(2%)
5
(4%)
Construction0
(0%)
0
(0%)
2
(11%)
2
(3%)
0
(0%)
4
(3%)
Mining0
(0%)
0
(0%)
0
(0%)
2
(3%)
1
(2%)
3
(1%)
Others1
(4%)
7
(41%)
6
(32%)
8
(13%)
19
(38%)
41
(23%)
Total2417196050170

Despite the continuing uncertainty, Brazil is certain to benefit from the following, which could result in an increase in transactions:

  • The country is known for its passion for football and with the World Cup tournament approaching in autumn 2022, it is expected that the consumption of certain retail products, such as televisions, cell phones and sportswear, will increase during the season.
  • New technology developed by the Central Bank of Brazil – platform embedding features such as automatic charges, automatic recurring payments and contactless payments – has already benefited more than 100 million users, from which digital businesses will also benefit.
  • New fintech businesses are providing a further economic boost, driven by some of the latest unicorns of the country. According to the International Compensation Bank, 50.5 per cent of fintech businesses in Latin America are concentrated in Brazil.[29]

Colombia

Colombia’s economy has recovered remarkably well from the covid-19 crisis. Strong fiscal and monetary policy support have averted a stronger contraction of incomes, and solid macroeconomic policy frameworks are preparing the ground for a continuing recovery of domestic demand. In contrast, growth and social inclusion continue to have policy challenges that affect more than half of income earners. Solving this through targeted reforms would provide a further boost for workers’ well-being.[30]

Table 16. Colombia macro outlook (2019–2022 forecast)[31]

KPIs201920202021e2022f
1 GDP growth (annual percentage)3.3%-6.8%9.9%4.1%
2 Foreign direct investment (US$ billions)14.07.59.413.0
3 Lending interesting rate11.8%9.9%9.3%N/A
4 Inflation, consumer prices (annual percentage)3.5%2.5%3.5%6.9%

One of the most popular trends in Columbia is digitisation, with consumers choosing to purchase products and services digitally. The sectors that have benefited from this trend are banking, health, education and entertainment. Additionally, consumers have begun to adjust their spending habits by increasing spending more in restaurants, hotels and department stores.[32]

Table 17. Top five targeted sectors – Colombia (2018–2022 YTD)[33]

Number of transactions
Sector20182019202020212022 YTDTotal
Energy68710132
Consumer: Foods3512314
Internet/E-commerce2225213
Transportation1306111
Medical: Pharmaceuticals2414011
Others81715111970
Total2239263826151

In Table 18, completed transactions in distress by sector show an increase in 2021 and 2022 driven by energy, financial services and industrial products.

Table 18. Completed transactions in distress by sector (2018–2022 YTD)[34]

Number of transactions (as percentage of total for the year)
Sector20182019202020212022 YTDTotal
(Average)
Energy2
(100%)
0
(0%)
1
(50%)
2
(50%)
0
(0%)
5
(50%)
Financial services0
(0%)
0
(0%)
0
(0%)
2
(50%)
3
(50%)
5
(13%)
Chemicals and materials0
(0%)
0
(0%)
0
(0%)
0
(0%)
1
(17%)
1
(0%)
Industrial products and services0
(0%)
0
(0%)
0
(0%)
0
(0%)
1
(17%)
1
(0%)
Computer services0
(0%)
0
(0%)
1
(50%)
0
(0%)
0
(0%)
1
(13%)
Telecommunications: Carriers0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
Computer software0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
Transportation0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
Utilities (other)0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
Consumer: Retail0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
Construction0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
Mining0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
Others0
(0%)
0
(0%)
0
(0%)
0
(0%)
1
(17%)
1
(0%)
Total2024614

Industries such as energy, infrastructure and medical are expected to dominate M&A activity in Colombia. Deregulation at the end of 2019, financial reforms and the increased popularity of telemedicine during the pandemic have boosted perception of the healthcare sector as one of the industries with the greatest potential for M&A. Changes in consumer habits have enabled the rapid expansion of sectors such as pharmaceuticals, logistics and e-commerce. Interest moving forward appears to be in innovative start-ups and tech-enabled players aiming to improve digital channels to get closer to their customers and with the aim of providing financial services to the non-banked portion of the population.

Chile

Although GDP grew by 11.8 per cent in 2021, the projection for the end of 2022 is just 2.2 per cent. Interest rates and inflation have upward forecasts, which could affect both companies and consumers. Looking forward, a further slowdown in year-on-year growth is expected. Increases in inflation and interest rates pose additional economic pressure in the region.[35]

Table 19. Chile macro outlook (2019–2022 forecast)[36]

KPIs201920202021e[37]2022f
1 GDP growth (annual percentage)0.9%-5.8%11.8%2.2%
2 Foreign direct investment (US$ billions)14.07.59.4N/A
3 Lending interesting rate3.6%2.8%4.4%6.8%
4 Inflation, consumer prices (annual percentage)2.6%3%4.5%6.0%

Recent trends in Chile show that exports are rebalancing towards services and manufactured goods, even as copper prices have risen post-pandemic. Chile has invested in a variety of economic sectors outside mining, such as agribusiness, renewable energy and tourism, which could reduce the country’s dependence on commodity exports. Additionally, Chile stands to benefit from global lithium demand and from its significant production of green hydrogen trends.[38]

Table 20. Top five targeted sectors – Chile (2018–2022 YTD)[39]

Number of transactions
Sector20182019202020212022 YTDTotal
Energy1111511543
Transportation3614014
Mining4220412
Consumer: Foods2323010
Industrial products and services4203110
Others172113142287
Total4145233532176

Table 21, below, shows that there was an increase in completed transactions in distress by sector in 2021 and 2022 driven by the energy, utilities, mining, financial services, computer services, transportation and retail sectors.

Table 21. Completed transactions in distress by sector (2018–2022 YTD)[40]

Number of transactions
Sector20182019202020212022 YTDTotal
(Average)
Energy2
(40%)
1
(33%)
0
(0%)
3
(33%)
2
(14%)
8
(27%)
Utilities (other)0
(0%)
0
(0%)
3
(75%)
1
(11%)
1
(7%)
5
(22%)
Mining1
(20%)
0
(0%)
0
(0%)
0
(0%)
3
(21%)
4
(5%)
Financial services0
(0%)
1
(33%)
0
(0%)
0
(0%)
2
(14%)
3
(8%)
Consumer: Retail0
(0%)
0
(0%)
0
(0%)
1
(11%)
2
(14%)
3
(3%)
Transportation0
(0%)
0
(0%)
0
(0%)
2
(22%)
0
(0%)
2
(6%)
Industrial products and services1
(20%)
0
(0%)
0
(0%)
0
(0%)
1
(7%)
2
(5%)
Computer services0
(0%)
1
(33%)
0
(0%)
0
(0%)
1
(7%)
2
(8%)
Construction0
(0%)
0
(0%)
1
(25%)
0
(0%)
1
(7%)
2
(6%)
Telecommunications: Carriers0
(0%)
0
(0%)
0
(0%)
0
(0%)
1
(7%)
1
(0%)
Computer software0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
Chemicals and materials0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
Others1
(20%)
0
(0%)
0
(0%)
2
(22%)
0
(0%)
3
(11%)
Total53491435

M&A activity will continue to grow, benefiting mostly the sectors that have proved more resilient, such as medical and technology-related. The energy, infrastructure, mining and agriculture sectors are expected to drive part of the M&A activity as well. In line with Chile’s carbon neutrality strategy up to 2040, solar deals and natural resources transactions are also expected to be a relevant trend. The current economical–political situation is perceived as favourable for the dealmaking environment.

Argentina

Argentina came out of recession in 2021, and the World Bank expects the country to achieve growth in GDP of 2.6 per cent by the end of 2022. The government has reached an agreement with the International Monetary Fund that includes relatively loose and gradual targets for fiscal and monetary consolidation and reserve accumulation, without considering structural reforms. In contrast, inflationary pressures continue to increase, largely because of supply chain bottlenecks and commodity prices.[41]

Table 22. Argentina macro outlook (2019–2022 forecast)[42]

KPIs201920202021e[43]2022f
1 GDP growth (annual percentage)-2.0%-9.9%10.0%2.6%
2 Foreign direct investment (US$ billions)6.74.0655.2N/A
3 Lending interesting rate67.3%29.4%35.6%N/A
4 Inflation, consumer prices (annual percentage)53.8%36.1%50.9%6.0%

M&A transactions are expected to remain low, based on an uncertain political and macroeconomic outlook. Low economic activity and negative growth since 2018, combined with high inflation and the negative effects of the pandemic, have made it difficult to restore confidence within the international investment community. Despite this, Argentina’s transactions have attracted debt providers and funds that typically have a higher risk profile.

Table 23. Top five targeted sectors – Argentina (2018–2022 YTD)[44]

Number of transactions
Sector20182019202020212022 YTDTotal
Energy11761227
Consumer: Foods1612010
Mining321118
Leisure430007
Manufacturing (other)313007
Others171711101570
Total3936221418129

There is also a more optimistic view with some variables that could have a positive effect on M&A transactions in the medium term, such as the size of the Argentinian economy and a belief that distressed assets, declining valuation, divestures and the long-term view of strategic investors could create opportunities that lead to recovery. The recent restructuring of the sovereign debt and the competitive advantages in certain key areas (agriculture, technology, pharmaceuticals and energy) might also boost deals.

Table 24. Completed transactions in distress by sector (2018–2022 YTD)[45]

Number of transactions (as percentage of total for the year)
Sector20182019202020212022 YTDTotal
(Average)
Energy1
(20%)
1
(25%)
1
(33%)
0
(0%)
1
(17%)
4
(20%)
Computer software0
(0%)
0
(0%)
0
(0%)
1
(25%)
2
(33%)
3
(6%)
Mining1
(20%)
0
(0%)
1
(33%)
0
(0%)
1
(17%)
3
(13%)
Chemicals and materials2
(40%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
2
(10%)
Telecommunications: Carriers1
(20%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
1
(5%)
Financial services0
(0%)
1
(25%)
0
(0%)
0
(0%)
0
(0%)
1
(6%)
Consumer: Retail0
(0%)
0
(0%)
0
(0%)
1
(25%)
0
(0%)
1
(6%)
Construction0
(0%)
0
(0%)
0
(0%)
1
(25%)
0
(0%)
1
(6%)
Transportation0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
Utilities (other)0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
Industrial products and services0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
Computer services0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
Others0
(0%)
2
(50%)
1
(33%)
1
(25%)
2
(33%)
6
(27%)
Total5434622

The country could benefit from advancements in natural gas extraction technology to make Argentina’s vast shale gas reserves accessible. Openness to foreign investment could allow firms to reverse years of underinvestment in key sectors, including agriculture and energy.[46]

Investing in distressed situations

M&A activity in Latin America is expected to recover at a different pace depending on geography, sectors and local policy. Some companies will likely need to reassess their M&A strategy to identify where to buy or build desired capabilities for the future, while others will likely pursue divestitures in non-core assets to reinvest in strategic capabilities or to strengthen their balance sheets. As a consequence of these different factors, some sectors expect an increase in restructurings and distressed M&A transactions. How can investors take advantage of these opportunities?

A common vehicle to invest in companies in distress is through M&A, but it is not the only way. The first step in making this type of investment is to look for the opportunity. The most common situations are when businesses are underperforming, are suffering from debt maturity or have an inadequate capital structure.[47] To determine whether an opportunity is viable, potential investors should examine macro trends, analyse which industries are susceptible to downturns and identify market inefficiencies. Having an established network that knows the participants in the distress space is critical. This is where the leads materialise, and well-connected parties will identify opportunities with companies looking for investors. In the same tenor, investors should support their decisions with robust analysis and data analytics. Once an opportunity has been identified, it is time to strategise.[48] To determine the real value of a business, it is necessary to consider different performance scenarios; for instance, some investors start with an analysis of what the liquidation value of the company is, given various situations. This liquidation analysis helps investors understand recovery ranges. Finally, investors should define how to approach the opportunity. There are also a number of ways to do this, depending on the desired ultimate goal.

The outlook for distressed M&A and restructuring in 2022

Economic statistics show that 2022 appears to be a year of recovery, although in some regions, this will still take longer. The pandemic brought unprecedented operating disruption to companies and accelerated fundamental shifts in consumer behaviour. Direct government stimulus and unprecedented access to capital have assisted companies in managing challenges. However, companies have started to switch off the survival mode and have switched their focus to longer-term growth and strategic opportunities. Some of the critical drivers prevailing are digital transformation, process simplification, automation, opportunistic business opportunities and maintaining strategic clarity in core business. In the medium term, as government support scales back, a modest increase in restructuring activity is expected.[49]

Latin American markets ahead will navigate an environment of high interest rates, attention on increasing inflation and relevant political activity in different countries. M&A appears to have a challenging, yet positive outlook ahead, as further capital is deployed by institutional investors in emerging markets, relevance of the region due to its proximity to the United States, ongoing adoption of the global trends, size of the economies of Brazil and Mexico, the ongoing vaccination progress, certainty in the recovery curves of each sector, among other factors.


Notes

[1] Jorge Luis Moreno Félix is a managing director, José Ignacio El-Mir Arnedo and Abraham Maldonado Zenteno are partners and Iván Neftalí Hernández is senior manager at PwC México.

[2] Mergermarket, May 2022.

[3] ‘Inside the macroeconomic trends that will shape 2022’, PwC (9 February 2022), at https://www.pwc.com/us/en/services/governance-insights-center/blog/macroeconomic-trends-2022.html (last accessed 21 June 2022).

[4] Alexis Crow, ‘Annual Outlook 2022: Decoding the Macroeconomic, Geopolitical, and Long-Term Investing Landscape’, Special Report No. 180, Observer Research Foundation (February 2022), at https://www.orfonline.org/wp-content/uploads/2022/02/ORF_SpecialReport_180_Outlook2022.pdf (last accessed 21 June 2022).

[5] Source: Mergermarket as at 15 May 2022.

[6] Source: Mergermarket as at 15 May 2022.

[7] Table 4 shows figures that are the result of dividing the deal value and the volume of transactions, showing that companies spend more money per transaction.

[8] Source: Mergermarket as at 15 May 2022.

[9] Source: Mergermarket as at 15 May 2022.

[10] Distress transactions that were the subject of this analysis were insolvency events, recapitalisations, divestments and auctions. Source: Mergermarket as at 15 May 2022.

[11] ‘Top Macro Trends Transforming the Businesses in 2022 | Intellizence Report’, Intellizence (6 June 2022), https://intellizence.com/insights/macro-trends/current/ (last accessed 21 June 2022).

[12] Inside the macroeconomic trends that will shape 2022, PwC (9 February 2022), at https://www.pwc.com/us/en/services/governance-insights-center/blog/macroeconomic-trends-2022.html (last accessed 21 June 2022).

[13] Note that the number of transactions carried out with software companies, whether relating to cybersecurity or other matters, has continued to increase in Latin American countries.

[14] Source: Mergermarket as at 15 May 2022.

[15] Source: Mergermarket as at 15 May 2022.

[16] ‘Latin American Economic Outlook 2021: Working for a Better Recovery’, OECD Development Centre (December 2021), at https://doi.org/10.1787/5fedabe5-en (last accessed 21 June 2022).

[17] Source: Global Economic Prospects, January 2022.

[18] Key performance indicators.

[19] ‘Mexico Economic Outlook. First quarter 2022’, BBVA Research (updated 2 February 2022), at https://www.bbvaresearch.com/en/publicaciones/mexico-economic-outlook-first-quarter-2022/ (last accessed 21 June 2022).

[20] Sources: 1 Global Economic Prospects, January 2022; 2 Central Bank; 3 International Monetary Fund (IMF); and 4 Trading Economics.

[21] Source: Mergermarket as at 15 May 2022.

[22] Retail trends 2022, Deloitte, March 2022.

[23] Source: Mergermarket as at 15 May 2022.

[24] Mexico country risk report, FitchConnect, March 2022.

[25] ‘Brazil economic outlook’, Deloitte (21 April 2022), at https://www2.deloitte.com/us/en/insights/economy/americas/brazil-economic-outlook.html (last accessed 21 June 2022).

[26] Sources: 1 Global Economic Prospects, January 2022; 2 Central Bank; 3 IMF; 4 Trading Economics.

[27] Mergermarket as at 28 June 2021.

[28] Source: Mergermarket as at 15 May 2022.

[29] Camila Santiago ‘Brazil in 2022 – An Overview of the Market’, PagBrasil (11 January 2022), at https://www.pagbrasil.com/news/brazil-in-2022-an-overview-of-the-market/ (last accessed 21 June 2022).

[30] OECD Economic Surveys: Colombia 2022 (December 2021), at https://www.oecd.org/colombia/oecd-economic-surveys-colombia-25222961.htm (last accessed 21 June 2022).

[31] Sources: 1 Global Economic Prospects, January 2022; 2 Central Bank; 3 IMF; and 4 Trading Economics.

[32] ‘Columbia: El nuevo consumidor colombiano: cambios y tendencias’, BBVA Research (15 December 2021), at https://www.bbvaresearch.com/publicaciones/colombia-el-nuevo-consumidor-colombiano-cambios-y-tendencias/ (last accessed 21 June 2022).

[33] Source: Mergermarket as at 15 May 2022.

[34] Source: Mergermarket as at 15 May 2022.

[36] Sources: 1 Global Economic Prospects, January 2022; 2 Central Bank; 3 IMF; and 4 Trading Economics.

[37] These figures are estimates.

[38] Chile country risk report, FitchConnect, January 2022.

[39] Source: Mergermarket as at 15 May 2022.

[40] Source: Mergermarket as at 15 May 2022.

[42] Sources: 1 Global Economic Prospects, January 2022; 2 Central Bank; 3 IMF; and 4 Trading Economics.

[43] These figures are estimates.

[44] Source: Mergermarket as at 15 May 2022.

[45] Source: Mergermarket as at 15 May 2022.

[46] Argentina country risk report, FitchConnect, March 2022.

[47] ‘Distressed Investing – Step 1: Find opportunities with confidence’, PricewaterhouseCoopers (April 2017), at https://pwc.to/3kYm7Vf (last accessed 21 June 2022).

[48] ‘Distressed Investing – Step 2: Develop a strategy for superior returns’, PricewaterhouseCoopers (April 2017), at https://www.pwc.com/ca/en/services/deals/buying-in-a-time-of-crisis/step-2-develop-a-strategy-for-superior-returns.html (last accessed 21 June 2022).

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