1. How strong were M&A trends in the first couple of months of 2020, before the pandemic? How has the covid pandemic affected M&A activity since March 2020? Have you seen an increase in recent months? What are the prospects for 2021?
During the first quarter of 2020, 58 transactions that altogether combined reached US$1.112 billion in invested capital were reported in the Mexican market, while in the same period of 2019 there were 61 transactions that altogether combined reached US$3.5 billion in invested capital per figures from Transactional Track Record. Therefore, during this first stage of the SARS Cov-2 Pandemic, there was a slight decrease in both the number of transactions and the capital invested.
The covid pandemic affected M&A activities in Mexico mostly during the second quarter of 2020 due to the sanitary emergency declared on 11 March 2020 by the World Health Organization stating that the covid pandemic would have a worldwide impact, which resulted in the lockdown of Mexico. In that quarter, there was a more pronounced decrease in both, the number of transactions completed and the capital invested. However, in both, third and fourth quarters, there was a rapid recovery to such an extent that the number of transactions and the capital invested slightly increased compared to the same period in 2019.
During the fourth quarter of 2020 and onwards, M&A activity resumed its upward trend. The second quarter of 2021 closed with a total of 165 transactions that altogether combined reached US$10.588 billion in invested capital, representing an increase of 36 per cent compared to the same period in 2020 and 23 per cent compared to the same period in 2019. Given the above and taking into account that a new economic lockdown in Mexico is not expected, an increase in M&A transactions is foreseen.
2. How has working remotely affected the ability to do the intensive work needed to complete a deal? Have you been successful in completing all the different aspects of a deal on a remote basis – company owners getting to know each other, diligence, negotiations?
We have noted that the implementation of technology and communications tools by most of the companies prior to, and during, the pandemic, eased considerably the transition to the remote provision of legal services in general, and more specifically in M&A transactions. Nevertheless, the pandemic did affect the usual timing on transactions for several reasons, for instance, the response times of several municipal, state and federal authorities has impacted the transactions, as obtaining certificates, permits and authorisations to be issued by authorities that in a number of cases are required to negotiate or complete transactions. Even nowadays, we see that many processes are still delayed due to large waiting lists that are in the pipeline to be cleared as many authorities struggle to function with limited mobility and have accumulated substantial workloads.
3. Did many buyers try to terminate or renegotiate pending deals because of the adverse effects of the pandemic by, for example, claiming that the seller had suffered a material adverse effect, had breached its covenant to conduct business in the ordinary course or otherwise failed to comply with the purchase agreement?
The initial uncertainty resulted in no significant changes to outstanding transactions during the early months of the pandemic except for short delays in closing transactions. However, as the effects of the pandemic and forecasts of its duration became clearer, more and more transactions sought modifications to the original agreements. The most commonly employed tool was to use the force majeure clauses, material adverse effect and rebus sic stantibus (things standing thus, where there has been a fundamental change of circumstances, a party may withdraw from or terminate the agreement in question) as leverage to renegotiate contracts with the possibility that failure to reach an understanding would result in litigation to seek termination of the contracts. This, together with sellers who understood those changes in circumstances, meant that in the industries where covid-19 had a drastic impact, the parties frequently renegotiated previous agreements and, in exceptional cases, terminated them.
4. Did buyers have difficulty obtaining acquisition financing during the pandemic?
During the past 18 months, the pandemic triggered a significant lowering of interest rates due to reduced demand for financing; although banks, funds and financial sponsors have been generally anxious to grant financings, the need of securing debt in many industries has been challenging as many debtors have been unable to offer comfort to financing parties.
5. Besides the pandemic, what are the factors influencing the level of M&A activity – Economic? Political? Commodity prices? Weakness in currency? Stock market performance? Liquidity? Rule of law? Other?
The level of M&A activity in Mexico has been affected by the change of the controlling political party that took office in December 2018. The International Monetary Fund published a report in which it states that Mexico is the emerging country with the least stimulus in the face of the crisis, allocating support of 1 per cent of the GDP, while the average for emerging countries is somewhere close to 6 per cent. Likewise, internal policies in the energy sector, have contributed to produce uncertainty for foreign investment, according to the Kearney 2020 Foreign Direct Investment Index.
Despite the above, we expect that the Mexican economy will benefit from (i) the consolidation of the new trade agreement (USMCA) with the USA and Canada; (ii) the strong reopening of most of the economic industries post-pandemic; and (iii) the recent results in federal elections where the opposing political parties obtained a significant increase in the seats in the Mexican Congress, balancing power therein.
6. Which industries do you expect will see the most M&A activity in 2021?
The OECD has projected growth in global GDP of 5.6 per cent. The USA is expected to grow its GDP by 6.5 per cent, as a result, among other factors, of the approved stimulus package for US$1.9 trillion. We expect the US stimulus package to contribute significantly to the growth of the Mexican economy during the following 12-18 months.
Given the above conditions, and as the consumer purchasing power recovers, the sectors expected to increase their M&A activity include:
- exports and manufacturing;
- automotive and airspace;
- telecoms and IT;
- industrial real estate;
- banking, financial and insurance services, where consolidation is envisaged; and
- e-commerce and fintech.
7. What types of deals do you expect to see?
During the remainder of 2021, we expect an increase in investments from large investors (institutional investors, private funds, hedge funds and pension funds) in new businesses, especially related to technology and fintech.
We also expect that, as seen throughout 2020, during 2021 international investors will most likely look for joint ventures with local entities or takeovers of Mexican players, suffering the financial stress caused by the pandemic.
In addition, we expect a number of mergers or acquisitions between commercial competitors among Mexican participants.
8. Discuss the level of M&A activity you have seen over 2020 and expect to see in 2021 of: (i) pure domestic deals; (ii) deals in your jurisdiction involving a domestic target and foreign acquirer from Latin America, or a foreign acquirer from outside Latin America; and (iii) deals involving a domestic acquirer and foreign target in Latin America or a foreign target outside Latin America.
Based on the reported transactions per the Rión Report, during 2020 pure domestic deals had the highest number of transactions representing 40.5 per cent of the overall M&A activity, followed closely by the acquisition of Mexican target companies by foreign entities with 36.4 per cent, while the acquisitions of foreign target companies by domestic buyers represented 23.1 per cent of the overall M&A activity in Mexico.
As the effects of the pandemic gradually mitigate and the USMCA becomes a useful tool for international trade, during 2021, we expect the trend that has existed during the past decade of having a greater number of transactions involving foreign buyers from the US, Canada, Europa, Middle East and Asia to continue.
9. What is the level of private equity activity? Are domestic or international funds involved? What kinds of deals are they doing?
According to the Rión Report, during 2020, the number of deals and the overall amount of capital invested in private equity decreased mainly because the private equity funds took a cautious approach in the face of economic, political and especially pandemic-related uncertainty. Regardless of the above, we have been noting recently that the venture capital funds had only a slight decrease because their investments relate to companies involved in the technology, fintech and e-commerce sectors that were barely negatively affected by the covid pandemic.
According to the most recent report by the Mexican Association of Private Equity, domestic and international funds investing in Mexico are usually (close to 90 per cent of their portfolio) seeding and funding early stages of development of their targets in Mexico.
10. Is acquisition financing available for deals? Where is financing coming from? How much concern do you have that an increase in interest rates or risk of a recession will limit the availability of financing?
Yes, financing is generally available for all players within the Mexican market and for almost all of the industries.
As every other year, we have seen both highly leveraged transactions, and less leveraged transactions. A number of factors have impacted the equity to debt ratio in the reported transactions, the most important being: (i) the industry and how it is affected by the pandemic; (ii) the target of the M&A; and (iii) the type of acquirer.
During 2020, as compared to 2019, the financing arising from international lenders and banks increased.
We think that the currency exchange stability has favoured the volume of M&A activity as a whole (both, transactions and financings), as almost half of the financing transactions during 2020 were valued and performed in US dollars. For more than four years and despite the change of political party in office, the economic stability in Mexico has incentivised the growth of leveraged transactions without fear of investors to acquire debt in foreign currency.
During the second semester of 2020 and the first quarter of 2021, we have seen a significant decrease in the interest rates of the Mexican financing sources led by Mexico’s Central Bank (Banxico), which has lowered the interest rates on several occasions to encourage rapid recovery post covid-19, which we anticipate might boost M&A activity in Mexico.
In addition to the foregoing, we expect that Mexican financial institutions will be players of utmost importance in the financing market during 2021, due to the fact that more than 80 per cent of the jobs lost due to the pandemic have already been recovered, which will trigger a boost on the need of financing for consumption going back to normal numbers.
11. How open is your country to investments and acquisitions by foreign buyers? Is there a level playing field when foreign and domestic bidders compete to buy the same domestic target company?
Mexico has for long time been a destination that welcomes investments and acquisitions of foreign participants in mostly all industries (save for a selective list of activities that have been restricted by law from foreign investment for a long time).
During the past 11 years, the number of reported transactions completed by foreign investors and local groups are somehow equalised and there are no legal or market blockers that might produce an uneven playing field for foreign bidders.
12. Are corruption and compliance concerns affecting M&A activity? Are there industries where this is a particular issue?
Given that the new administration has been very vocal against corruption, there are a number of actions pending to implement the National Anti-corruption System.
Mostly, these anti-corruption measures have affected a number of transactions regarding government procurement and joint ventures with governmental bodies. We have noticed a certain reluctance from clients to enter into transactions in which targets (mostly foreign) are exposed to government contracts.
13. How big a part of M&A activity is the restructuring of financially troubled companies? Have you seen more of this in 2020 as compared with 2019, due to the pandemic or otherwise? What are the prospects for 2021?
According to the Rión Report, there was a slight increase in restructuring transactions and workouts, which we think was caused by the fact that most M&A transactions were concentrated in sectors that were not affected by the pandemic or that were even benefited, such as technology and telecommunications, which switched from 9 per cent of the overall invested capital in 2019 to almost 50 per cent of the invested capital in 2020. Also, due note should be taken that often restructuring transactions are not disclosed or not disclosed shortly after their closing.
In 2021, we expect these numbers to remain similar and gradually begin to stabilise to pre-pandemic levels as the economic activities resume.
14. Does your country’s bankruptcy law permit the reorganisation of the debtor as a going concern, and the acquisition of the entity out of bankruptcy? Are you seeing much activity in this area?
Yes, the Reorganisation Law in Mexico allows: (i) debtors to go through a reorganisation process; (ii) the possibility to have new investors; (iii) to sell the entity subject to the reorganisation or bankruptcy proceeding at any time prior to the bankruptcy liquidation of the estate to pay creditors.
According to the Federal Institute of Insolvency Specialists, during the third and fourth quarters of 2020, the number of Mexican companies that filed for restructuring proceedings increased by around 200 per cent, more than any other semester recorded. Despite the above, there was no increase in M&A activities overall, so we expect that during 2021 a significant increase could be experienced, although without representing a large percentage either in the number of transactions or in the invested capital of M&A activities.
15. Has there been any increase in public company M&A?
While there is a slight increase in these types of transactions, the public M&A activity is somewhat in the same pace. The reduced number of public companies makes it impossible for these numbers to have a significant increase.
Despite the above, according to the reported transactions in the Mexican stock exchanges and Institutional Stock Exchange, subsidiaries to public companies continue to show an intense M&A activity, mainly due to a mandatory reorganisation triggered by the recently passed labour and regulatory provisions restricting outsourcing.
16. How well protected are minority shareholders in public companies? What recent developments have there been as relates to independent directors, special committees, independent advisers, fairness opinions?
The rights granted to minority shareholders under the Stock Market Law are:
- right to appoint and revoke one member of the board of directors, with every 10 per cent of stake, even for stock without voting rights;
- right to appoint a statutory auditor, with 10 per cent of stake, even for stock without voting rights;
- right to request the chairman of the board of directors to call a to a shareholders' general meeting at any time with respect to the matters on which they are entitled to vote, with 10 per cent of stake:
- right to file a claim for civil liability against the directors for the benefit of the company, with 15 per cent of stake; and
- right to challenge in court, resolutions passed by the shareholders’ meeting, with 20 per cent of stake.
During 2020, there were no changes regarding independent directors, independent advisers or fairness opinions. As to special committees, we have seen a growing trend on companies regarding sustainability or ESG committees that are granted authority to analyse risks stemming from global warming, the transformation of companies into net zero-carbon emitters, ESG policies, responsible investments. Although this is not yet mandatory to most companies from a regulatory or legal perspective in Mexico, the trend initiated in Europe has started to impact the Mexican corporate ecosystem due to financial entities and fund managers requiring their target companies to incorporate such matters in their governance structure and corporate practices.
17. Has there been any increase in shareholder activism and hostile takeovers? Are international hedge funds active in your market? What defences are target companies permitted to adopt?
Considering the reported transactions and based on the Rión Report, during 2020 there was no significant change in shareholder activism and we are not aware of any hostile takeovers.
Hedge funds (both, local and international) as well as institutional investors are quite active in the Mexican market, particularly as stakeholders to public companies and long-term investments.
Given the large volume of capital they manage, Mexican pension funds, also called AFORES (Administradoras de Fondos para el Retiro), are the most important investors in the Mexican market.
In general, there are no restrictions on private companies regarding the anti-takeover measures they can take. Public companies are allowed to include some anti-takeover measures as long as such measures do not completely preclude the possibility of the take-over. In terms of the Mexican Stock Market Law, the public companies can include in their bylaws provisions so as to prevent the takeovers that may grant control to third parties or even to the shareholders of the public company (such as poison pills).
18. Have directors, management and controlling shareholders changed how they conduct themselves in M&A deals? What kind of fiduciary duties do directors, management and controlling shareholders have under the laws of your jurisdiction? From your experience, are directors, management and controlling shareholders more diligent today in their review of M&A transactions and other matters?
In general, we have not observed changes as to how directors, management and controlling shareholders conduct themselves in M&A deals.
The Stock Market Law provides managers of public companies with two fiduciary duties that must be followed – duty of diligence and the duty of loyalty.
The directors shall at all time perform their duties in the best interest of the public company and its affiliates and subsidiaries. The members of the board of directors shall fail to exercise the duty of diligence and thus, be liable whenever damage is caused to the company’s assets or to their affiliates and subsidiaries. We noted that recently there has been a greater focus on the adoption of ESG criteria by directors and it has been considered as part of their duty of diligence.
The duty of loyalty should be followed by the directors as they must keep confidentiality on the information and matters that they have knowledge of and avoid pursuing business endeavours that belong to the company to avoid being held liable for the breaches of their fiduciary duties. Whenever directors fail to exercise the duty of loyalty, they will be responsible for the benefits obtained and damages caused to the company, among others.
Directors and managers are increasingly trying to obtain the best possible support (financial, legal, accounting) prior to closing M&A transactions, as well as opinions from independent advisers on the viability of the M&A.
In recent years, we have seen a slight increase in the claims against managers for breaches of their fiduciary duties in Mexico. In almost all the cases, the outcomes of such litigations are not public, since unrevealed settlements are usually reached between the parties.
19. Should directors, management and controlling shareholders be more concerned today about negative publicity, shareholder criticism, regulatory pressure, shareholder lawsuits and liability from potential litigation?
As in every other jurisdiction, due to the reputational publicity and the increasing pressure of regulators (mostly through audits), the directors and managers and controlling shareholders are becoming more concerned of being exposed to potential litigation.
Hiring insurance for managerial and decision-taking positions against litigation has been an increasing practice during the past years for managers and directors of public companies and of private but institutionalised entities.
Particularly on environmental issues, we have noticed that recent European Union regulations on issues related to the reduction of carbon emissions have generated certain concerns among executives, mainly due to the lack of regulation in Mexico. We expect that a process of voluntary adoption of good corporate and environmental practices similar to those issued in the European Union will begin in anticipation of enacted regulation in this regard in Mexico.
20. Are there major differences in how domestic and cross-border deals are being conducted? For instance, does the type of purchase agreement used in your jurisdiction differ significantly from the international style of agreement? If so, which type is being used more often?
Generally, domestic and cross-border deals involving Mexican participants are conducted in similar ways.
Purchase agreements often follow the international style of such agreements adjusted to the Mexican legal regime.
21. Have there been changes in the process for how M&A transactions are conducted in your jurisdiction?
The processes of M&A transactions in Mexico have evolved to be conducted mostly on a remote basis. Also, the usual timing of an M&A transaction has been extended because the response times of diverse municipal, state and federal authorities has impacted the transactions, as obtaining certificates, permits and authorisations depends on authorities that in many instances have struggled to function with limited mobility and have accumulated substantial workloads.
22. How level is the playing field for domestic and international bidders?
The playing field is level in our opinion. Foreign bidders are usually very concerned with compliance breach (ie, money laundry and corruption), corporate governance and corruption findings.
It is understandable that domestic investors are often more tolerant to certain risks or contingencies due to their deeper knowledge of Mexican market. We see that international buyers are usually fearful and more uncertain on labour risks, governmental actions and law enforcement.
23. For international buyers and investors looking at deals in your jurisdiction, what are the three most important pieces of advice you have and what are the three most important pitfalls that should be avoided?
The most important advice for international buyers and investors that are interested in deals in Mexico would be:
- conduct deep financial and legal due diligence;
- certainty on the perfection of securities and governmental approval requirements; and
- adequate choice of law to ensure enforceability and foreclosure.
As to the pitfalls that should be avoided by international buyers and investors with transactions in Mexico:
- material tax, labour and social security contingencies. Outsourcing and employer substitution schemes should be carefully evaluated;
- environmental liabilities; and
- carve-outs and/or caps on representations or indemnities.
Whenever bidders were to be competitors, they should be very careful during the due diligence process to avoid any breach of antitrust regulations forbidding pricing disclosures.
24. Have there been any significant regulatory developments affecting M&A – your country's securities exchange commission, antitrust regulators, tax authorities, Central Bank, other regulators that review deals etc?
The main regulatory developments that could affect M&A activities are (i) the labour reform; and (ii) the recent reform to the Electricity Industry Law.
The labour regulation seeks to eliminate practices that harm the public treasury and the labour rights of employees by prohibiting, in general terms, the use of subcontracting of personnel currently authorised in the Federal Labour Law and by establishing precise rules so that individuals and legal entities may only subcontract for the execution of specialised works.
With respect to the controversial energy legislation, the main changes are as follows:
- The federal government will have the authority to review, renegotiate or terminate electric power purchase and sale contracts entered into with independent producers.
- The power granted to the Energy Regulatory Commission (to revoke self-supply permits.
- The change in the order of the dispatch of electricity, giving priority to the electricity produced by the generation plants owned by the government owned Federal Electricity Commission (CFE).
- The amendment to the guidelines for the granting of Clean Energy Certificates favouring the CFE.
- The restriction for granting of generation and commercialisation permits to the planning criteria established in the Programme for the Development of the National Electric System 2020-2034.
The Mexican Antitrust Commission continue to be quite active in different markets, including energy, transportation, agro-foods, finance, health, digital platforms and government procurement as it relates to potential collusion among bidders. For this reason, the Commission has indicated the need to improve the legal framework to avoid the abuse of loopholes. It has suggested increasing transparency, providing new price determination methods prior to public bids, and creating unified regulations instead of several local regimes, among other measures. All transactions need to be reviewed by an antitrust specialist to calculate if any thresholds are met that trigger an authorisation of the transaction.
On the infrastructure side, the federal government continue with its four major infrastructure projects, including: (i) an alternate airport in the Santa Lucía military base 30 miles north of the current airport; (ii) an oil refinery in Dos Bocas, Tabasco; (iii) the Mayan Train, which is intended to traverse the Yucatán Peninsula and to be a major connection within the south region of the country; and (iv) the Transoceanic Corridor in the Isthmus of Tehuantepec, intended to provide transportation and industrial infrastructure as an alternative to the Panama channel. Subject to further actions to be taken by the new administration, we expect that these projects may bring an important amount of transactions (by the way of government procurement, financing or joint ventures).
Finally, the Mexican Congress is expected to work on the completion and adoption of the Basel IV regulations as to the international banking standards regarding supervision, reporting, clearing of transactions, among others, which was suspended during 2020 to address the urgent pandemic-related matters. We expect that international pressure from other jurisdictions and the internal market itself, will help the newly elected Mexican Congress to better understand the needs of investors and ease the measures required for them to carry out transactions.