1. Has the level of M&A activity slowed, increased or remained flat in 2019 as compared to 2018, and what are conditions like today? In general terms, what level of activity is foreseen for 2020? 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?
M&A activity in 2019 in Peru was comparable to 2018, with considerable activity in multiple sectors (ie, electric, construction, food and beverage and retail, among others). The main factors influencing M&A activity are economic, political and regulatory.
Although the Peruvian economy has slowed its growth since 2014, it is still one of the best performing economies of the region and, in that sense, M&A activity remained steady. 2020 is expected to bring forth more economic growth than 2019, so we foresee an increase in the number of deals and international players in the market.
There was political instability in Peru during 2019, but the crisis did not have considerable impact on M&A activity. Furthermore, Peru is benefited by comparison, as it is currently one of the most politically stable countries in the region. For example, while a constitutional reform is under way in Chile and other attractive countries such as Argentina or Venezuela remain in an economic and political crisis, many investors may consider the possibility of investing in Peru in 2020, which has an appealing foreign investment regulation and many opportunities to grow in several sectors and industries.
The main regulatory obstacle for 2020 is the newly enacted antitrust regulation, which shall enter into force in mid-2020 (see question 20). Although this will certainly represent a hurdle for some investors and require some adaptation in M&A activity, we do not expect that it will significantly decrease activity in 2020 as international investors are accustomed to antitrust regulations, even within Latin America. In fact, Peru was the only country that did not have in place a M&A antitrust control (except for the electric industry).
2. Which industries do you expect will see the most M&A activity in 2020?
We foresee that agroindustry, electricity, retail, mining and education will see the most M&A activity in 2020.
3. What types of deals do you expect to see?
We expect to see a majority of total acquisitions, which has been the norm in Peru (the majority of companies in the Peruvian market are wholly owned family companies). In some cases, we will see acquisitions of majority stakes with call and put options to acquire the seller’s remaining stake in the years following the transaction. This structure permits buyers (especially foreign buyers) to use the seller’s experience in the region and the business during the first few years of investment before acquiring 100 per cent stake in the target. In the same line, foreign investors with majority stakes will probably aim to consolidate a 100 per cent interest during 2020.
4. Discuss the level of M&A activity you have seen over 2019 and expect to see in 2020 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.
In 2020, we expect to see a similar variety of M&A deals as in 2019, which are almost purely composed of: (i) domestic deals and (ii) deals involving a foreign acquirer of a Peruvian company.
However, we expect that there will be an increase in the number of deals involving foreign acquirers in comparison to 2019. Peru is positioned as a more attractive destination for investors because, while its positive economic performance presents opportunities for foreign investors, many local companies are inclined to sell due to the decreased growth the Peruvian economy has faced as of 2014 (Peru was the country with the highest growth in the region during previous years).
Furthermore, foreign investors may find Peru as a more attractive investment opportunity within the region considering the current political climate in other traditionally stable and investor friendly countries, such as Chile, Argentina or Venezuela. This may also motivate Chilean investors (who already have a significant presence in Peru) to seek further investment opportunities in the country.
5. What is the level of private equity activity? Are domestic or international funds involved? What kinds of deals are they doing?
Private equity activity has been increasing in the region in recent years based on the presence of international and newly created local funds and investors, but it is still not an important source of M&A activity in the country. However, we expect to see a certain increase in activity as the maximum disinvestment term for many private equity funds is coming to a close.
6. 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?
Financing in M&A transactions is not typically employed in Peru. The average deal size in the region is much lower than developed countries, which limits the necessity to finance the transaction. In any case, for some specific deals, syndicated loans are included but they do not involve a high-level complexity. Financing usually comes either from local banks or international lenders. We do not foresee any limitation to the availability of funding during 2020.
7. 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?
Peru is very open to acquisitions by foreign buyers. There are no widespread restrictions on foreign entities investing in Peru, which creates an even playing field from a regulatory perspective. In fact, Peruvian laws encourage an equal treatment to foreign companies and individuals to own companies (with few exceptions such as owning real estate property within 50km of the borders or specific industries such as telecommunications and aviation).
In a competitive bidding processes, there are typically more foreign bidders than local bidders because of the limited size of the Peruvian economy. However, local bidders may be able to provide certain attractive conditions for the seller because they are willing to manage negotiations within a strictly Peruvian standard, including the application of Peruvian law in the acquisition agreements. This is very attractive for sellers, especially family companies (which make up the great majority of Peruvian enterprises).
For 2020, with the entry into force of antitrust regulations, we may see an advantage in favour of foreign buyers with minimal or no participation in the Peruvian market, as they may not be subject to antitrust approval. This could be an attractive quality for sellers who wish to close the deal within a shorter time frame).
8. Are corruption and compliance concerns affecting M&A activity? Are there industries where this is a particular issue?
Corruption and compliance concerns are not affecting M&A activity in Peru in a significant manner, as they are usually handled through a thorough due diligence process and representations and warranties from the sellers in the acquisition agreement. Compliance regulations were recently enacted into force which require Peruvian companies to implement a compliance prevention system. The implementation of this system entitles the company and its officers to avoid responsibility in case of certain breaches of anticorruption regulations by its employees.
Therefore, from a seller’s perspective, the implementation of an adequate compliance prevention systems will serve as a guarantee that: (i) only limited representations and warranties will have to be granted in anticorruption matters, and (ii) they will very likely be protected from any post closing claims.
From a buyer’s perspective, it is important to: (i) confirm during due diligence that the company has an adequate compliance prevention system that complies with the parameters set forth in applicable law, and (ii) demand that the seller grants the necessary representations and warranties, which will be more or less aggressive depending on the findings of the due diligence process.
9. How big a part of M&A activity is the restructuring of financially troubled companies? Have you seen more of this in 2019 as compared with 2018? What are the prospects for 2020?
Restructuring of financially troubled companies is not a significant part of M&A activity in Peru (see question 10 for further information).
10. 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?
Peru’s bankruptcy law does not permit the acquisition of an entity product of a debtor’s reorganisation outside of bankruptcy proceedings. Any restructuring and subsequent transaction involving the restructured entity of the debtor will have to be approved by the Creditors’ Assembly and the Peruvian regulatory authority (National Institute for the Defence of Competition and Intellectual Property-INDECOPI).
11. Has there been any increase in public company M&A?
There has not been a significant increase in public company M&A. However, the biggest deal involving a public company was closed in 2019, with the sale of Luz del Sur, the largest electricity distribution company in the country. Sempra Energy sold its 100 per cent interest (representing 83.6 per cent of the company’s shares) to China Yangtze Power for US$3.5 billion.
12. 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?
Minority shareholders in public companies are protected by the mandatory offer threshold. Public companies in Peru traditionally have a majority shareholder that controls the company. Therefore, buyers usually acquire a significant stake of the company directly from the majority shareholders before launching a mandatory tender offer for a minimum number of shares calculated pursuant to the following formula:
(X/Y) x (1-Z)
X = percentage acquired in the last three years
Y = third party participation before the acquisitions; and
Z = current third-party participation
Consequently, a third party may not acquire a significant stake of the company from a majority shareholder without launching a tender offer for a proportionately significant stake held by minority shareholders.
13. 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?
Shareholder activism and hostile takeovers are not common or significantly developed in Peru. It is not possible to identify common or permitted defensive measures because they are not commonly employed. Furthermore, directors (which would traditionally execute defensive measures against a hostile takeover) are expected to remain neutral as per the Corporations Law throughout the sale process and simply issue a report outlining the advantages and disadvantages of the transaction.
In rare instances, shareholders set forth poison pills or crowned jewel defence provisions in shareholders’ agreements, which would be triggered by a majority shareholder or the directors acting as instructed by the appointing shareholders.
14. 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?
The role of directors and controlling shareholders in M&A transactions has largely remained the same in recent years in Peru.
True decision-making power in Peruvian companies lies with the controlling shareholder, rather than directors, who will act diligently and neutrally within the restrictions of applicable law, the bylaws and existing shareholders’ agreements.
The directors’ duties in an M&A transaction are limited to issuing a report outlining the advantages and disadvantages of the transaction, as well as any conflicts of interests (only applicable for public companies). Therefore, directors have a duty to fulfil their obligations under applicable law and corporate governance documents, although they are not empowered to execute decisions that may require the existence of a fiduciary duty of the same nature as Common Law.
In the case of controlling shareholders, although they are in control of the company, there is no doctrine of fiduciary duty to minority shareholders, but rather limitations on their ability to enforce certain decisions on minority shareholders. For example, if the controlling shareholder votes to spin off a business to sell to a third party, the minority shareholder may separate from the company.
Minority shareholders are traditionally protected by the existence mandatory public offer threshold applicable to public companies (see question 12 for further information) and tagalong rights in private companies.
15. Should directors, management and controlling shareholders be more concerned today about negative publicity, shareholder criticism, regulatory pressure, shareholder lawsuits and liability from potential litigation?
Controlling shareholders and officials of the company could potentially feel more concerned over media perception surrounding the transaction due to increasing media scrutiny, considering the latest corruption scandals in the region. Taking into account that the majority of companies in Peru are family-owned enterprises, there may be a certain trust associated to the brand which may require strategic publicity when announcing that the brand will now be controlled by a foreign buyer (ie, the acquisition of Inca Kola, an emblematic Peruvian soft drink, by the Coca-Cola Company). However, this is not a new concern, or a concern strictly limited to the region.
Regarding regulatory matters, controlling shareholders may be more concerned about the regulatory pressures and expenses associated with the entry into force of antitrust regulations (see question 20 for further information).
16. 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?
Peruvian M&A is carried out under a fairly international standard. The structure and terms of purchase agreements and shareholders’ agreement are frequently familiar to foreign parties, which eases negotiations in cross-border deals. Foreign buyers will usually have to negotiate within certain conditions which are considered standard in the Peruvian market and may not be standard in international M&A markets (ie, the exclusion of consequential damages from the indemnifiable damages by seller, which is sometimes worrisome for foreign buyers who are sensitive to reputational damage). One specific aspect that may be more appealing to sellers in domestic transactions is that the applicable law, settlement of disputes and escrow clauses will not be questioned by a local buyer, as opposed to a foreign purchaser.
17. Have there been changes in the process for how M&A transactions are conducted in your jurisdiction?
The M&A process has remained largely the same in recent years, and international trends apply in Peru in the same way as in foreign countries. The main difference would be that the local players in the market have become more sophisticated due to increased M&A activity, which makes Peru a friendlier destination for investors in terms of negotiation.
However, there will be a considerable change in the M&A process when the antitrust regulation enters into force in mid-2020 (see question 20).
18. How level is the playing field for domestic and international bidders?
International buyers are traditionally more risk adverse because they are subject to international compliance policies and greater reputational risk than a local buyer. Therefore, practice shows that international buyers (especially the ones from developed countries) are more alarmist to due diligence findings and may require a higher standard of compliance or indemnity than a local buyer.
Nonetheless, in our experience, when properly advised by local counsel, international buyers are able to put certain risks in perspective with the Peruvian market.
19. 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 three most important pieces of advice are:
- carry out a thorough due diligence process with a sophisticated and specialised firm that has real experience in each sector, including engaging the correct financial advisers to determine the purchase price and eventual adjustments;
- ensure that the firm advising you has a strong and specialised antitrust area that is able to advise you if the deal is subjected to antitrust controls; and
- ensure that the representations and warranties granted by the seller are reviewed by a specialised team of lawyers that can ensure that they cover the contingencies that may emerge after closing, including indemnity provisions and enforceability of collaterals.
The three most important pitfalls are:
- avoid analysing commercial and legal risks purely from an international perspective, as they need to be analysed taking into account the Peruvian context;
- be prepared to adapt to standard Peruvian M&A negotiation practices to ensure that your demands are not completely off-market and unacceptable to seller (this requires the assistance of a sophisticated and experienced Peruvian M&A lawyer); and
- not analysing the integration strategy before closing the deal, as M&A deals are not merely a combination of business and economic units, but foremost a cohesion of teams and individuals.
20. 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?
Before 2020, Peru was the only country in the region to not have in force M&A antitrust regulations (except for the electricity sector), although several discussions and proposals over the past decades were presented. Nevertheless, at the end of 2019, the government enacted M&A antitrust regulations, certainly being the most significant regulatory affection in M&A in Peru. The Antitrust Regulation Law is set to enter into force in mid-2020.
According to the Antitrust Regulation Law, an act of concentration must be notified to INDECOPI when it confers control to the purchaser or the resulting company and exceeds the thresholds in terms of sales and/or gross income established by said law. An operation will qualify as an act of economic concentration if it entails a transfer or change of the control of a company or part of it, as follows:
- a merger between two or more firms or companies;
- an acquisition of shares that confers to the owner the control of the company;
- joint ventures or another form of associative contract; and
- acquisition of control of the productive and operative assets from another company, through property rights or other legal powers.
If the transaction is classified as a concentration operation, previous authorisation may be required if the sum of the total gross sales in Peru of both parties reaches or exceeds approximately US$145million or the total gross sales in Peru of both parties reaches or exceeds approximately US$31 million each (please note these thresholds are related to total gross sales of each company, including its economic group, and are not limited to sales of relevant products under the transaction).
Therefore, transactions that meet the above requirements will be subject to antitrust control by the authority prior to closing, subject to the following general procedure:
The request for the authorisation must be submitted by the companies involved, attaching the background of the transaction. The authority, within a period of 10 working days, will admit the request or, if applicable, will require the correction of the observed defects.
If the concentration operation does not generate significant restrictions to an effective competition, it will be authorised within 30 working days from the initiation of the proceeding. On the other hand, if significant restrictions are determined, the authority will initiate a 90-day second stage (extendable for 30 additional days), to evaluate possible restrictions to competition in greater detail and the existence of sufficient and reasonable economic efficiencies necessary, and offset possible restrictive effects. Finally, the authority may authorise the operation, authorise it but imposing compensating conditions, or deny it.
The competition agency will consider factors such as the structure of the relevant market, real or potential competition, sources of distribution and commercialisation, creation or strengthening of a dominant position, generation of economic efficiencies, etc as variables to evaluate to decide whether to authorise the operation.
If the authorisation is denied, the applicants may file an appeal before a tribunal at the National Institute for the Defence of Competition and Intellectual Property (INDECOPI), which must decide within a maximum period of 90 working days.
It should be noted that no business concentration operation can be executed or have effects before the authority has expressly authorised the transaction.