Mergers and Acquisitions

Last verified on Wednesday 14th February 2018

Chile

José María Eyzaguirre B and Felipe Larraín
Claro & Cia
  1. 1.

    Has the level of M&A activity slowed, increased or remained flat in 2017 as compared to 2016, and what are conditions like today? In general terms, what level of activity is foreseen for 2018? 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?

  2. Even though economic activity is at a low level (eg, no or minimal growth around the region), M&A activity remains relatively high, both on bilateral transactions (negotiated mergers or acquisitions, with complete due diligence and tailor-made contracts) and on “auction”-style transactions (investment bank controlled process, where you bid for a price, closing conditions, limited due diligence and a seller “friendly” transfer agreement). We expect a similar trend in both areas during 2018.    

    Economic downturn (in this case, in all Latin America) has somehow affected the pipeline of deals (though there are some indications of a change due to the election of more ‘market oriented’ presidents in the region). However, owing to the depreciation of local currencies, certain productive and strategic local or regional assets have been sold to foreign investors, who have taken the advantage of a favourable valuation and exchange rate. Demand by prospective investors from the US, Canada,  Europe and the Middle East is strong. Also, what appeared to be isolated cases of some consolidated local operators now looks more like a trend: companies headquartered in Chile making relevant investments offshore, particularly in the Peru, United States, Europe, China and to a lesser extent in Mexico and Colombia. Also Argentina has opened again as potential market. The factor influencing the level of M&A activity is mostly the need for growth in competitive markets where an organic increase in market share takes time and resources.

  3. 2.

    Which industries do you expect will see the most M&A activity in 2018?

  4. Energy and utility assets, as regulated sectors, are always a placeholder for investors looking for a low risk investment with a steady cash flow. Similarly, foreign institutional investors divest from time to time on these assets, or make room for an additional partner to finance a growth plan. Other areas that are likely to be active are transportation, healthcare, mining, media, financing services, and retail and consumer products. In mining, major players are always on the lookout for deposits and mines to add to their reserves, though with the current price of the commodities, M&A transactions are more related to divestures by major offshore operators to cover cash or capital calls at home. In media, sport TV is bringing new players since substantial value may be realised. And, in commercial real estate and retail and consumer products we are seeing either fierce competition to acquire the remaining players or announced IPOs to grow organically. The agribusiness and salmon industry is also in a new peak, with IPOs and M&A transactions.

  5. 3.

    What types of deals do you expect to see?

  6. We expect to see outright divestitures – and consequently acquisitions – by private equity firms and foreign institutional investors. There is no year without a change of interest holder in energy, infrastructure or utility projects. When dealing with regular local controllers and shareholders, negotiated sales, joint ventures and mergers appear to be the rule. The reasons for such transactions are usually a good price or exchange ratio, or the alternative deal to going public and realising the capital upside with a partial sale. Another trend that is becoming a standard feature is Chilean investors going beyond the border and investing in the United States, Europe, China, Peru and Colombia. The foregoing is done either alone through greenfield projects or direct acquisitions, or in a joint venture with a local partner. High valuations on targets, though, have made prospective investors pause and consider greenfield projects instead of the usual acquisition of a local operator. Today, Brazil is getting out of the freezer, but local operators with cash at hand are looking for bargains. Assets in Argentina have also become a new alternative. 

  7. 4.

    Discuss the level of M&A activity you have seen over 2017 and expect to see in 2018 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.

  8. There are plenty of deals: big players acquiring competing smaller outfits as part their growth plan (in which case, they have to overcome the scrutiny of an increasingly active antitrust agency and a new merger control regime that entered into effect in June 2017), and newcomers (there are several family offices or former shareholders that have divested when a foreign investor has taken over, with money to invest) acquiring small and medium-sized privately run companies to make them grow organically (likely looking to repeat the divestiture process in the future).

    There is a strong presence of US, Canadian, European and Middle Eastern investors looking for local targets in consolidated markets. Recently, two additional countries show up with foreign acquirers: Colombia and Peru. Also, the common “trading’ or “commercial” activity by China and Middle East countries from abroad is slowly evolving in outright “equity” investments.

    This is becoming the norm in local companies with a long-standing settled controller trying to grow outside of Chile. The first target is Latin America, with Peru and Colombia being the go to markets for potential growth (and sometimes the United States, Mexico and China). There are examples in retail, construction, airlines, agribusiness and the financial services business.

  9. 5.

    What is the level of private equity activity? Are domestic or international funds involved? What kinds of deals are they doing?

  10. Private equity activity, both local and international, is relevant. Private equity firms usually target mid-sized, privately held companies with strong presence in the respective market and expansion potential, with the goal to either merge it with other similar players or make it grow organically or through additional acquisitions. The next step is implementing a partial or complete exit by making the company public or divesting privately in, usually, an auction-style transaction. We have also seen private equity activity on infrastructure and IT deals consolidating presence around Latin America.    

    The handicap of private equity is that it cannot include the post-closing synergies that an acquirer with presence in the market can. The foregoing has made them arrive second in several transactions in which there is competition. To cope with this, once they make their first acquisition in an area, they usually target the same kind of companies until reaching scale economies with an attractive cash flow and market share, to then divest or go public.

  11. 6.

    Is acquisition financing available for deals? For strategic buyers? For private equity buyers? From domestic or international sources? What amount of debt/ equity leverage are you seeing in private equity transactions? Where is financing coming from – domestic sources, international lenders? Governmental agencies? Banks or capital markets?

  12. While some foreign banks have recently limited their activity is this area, acquisition financing is a strong feature in M&A. Furthermore, competition among banks, local and foreign, is common and they try to bundle acquisition financing with added-value services (eg, capital markets, derivatives) to the acquirer or the target. It is not uncommon to see transactions in which third-party financing represents up to 80 per cent of the acquisition price, on a non-recourse basis, the collateral being the shares or the assets of the target company. This rule applies to regular acquirers (ie, operators) and, to a lesser extent, to private equity deals. There is no financing sponsored by governmental agencies, except in small seed or venture capital projects.

  13. 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?

  14. Perhaps one of the distinct features of Chile is the treatment it gives to foreign investors. The playing field is completely levelled when competing with domestic bidders. Foreign exchange rules, applicable taxes, access to the courts, the rule of law, enforcement of foreign judgments, transparent access and fair treatment with the government are placeholders in the Chilean economic environment.

    The challenges are in other areas and pose the same difficulties to domestic and foreign investors: regulatory and environmental permits for new or expansion projects, especially in the energy sector and the regulatory framework of the health insurance business. Chilean law on this area has fallen behind. There is a lot of litigation and diverse results in courts, leading to a level of uncertainty that impacts investment, whether domestic or foreign.

  15. 8.

    Are corruption and compliance concerns affecting M&A activity?  Are there industries where this is a particular issue?

  16. No. It is a well-known fact that a key for doing business in Chile is to abide by the rules and that there is no tolerance for cutting corners or back alley deals. Similarly, compliance matters are a staple on due diligence in any M&A transaction.

  17. 9.

    How big a part of M&A activity is the restructuring of financially troubled companies? Have you seen more of this in 2017 as compared with 2016? What are the prospects for 2018?

  18. Not really. Even though the Chilean economy is somehow reactive to the world economy, we see most of the M&A activity coming as an alternative to organic growth or driven by private equity buyers. Moreover, financially troubled companies usually face disputes with financing parties, consumer class actions, labour and social security debts or regulatory inquires that make them difficult to price. The same applies to the transaction structure. Unless you have a backstop guarantee from the seller, there are risks that no buyer may assume when considering acquiring a financially troubled company.

  19. 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?

  20. On paper, yes. And the bankruptcy law was amended to make such alternative viable. Having said that, we are still far from applying our bankruptcy law as an alternative to make a transaction with a financially troubled company. The process is uncertain and takes too long, creditors tend to fight back in court and there is still a reputational issue on resorting to bankruptcy. The Superintendency of Bankruptcy and Re-entrepreneurship is working hard to set up the environment and sell the “reorganisation” alternative. There have been some successful reorganisations that predict that in the near future this may become a more used alternative; but as of today it remains the exception, not the general rule.

  21. 11.

    Has there been any increase in public company M&A?

  22. Not really. There have been some relevant transactions, like the acquisition of Banmedica by UHG and the sale of Enjoy to Advent through tender offers, and there is always noise of a potential transaction at the level of SQM, but generally public company M&A does not run out of the general trend.

  23. 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?

  24. This is a judgment call. Current laws and regulations afford sufficient protection and we see no real reason to amend them. What can be considered a step forward is that the application of the protective and oversight provisions on conflict of interest, related party transactions, interest of the company and role of independent directors has shifted from a mere formal compliance to real substantive. In other words, for a transaction to clear today, it cannot simply go through the motions but it has to make sense to all shareholders and other stakeholders. Otherwise, institutional investors, independent directors or the securities regulator will not be shy in raising their objections, and, even with the formal voting power, the controller will face difficulties in getting the deal through. 

  25. 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?

  26. Yes. As mentioned before, in January 2010, new corporate governance rules entered into effect. These rules strengthened the role of independent directors and imposed restrictions on related party transactions, including the obligation of interested directors to abstain. And, a new regulation on corporations was enacted in July 2012 that defined an active role on the directors, particularly in their interaction with the management. Also, on November 2012, the Superintendency of Securities and Insurance issued a new regulation on standards of corporate governance, that each publicly held corporation reported on June 2013. This regulation was further upgraded with more stringent requirements in 2015, and the companies reported again in the first quarter of 2016 and shall do the same every year. 

    While not directly related to M&A, today’s duty of care of the directors permeate the process and the term and conditions of a M&A transactions, particularly on issues such as equal treatment of shareholders, alternative transactions, access to material non-public information (due diligence) and disclosure.

    Finally, recent changes in tax laws giving more oversight and discretion to the regulator make thin capitalisation and leveraged transactions even more difficult to structure. Finally, as mentioned before, starting on June 2017, Chile will become a pre-merger antitrust filing jurisdiction on all concentration transactions reaching certain threshold.

  27. 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?

  28. Yes. There have been several relevant milestones. In January 2010, new rules on corporate governance entered into effect. This was supplemented with a new regulation on corporations enacted in July 2012. And, in 2011, the La Polar case exploded. This brought management and directors of publicly traded companies into a new scenario. The diligence imposed by the legal duty of care is still yet to be defined (there is pending litigation on this issue), but directors have responded with more involvement in the day-to-day businesses of the companies and realising that they have to adopt decisions that otherwise were left to the shareholders’ meeting (eg, opine on unsolicited or control group sponsored business combination proposals). The foregoing is coupled with more shareholder activism, especially from institutional investors (eg, pension funds), and a stringent oversight from the securities regulator. Similarly, the outcome of the in-kind capital increase of Enersis by its then controller Endesa España (which was announced in mid-2012 and stirred strict scrutiny by minority shareholders and independent directors) and the recently closed new corporate reorganisation sponsored by its current parent company Enel has set a precedent for several new standards on the role of the controlling shareholder, the duties of the board and rules on related-party transactions. 

  29. 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?

  30. Yes. The rules on corporate governance are evolving in one direction: fiduciary duties, particularly on management and directors. The new regulation on corporations enacted in July 2012 defined an active role on the directors, particularly in their interaction with the management. Similarly, shareholder activism, well-informed specialised media and certain regulatory and plaintiff awareness, is making corporate governance an issue. There is little case law on the matter, and the well-settled principles found in Delaware are not necessary followed by the securities regulator and the courts. Time will pass before we have clean-cut rules to follow on close-call cases. There is still no relevant jurisprudence on shareholder lawsuits brought against controllers and/or management.

  31. 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?

  32. Even though local agreements tend to be shorter and less complex, they have long incorporated the concepts of cross-borders transactions such as representations and warranties, pre-closing covenants, closing conditions, indemnities, caps, non-compete and exclusivity provisions, and choice of law and arbitration. Of course, deals between local parties are subject to local law and arbitration, while transactions with an international component usually resort to New York or English law and to ICC or other panel structure arbitration. And, if there is a compromise in an international transaction, experience dictates that parties have preferred to keep arbitration international and be subject to Chilean law.

  33. 17.

    Have there been changes in the process for how M&A transactions are conducted in your jurisdiction?

  34. Yes. You could say it has been a sellers’ market for a while, so there has been a trend towards auction-style transactions, where potential buyers shall commit substantial resources to assess the target in a short period of time. Similarly, decisions to make a binding offer are taken with limited due diligence information and with transaction documents that, in the absence of gross negligence on the side of the seller, do not provide much protection to the buyer. This puts a lot of responsibility on the advisers, and experience and know-how become crucial.

  35. 18.

    How level is the playing field for domestic and international bidders?

  36. The playing field is levelled. Being as Chile is really a “pass through” country, open to all investors and caring to be an eligible market, the standard of care and review of a potential acquisition by a foreign or local bidder is very similar. It may very well be the case that a local investor has foreign stakeholders (eg, has tapped the financial markets abroad or have an IFC minority investment), and that feature somehow balances the rule book on deal making for everybody. 

  37. 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?

  38. As regards advice, resources spent on efficient due diligence – lawyers, accountants and financial advisors working together – is money well spent, and far better than a buyer-friendly contract. If possible, avoid complex post-closing price adjustment clauses: they are the first cause of litigation, even above breach of representations and warranties. Another matter is to not underestimate local competition. The Chilean market is complex and well- developed. In several markets local players may compete at the same level with a multinational – this affects optimistic post-closing synergies. Finally, one should consider keeping local management. The best transitions on acquisitions have been those in which senior officers remained in the company. On pitfalls, Chile is a by-the-book jurisdiction: international buyers and investors should try to avoid experiences in other, less-developed countries, particularly when dealing with the government and elected officials in procurement contracts and regulated business. Similarly, aggressive tax acquisition structures are now on the radar of the tax regulator, who due to a recent comprehensive legal reform, has brand new tools to make substance prevail over form. Other pitfalls are lack of permits (regulatory and environmental), which may hinder operations or expected growth; and the new rules on merger control (with pre-clearance became mandatory starting on June 2017), which may delay or affect closing certainty on the actual transaction pursuant to which an international buyer is making its investment or future inorganic growth factored into the acquisition.

  39. 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? 

  40. Yes. As mentioned before, in January 2010, new corporate governance rules entered into effect. These rules strengthened the role of independent directors and imposed restrictions on related party transactions, including the obligation of interested directors to abstain. And, a new regulation on corporations was enacted in July 2012 that defined an active role on the directors, particularly in their interaction with the management. Also, on November 2012, the Superintendency of Securities and Insurance (today the Financial Market Commission) issued a new regulation on standards of corporate governance, that each publicly held corporation reported on June 2013. This regulation was further upgraded with more stringent requirements in 2015, and the companies reported again in the first quarter of 2016 and shall do the same every year.     

    While not directly related to M&A, today’s duty of care of the directors permeate the process and the term and conditions of a M&A transactions, particularly on issues such as equal treatment of shareholders, alternative transactions, access to material non-public information (due diligence) and disclosure.    

    Finally, recent changes in tax laws giving more oversight and discretion to the regulator make thin capitalisation and leveraged transactions even more difficult to structure. Finally, as mentioned before, on June 2017, Chile became a pre-merger antitrust filing jurisdiction on all concentration transactions reaching certain threshold.

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Questions

  1. 1.

    Has the level of M&A activity slowed, increased or remained flat in 2017 as compared to 2016, and what are conditions like today? In general terms, what level of activity is foreseen for 2018? 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?


  2. 2.

    Which industries do you expect will see the most M&A activity in 2018?


  3. 3.

    What types of deals do you expect to see?


  4. 4.

    Discuss the level of M&A activity you have seen over 2017 and expect to see in 2018 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.


  5. 5.

    What is the level of private equity activity? Are domestic or international funds involved? What kinds of deals are they doing?


  6. 6.

    Is acquisition financing available for deals? For strategic buyers? For private equity buyers? From domestic or international sources? What amount of debt/ equity leverage are you seeing in private equity transactions? Where is financing coming from – domestic sources, international lenders? Governmental agencies? Banks or capital markets?


  7. 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?


  8. 8.

    Are corruption and compliance concerns affecting M&A activity?  Are there industries where this is a particular issue?


  9. 9.

    How big a part of M&A activity is the restructuring of financially troubled companies? Have you seen more of this in 2017 as compared with 2016? What are the prospects for 2018?


  10. 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?


  11. 11.

    Has there been any increase in public company M&A?


  12. 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?


  13. 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?


  14. 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?


  15. 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?


  16. 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?


  17. 17.

    Have there been changes in the process for how M&A transactions are conducted in your jurisdiction?


  18. 18.

    How level is the playing field for domestic and international bidders?


  19. 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?


  20. 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? 


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