Mergers and Acquisitions

Last verified on Wednesday 28th February 2018

Mexico

Mario Jorge Yanez Vega and Mayuca Salazar Canales
Hogan Lovells
  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. The level of M&A activity in Mexico had a surprising year in 2017, despite the doubts casted by different factors like the new administration in the United States, the threat on the potential withdrawal of the United States from the North America Free Trade Agreement, the political landscape in Mexico in preparation of the 2018 presidential elections and continuous claims of corruption at state and federal levels. Notwithstanding all these adverse factors, the value in US dollars of M&A deals in Mexico in 2017 increased significantly in comparison with 2016 (US$25.9 billion v US$16.4 billion). Usually the start of the year is slow for transactional activity. However, 2018 has shown signs of a good start. The value reported of M&A transactions in January 2018 is US$2.228 billion, compared to only US$740 million in January 2017 and 454 million in 2016. Alas, the fast pace seen in January 2018 may not keep the same levels the rest of the year. We expect large and medium-sized corporations to be cautious with respect to acquisition plans the first semester of 2018, patiently waiting for the outcome of the negotiations of the revised North America Free Trade Agreement and the results of the presidential elections that will take place on 1 July. Obviously, there will be some relevant deals in 2018, some of them already signed in 2017 and just subject to the successful completion of the conditions to closing. The Mexican stock market may suffer the uncertainty that the first half of 2018 will present, as the expectation is for a very volatile behaviour. We cannot overlook the fact that the Mexican economy is still too dependent on the United States. Therefore, factors like the new tax reforms pushed by the federal government of the United States could have a considerable effect on the decision-making process of US companies investing in Mexico.

  3. 2.

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

  4. It is hard to tell which industries will see the most M&A activity in 2018. We expect a considerable activity in the real estate market with the FIBRAs (Mexico’s form of REITs) leading the way. The food and beverage industry is an industry that never ceases to bring opportunities for new transactions. Just recently The Coca-Cola Company bought the Topo Chico water and soft drink brand portfolio from Mexican blue-chip Arca Continental for a reported amount of US$220 million dollars. Bacardi signed a purchase agreement in December 2017 for the acquisition of the renowned “Patron” tequila company. Also on the public company front, another Mexican blue chip with vast participation in the food and beverage industry, Fomento Economico Mexicano, sold part of its stake in Heineken, reducing its participation in the latter from 20 per cent to less than 15 per cent. Another market that is catching the attention of venture capital is FinTech, and with the expected passing and promulgation of the new FinTech Law we expect even more interest in established and start-up companies in this industry. We also expect more and more transactional activity in areas related to the energy sector and the automobile industry.

  5. 3.

    What types of deals do you expect to see?

  6. Transactional activity in Mexico has never been dominated by one or two types of deals. Large international companies still look to partner with Mexican groups to form joint ventures. Local Mexican conglomerates and Mexican subsidiaries of foreign companies are the ones that usually tend to go for outright acquisitions, both in asset and stock deals. Venture capital firms like to invest with a minority participation in certain instances to test the waters, but in some cases go for a total acquisition. In real estate, FIBRAs are starting to dominate the project specific acquisition of assets to increase their portfolio of properties. Risk management, tax considerations and the target’s profile are some of the factors that influence the decision on what type of transaction is the convenient one. The merger of equals type is probably the one with less activity, but some in 2017 were relevant, such as the merger by insurance giant Chubb of its subsidiaries in Mexico.

  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. We used to see more transactions with international profiles, mostly carried out by international companies seeking to acquire Mexican targets. Now it is all diversified and there is not one dominating trend. Mexican large conglomerates are still very active in selling and buying targets both in Mexico and abroad. In terms of regional coverage, Mexican companies tend to go after other Latin American markets, and not the other way around, whereas Mexico is seen more as a target from potential buyers coming from more developed countries. Economic and political stability as well as infrastructure development are huge factors when it comes to making investments in Latin America. That is why we see more interest by Mexican companies in targets located in countries like Peru or Colombia, versus other countries such as Bolivia or Venezuela. Brazil presents many challenges for foreign investors owing to its complicated tax structure and employment laws. Argentina is trying to open its markets to investment of other countries after a phase of protectionism and tight regulation policies implemented by less business-friendly past administrations. In the past 20 years, we have seen Mexican companies like America Movil, Grupo Bimbo, FEMSA and CEMEX go in a very aggressive mode seeking to become leaders in their specific industries in the Latin America region. We believe that this will continue to be the trend in 2018, and not the opposite.

  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 in Mexico started to become relevant in the 2000s and has only increased over the years. In the beginning, there were more foreign venture capital firms that dominated versus Mexican funds. However, in recent years Mexican private equity funds have surged, if not at the same levels of foreign funds, but relevant enough to be recognised. We have identified that private equity funds are drawn to investments in industries like retail, textile, diversified industrials, consumer products, transportation and hospitality. Private equity is still not highly regulated in Mexico, making this vehicle very attractive.

  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. Acquisition financing is available to all type of buyers. Public companies in Mexico tend to use stock or private debt offering as a source of financing rather that bank loans. These options have proved to be very convenient and less burdensome that the more conventional bank loans. Due to the usually high interest rates kept by Mexican banks, buyers usually look for alternative sources of financing, like foreign banks or financial institutions. For medium or small-size transactions Mexico has government-owned development banks such as NAFIN and Bancomext providing financing to domestic buyers. In recent years the International Finance Corporation has been more active in Mexico and is now a serious player when it comes to an alternative to finance acquisitions. Through the years Mexico has made efforts to make the process of securing assets and collaterals an easier exercise, both to register liens and also in the foreclosure and attachment process. These efforts have dissipated to a certain extent the concerns that international banks and financial institutions used to have in granting loans for acquisition of Mexican targets.

  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. Mexico has become one of the most open countries for foreign investors. As of 1993, with the passing of the current Foreign Investment Law, the general rule is that foreign investment is not limited but for only a few strategic industries. There are just very few areas of industrial activity that are reserved to the Mexican government, reserved to Mexican investors or where the participation of foreign capital is limited to a certain percentage. The levels of direct foreign investment in Mexico are almost equal to domestic investment. According to the annual and quarterly reports published by the National Commission of Foreign Investment of Mexico, direct foreign investment increased more than 10 per cent from 2016 to 2017 (year end results are not yet available, but the comparison between January–September 2016 with the same period in 2017 show an increase from US$19.7 billion to US$21.7 billion). In bidding processes, for government-owned assets or projects, for public and private projects and for the sale of private companies, we notice no discrimination between domestic or foreign buyers. This is mainly caused by the commitments to grant most-favoured country and national treatment to companies that are resident of countries and regions with which Mexico has entered into free trade agreements. Mexico has made a gigantic effort to extend guaranties to foreign investors that the playing field is levelled and there is no favouritism towards Mexican companies.

  15. 8.

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

  16. We could say that corruption and compliance concerns are an item of discussion when it comes to M&A activity, but they are not something preventing transactions from happening. As mentioned in the response to previous questions, every year we see more M&A activity than the previous one. Mexican targets or sellers are getting used to see compliance and anti-corruption conduct clauses in the transaction documents, and complain less than they used to in keeping those clauses in. Corruption and compliance related concerns elevate in deals where the target is heavily involved in government contracts or is a supplier of government-owned entities. The level of scrutiny in due diligence reviews raises considerably in such cases. What we as a firm have done to deal with this situation is to bring our compliance practice team to due diligence review process. This is both an initiative of the firm but also a demand from our clients. This is not necessarily different when we represent a buyer or the seller. Mexican sellers now understand that anti-corruption and compliance will be topics in the due diligence process and in the negotiation of the acquisition, and therefore are taking the initiative to investigate internally before they put a target out there for sale. These pre-sale investigations conducted by sellers facilitate enormously the negotiations with the buyer, as they bring a certain level of confidence and comfort to the relationship between the parties. However, sophisticated buyers, and especially big international conglomerates and public companies, do not stop there and still conduct their own due diligence review. Mexico established in 2017 a new anti-corruption system at the federal level that must also be emulated by state governments. The system involves the passing of anti-corruption laws and the organisation of new anti-corruption enforcing agencies. The Mexican government trusts that these measures will appease the concerns of foreign and domestic investors, thus increasing transactional activity in Mexico.

  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. We still see restructuring as an important part of M&A transactions, specially in privately held targets. In many deals that we are involved in we see a good part of the purchase price allocated to pay off debt incurred by the target. Our expectations are that we will continue to see this situation. There is no real basis to determine if acquisition of distressed companies will increase in 2018 in comparison with 2017. There could be speculations that distressed M&A activity will be lower in 2018 than 2017 because we expect M&A activity as a whole to be more cautious due to the current negotiations to amend the North America Free Trade Agreement and the outcome of the presidential race. However, there are always buyers that do not have second thoughts on taking the risk in distressed companies if they see a competitive advantage or simply a good bargain.

  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. Mexico’s bankruptcy statute (known as Ley de Concursos Mercantiles) allow the reorganisation of an entity and, after an understanding is reached with creditors, the acquisition of such entity (assets or stock). The interest of the creditors must be carefully considered in a transaction involving an entity subject to reorganisation. If an entity moves from reorganisation to bankruptcy, the stock acquisition of the bankrupt entity is not viable for different reasons, but most importantly, because the assets of the bankrupt entity will be subject to liquidation. We do not see much activity if none at all with respect to stock deals where the target is a company subject to reorganisation, much less of companies that are declared bankrupt.

  21. 11.

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

  22. Public company M&A activity increased in 2017 in comparison with 2016. We have already reported the increase in value from 2016 to 2017 (in total the increase was US$9.5 billion dollars), and a good part of that increase is represented by transactions involving public companies. In 2017, Mexican blue-chip companies continued to aggressively pursue acquisition opportunities, but were not the subject of friendly or hostile takeovers. Publicly traded companies look for targets not only in the Mexican market, but also abroad. Companies such as Mexichem, America Movil, Grupo Arca, Bimbo, Femsa and others reported M&A transactions in markets other than Mexico or with non-Mexican companies during 2017.

  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. Minority shareholders in public companies receive the protection afforded to them under our Securities Market Law (Ley del Mercado de Valores). This protection is afforded in different aspects, like observance of minority rights in takeovers (see sections 99 and 102 (VI)), appointment of board members (see section 50(I)), right to call shareholders meetings (see section 50(II)), postponement of shareholders meetings under certain circumstances (section 50 (III)), and judicial opposition to resolutions adopted by a shareholders’ meeting (see section 51). Our Securities Market Law also provides for the appointment of independent members of the board of directors of publicly traded companies (see section 241). Independent members of the board of directors must account to at least 25 per cent of the membership. As it is the case in other more developed countries, Mexico has now organisations and associations of professionals who offer their services as independent board members. These professionals are usually ex-CEOs, ex-CFOs of large corporations, but also professionals who have been partners in consulting and law firms who have retired but whose experience is in demand. Mexico is no stranger to the fact that the world has become a smaller place where the uses and customs adopted in other markets transcend borders and are adopted generally. This is the case of fairness opinions. The issuance of fairness opinions is now a requirement to every Mexican publicly traded company looking to place a new offer in capital markets. We have identified the presence of global firms in Mexico successfully offering these services.

  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. The stock market in Mexico is very small compared to capital markets in other more developed countries. The Mexican Bolsa Mexicana de Valores only have listed a handful of companies. Hostile takeover is not common in Mexico. However, the Securities Market Law does establish the right of publicly traded companies to insert in their by-laws poison pill provisions preventing hostile takeovers (see section 48).

  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. Director and management activity and authority increase in level depending on the profile of the particular company. Boards of directors are very influential in publicly traded companies and large private conglomerates. Companies that are wholly owned by a close group or family have little influence from the board, whose members are appointed more as a formality than anything else. Legally speaking, according to the principles established in the General Law of Commercial Companies, the board of directors is ultimately responsible for the management of the business of a company and have a fiduciary duty to respond for that to the shareholders. Still, the shareholders’ meeting is the highest corporate body of a company and can always overturn or override a decision adopted by the board of directors if voting requirements for that are met. The General Law of Commercial Companies and the Securities Market Law establish certain voting requirements that must be met in order to adopt resolutions to matters that are most relevance to the life and business of a company. Those statutory voting thresholds may be increased to become stricter, but they cannot be reduced by the shareholders or the board of directors. In our experience, board and management are more involved now in the review of M&A transactions than they were in the past, both on the buyer and seller side. A big factor for this is the almost universal adoption of compliance and anti-corruption rules, guidelines and practices.

  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. Directors, management and controlling shareholders should be more concerned about the scrutiny that they may become subject. Technology is a big part of this development. With the development of the internet and social networks, everything can become news in an instant. A corporate scandal could have been concealed better 25, 20 or even 15 years ago. Not now. Government agencies now react to social networks. We have seen investigations begin by regulators as the consequence of news spreading through the media and social networks, and minority shareholders or other interested parties react to hold directors, officers and controlling shareholders responsible for their actions. At least in Mexico, being a director, officer or controlling shareholder in a company that is involved in government contracts or that is publicly traded adds another layer of exposure, as those companies are more in the radar of media and social networks.

  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. Purely domestic and cross-border transactions are looking more and more alike. Other than very specific issues governed by local law, the structure of a purchase agreement (for stock or assets) can be pretty much the same in both instances. Representations and warranties are usually “tropicalised” to adjust to local law and practice. In Mexico, we are influenced by the United States’ more favoured form of purchase agreement. Mexican parties have adapted and become more sophisticated to the point where they are comfortable with the more cross-border type of document.

  33. 17.

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

  34. The phases of a transaction are very much alike in Mexico than in other more developed markets. A transaction usually starts with a declaration or letter of intent, followed by due diligence, the drafting and negotiation of transaction documents, the signing and the closing. The level of activity at the private company level grew to a point where our antitrust regulators sponsored changes to our Federal Law of Economic Competition in order to increase the thresholds that transactions must reach to trigger the requirement to file a clearance notice. Before this increase in the notice thresholds it was almost a given that any medium-size transaction would be subject to clearance before the parties were able to close. The increase in the thresholds has alleviated this situation and now more medium-size transactions sign and close simultaneously than before.

  35. 18.

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

  36. Although it could be said that domestic buyers should have more familiarity with the issues that are of most concern when analysing the acquisition of a target (tax, environmental, labour and anti-corruption are at the top of the list), that familiarity these days are causing domestic buyers to be stricter that what they used to. Domestic buyers, just like multinational conglomerates, will negotiate the purchase price down if they find red flags during the due diligence process. Also, some domestic buyers would push more now for sandbagging clauses in the purchase agreement than what they used to before. A domestic buyer will come into the transaction with concerns because it knows what skeletons the target may have in its closet. A multinational buyer steps into the transaction with concerns based more from a lack of knowledge.

  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. The three most important pieces of advice that we give to an international client looking to acquire a Mexican target are: (i) always be prepared to receive from the seller a request to agree to the most convenient tax planning structure. We like to raise this at the very beginning to avoid any delays in the deal caused by bringing the issue to the table at the very end of negotiations; (ii) be aware of all environmental and labour issues when making the risk assessment exercise. Until recently environmental compliance has not been fully observed by Mexican companies, especially those with 100 per cent Mexican ownership. It is also important to look at the employment structure of the target, particularly in companies involved in industries with intensive union activity; and (iii) do not sign a purchase agreement that the client is not comfortable with. There are a few examples that we can share. Purchase agreements can be drafted and signed in a foreign language (usually English), with the exception of the document evidencing the transfer of real estate property. The buyer should push for the language in which it is most comfortable. Another example is the level of comfort on the representations and warranties that the seller is willing to give. And finally, the buyer should be comfortable with the choice of law and dispute resolution clause. We usually advise our international clients to select binding arbitration. The pitfalls that should be avoided, in addition to being contrary to the items recommended in (iii), are lowering the guard thinking that the Mexican seller is less sophisticated, and avoid as much as possible a renegotiation of the assumptions under which the deal is being struck if a letter of intent and the business terms of the transaction have already been established.

  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. The establishment of the agencies and legal framework that affect M&A activity has been stable the past three to four years, with the exception of the new anti-corruption system. Before that, Mexico completed a huge effort to change laws and establish new agencies targeting the opening of different industries that in the past were monopolised by the federal government or a small group of companies, which hindered competition and economic growth. Now the energy sector is open to private investors, domestic or international, new telecommunications and economic competition laws and regulators were established, and changes were introduced to the income tax law and the federal labour law to make them more business friendly and acceptable.

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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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