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Mexico

Published on Wednesday 27th February 2019

    • Mexico

      The level of M&A activity in Mexico was below expectations and significantly lower than 2017. Basically, 2018 was a year of two tales. The first semester had a similar performance compared with the same period of 2017. The drastic decline came in the second semester, where M&A activity became stagnant. Seems like the positive outcome of the negotiations of the new free trade agreement (United States-Mexico-Canada Agreement) could not revert the lack of confidence in the incoming administration of President Lopez Obrador. This is the only explanation for what became a very low M&A activity, consistent from May to December 2018. Another indirect factor is the slight devaluation that the Mexican Peso suffered in the second semester of 2018, which affects the deal valuation in US dollars. The value in US dollars of M&A deals reported in Mexico in 2018 decreased in comparison with 2017 (US$27.1 billion in 2017 v US$16.93 billion in 2018). This decline took Mexico back to 2016 numbers in terms of deal dollar valuation. The best performance on a month by month basis during 2018 came in April, which accounted for 25% of dollar value for the whole year (US$4.44 billion). However, the good performance in April 2018 could not be sustained with the worst performance coming in May 2018, at a US$645.0 million value. There was some hope for a strong fourth quarter with October 2018 being the second best month of the year at US$2.3 billion, but the numbers declined in November and December 2018 with performances of US$963.0 million and US$953.0 million respectively. We expect that 2019 will start slow, as large international corporations and private equity funds may remain cautious with respect to acquisition plans for the first semester of 2019. The new USMCA is yet to be approved by all three legislative powers in the United States, Mexico and Canada. Also, there is still some doubts that the policies implemented by the new government of President Lopez Obrador will be oriented towards fostering private investment and market independence. So far the signals are mixed. The auctions for new oil and gas and electric power projects are stalled, with the new administration already declaring its intentions to have a stronger government control on the power industry and supply. The construction of the new international airport of Mexico City, currently the largest infrastructure project in Mexico, was subject to a public referendum/survey, the results of which was the backing by the small amount of voters of the new administration’s intentions to shut down the project. This has caused a lot of mayhem and adverse reactions both on the part of the contractors and private investors. The government is yet to find a solid solution to the cancellation of the project and construction continues alas at a small pace, just to avoid defaults in the construction contracts and the acceleration of payment of the loans and notes held by investors and financial institutions. However, surprisingly the Mexican stock market has not suffer yet significant losses and the Mexican Pesos has performed well, gaining back around 15% in value versus the levels of November 2018. Apparently, the maintenance of the same tax rates and policies that come from the past administration has been received well by the private sector, but it is not yet translating into more appetite for deals.

      Last verified on Tuesday 26th February 2019

    • Mexico

      During 2018 we noticed a high volume of M&A deals in the consumer products industry. Not only food and beverage, but also in other consumables related to the automobile industry, household goods, etc. An example was the purchase by Repsol, the Spanish oil and gas/energy giant, of a 40 per cent participation in Bardahl de Mexico, Mexico’s largest lubricant and automobile additives. We also saw Exxon invest in the distribution and operation of gas stations. Private equity firms like ACON Investments, Promecap and Northgate were active, some acquiring and others selling their participation in Mexican companies. We expect that this trend will continue. We also can expect a continuation in the interest of private investors in the real estate market. FIBRAs (Mexico’s form of REITs) are still raising capital and expanding their property portfolio, and this trend should continue in 2019. We expect FIBRAs to look at the hospitality and tourism industry in 2019, which still has vast opportunities Venture capital is still betting in the FinTech industry. In 2018, we saw the passing and promulgation of the long awaited FinTech Law, which is aimed at regulating and providing legal assurances to both investors and consumers. This should induce Venture Capital firms to continue their funding of FinTech start-ups. Unfortunately, we do not see a bright future in energy related deals, as the policies implemented by the new government may discourage domestic and international energy conglomerates from investing in new projects.

      Last verified on Tuesday 26th February 2019

    • Mexico

      Mexico is still one of the 15 largest economies in the world and the second largest in the Latin America region Given the uncertainty in Mexico owing to the change of course by the new government on certain policy issues, we expect more joint venture deals, especially for international investors. Direct and whole acquisitions will still be happening, but we believe that collaboration and reliance on the knowledge of the local market will encourage international investors to seek association with Mexican counterparts.

      Last verified on Tuesday 26th February 2019

    • Mexico

      In recent years we’ve seen more transnational deals mostly carried out by international conglomerates seeking to acquire Mexican targets. Mexican blue chips are still very active in selling and buying targets both in Mexico and abroad. In terms of regional coverage, the trend of Mexican companies investing in other Latin American market is shifting and now they look at more profitable markets like North America, Europe and Asia. In the past 20 years, we have seen Mexican companies such as 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, but now they’re also looking at other markets that will represent higher yield and less uncertainty. Economic and political stability as well as infrastructure development are huge factors when it comes to making investments in Latin America. Mexico will probably see itself displaced by Brazil in 2019 in terms of interest of direct foreign investment. Although Brazil presents many challenges for foreign investors owing to its complicated tax structure and employment laws, the new right winged government has already established that it will provide a more business friendly market conditions than its predecessors.

      Last verified on Tuesday 26th February 2019

    • Mexico

      Although statistics to measure private equity investment are not as accurate as we would like them to be, we still see deals involving private equity funds reported in connection with Mexican targets. In recent years Mexican private equity funds have surged and are almost at the same level of investment of foreign funds. Private equity funds preferred target for transactions in Mexico that are in the US$25.0 million to U$50 million. We have identified that private equity funds are drawn to investments in industries such as retail, textile, diversified industrials, consumer products, transportation and hospitality. Private equity is still not highly regulated in Mexico, making this vehicle very attractive. For 2019, the forecast of private equity activity is that the first semester there will be caution in order to observe and determine what the true colours of the new Mexican government are, with a potential to an increased activity in the second semester.

      Last verified on Tuesday 26th February 2019

    • Mexico

      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. A potential development that the new Mexican government may introduce in 2019 is the merger of NAFIN and Bancomext into one big government owned development bank. 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. Over 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.

      Last verified on Tuesday 26th February 2019

    • Mexico

      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 decreased more 22 per cent from 2017 to 2018, from US$1.551 billion dollars to US$1.208 billion. In terms of equal opportunities for foreign investors versus domestic, the playing field is even as a general rule. The exceptions to the general rules are found in industries where investment is restricted to Mexican investors or where foreign investment is limited to a certain threshold. These cases are scarce and exist as a matter of national security or protection to strategic areas of the economy.

      Last verified on Tuesday 26th February 2019

    • Mexico

      Corruption and compliance concerns are an item of discussion when it comes to M&A activity, but they rarely prevent a transaction from closing. There may be cases where during the due diligence process the buyer identifies certain irregularities with respect to corruption and compliance that cause a break up, but this is the minority compared with deals that actually close. However, it is true that investigating past conducts on the part of the target and seller is becoming one of the most important aspects of a due diligence review. 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. 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.

      Last verified on Tuesday 26th February 2019

    • Mexico

      M&A transactions involving distressed targets is ever present, especially 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 2019 in comparison with 2018. There could be speculations that distressed M&A activity will be lower in 2019 than 2018 because we expect M&A activity as a whole to be more cautious during the first semester of 2019 as potential buyers ponder on their risk analysis of the market due to the new Mexican government policies. 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.

      Last verified on Tuesday 26th February 2019

    • Mexico

      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.

      Last verified on Tuesday 26th February 2019

    • Mexico

      Public company M&A activity decreased in 2018 in comparison to 2017. We have already reported the decrease in value from 2017 to 2018 (in total the decrease is US$10.2 billion dollars). However, in 2018 some Mexican blue-chip companies continued to seek acquisition opportunities both in Mexico and abroad. Highlights of public company M&A activity are ALSEA’s expansion in the European market for the operation of Starbuck’s locations; Televisa’s purchase of Axtel’s cable residential fibre optic network in the northern region of Mexico; Vitro’s sale to Owens-Illinois of its participation in Empresas Comeagua; Arca Continental’s acquisition of Peruvian beverage manufacturer Corporacion Lindley from the Coca Cola Company; FEMSA’s (the largest Coca-Cola bottler in Latin America) acquisition of Ecuador company Corporacion GPF.

      Last verified on Tuesday 26th February 2019

    • Mexico

      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.

      Last verified on Tuesday 26th February 2019

    • Mexico

      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 of the Stock Market Law).

      Last verified on Tuesday 26th February 2019

    • Mexico

      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.

      Last verified on Tuesday 26th February 2019

    • Mexico

      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.

      Last verified on Tuesday 26th February 2019

    • Mexico

      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.

      Last verified on Tuesday 26th February 2019

    • Mexico

      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.

      Last verified on Tuesday 26th February 2019

    • Mexico

      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.

      Last verified on Tuesday 26th February 2019

    • Mexico

      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 one's 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.

      Last verified on Tuesday 26th February 2019

    • Mexico

      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.

      Last verified on Tuesday 26th February 2019

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