TTR In The Press

Business News Americas / BN Americas

January 2021

M&A Watch: Firms assessing Mexico pandemic aftermath, deal opportunities

The COVID-19 pandemic’s full impact on M&A in Mexico is starting to come into focus as industry insiders are taking stock of 2021 opportunities and risks, with companies and funds enjoying solid liquidity positions holding a coveted edge. 

Mexican deal volume was down 6.9% last year to a total of 298 M&A, private equity, venture capital and asset acquisition transactions.

The aggregate value of those transactions dropped 27% to US$13.2bn, according to research firm Transactional Track Record (TTR).

TTR, in its latest transactional impact monitor for Mexico, provided to BNamericas ahead of its official release, reported that financial services lead transactional activity in 2020 and the technology sector came in second, with the former recording a 2% increase to 58 deals, while technology saw a 13% drop to 55 transactions. 

Internet-related deals rose 18% to rank third with 40 transactions, followed by real estate deals, down 53% to 19.

Meanwhile, inbound acquisitions by US-based buyers rose only 1.37%, well below the 17.7% increase recorded in 2019 and the 29.2% jump in 2018.

Despite the slump, TTR said Miami-based investment bank 414 Capital closed nine transactions between Mexico and the rest of Latin America. 

Those deals, said 414 Capital founder and CEO Ariel Fischman, came despite strong concerns in the first half of 2020 at the peak of pandemic-related lockdowns, which later eased some, allowing the company to close transactions in the industrial, food, agriculture, telecom, financial services and e-commerce segments.

Fischman said that about a quarter of the transactions 414 Capital had underway in March were put on hold and some were slowed down, though two of the deals closed last year were initiated after the start of the market tumult.

Digital in 2021 

Digital transformation has stood out as a result of the pandemic, said Eduardo González, partner at M&A specialty law firm Creel, García-Cuéllar, Aiza y Enríquez, not only due to confinements but also because the health crisis hit Mexico at a time when it was primed for digital acceleration.

Fintechs, for example, have been in great demand, from e-commerce to mobile banking and electronic payments that allow companies to exploit synergies and implement loyalty programs, said González. 

Deals in 2021 will be driven by market leaders strengthening their positions; businesses that need to adjust their model to stay relevant in the context of digitalization; and companies exploring investments or partnerships that can accelerate their adoption of emerging technologies, according to González.  

A handful of cash-rich Mexican conglomerates are on the lookout for value-driven acquisitions both at home and to the north, he said. “It could be a good time for it, though we’ve been talking about this outbound M&A from Mexico for the past 20 years.” 

While the Mexican peso has stabilized again at close to 20:1 against the US dollar, the peso is still to weak to spark a wave of outbound deals to the US or Canada, said González. 

Mexican banks have also been eyeing technology deals to accelerate their digital transformation, he added.

The pandemic’s sector impacts

The financial industry could turn out to be one of the hardest hit sectors in the aftermath of the pandemic, with the full toll of charge-offs and loan defaults unlikely to emerge until the second quarter. 

Nexxus Capital founder and chairman Arturo Saval, described the Mexican financial sector’s position as precarious, predicting in the TTR report that of the country’s 51 banks, 25 will have a very hard time, and some will shut down for good.

Saval said the closure of some lenders stood to put extra pressure on the large players that will remain, many of which are based overseas and are facing stress in their home markets as well. “There will be a lot of stress in the banking industry globally, which will make them reluctant to increase their exposure in Mexico.”

Business sectors have been impacted to varying degrees by the pandemic, some being very hard hit, though many firms have been able to continue operating despite major drops in sales and profitability, which is a reason for cautious optimism, according to González.

Saval said e-commerce is the obvious example, bolstered by Mexico’s lag in this area before the crisis. 

The country is under-leveraged compared to many of its Latin American peers and the public finances are in good shape, with the exception of state-owned oil giant Pemex, which is mostly due to the position taken by the administration of President Andrés Manuel López Obrador to prop up the debt-straddled company, said Saval.

Investment in conventional energy faces tremendous hurdles, according to González. 

“AMLO has consistently tried to make the petroleum industry a sacred cow for the people of Mexico for many years, and decisions governing the sector won’t likely be made based on any market intelligence, nor geopolitics, but rather for his own political benefit,” he said.

Saval also bemoaned the federal government’s limited support to help the private sector cope with the pandemic, with the financial aid estimated at around 0.6% of GDP and being much smaller than in many other Latin American countries.

Several sectors have been put under enormous stress, especially the country’s large hospitality industry, said Saval.

Private equity 

TTR recorded 17 private equity transactions through December 28, down 29% from the 2019 total, with the capital involved amounting to US$1bn, down 60.5%.

Fund managers are set to drive M&A in 2021, notwithstanding, said González, as private equity investors rethink their holding periods and either postpone or accelerate exits.

Nexxus Capital suspended a few processes in 1H20, including a restaurant business, Saval said. “That doesn’t mean there are no buyers, but we’re not in a position to rush our exit, and most of our LPs have agreed that it would be a stupid time to sell.” 

On the investment side, Saval sees a host of opportunities, “mostly because I do expect a drought in the liquidity side; I see a lot of companies suffering this year, which means huge upside if you have liquidity.”

Fischman from 414 Capital has a different view, saying: “I don’t think the hypothesis of the rich guy coming with a bundle of cash to buy a bunch of assets on the cheap will materialize.” Given the current climate, private equity funds are more likely to consider smaller ticket deals in the Mexican market, he added.

Source: Business News Americas / BN Americas - Chile 

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