31 Jul Latin America M&A Landscape
By Raymond Perez & Lorena Reategui
Deal activity in Latin America is expected to recover in 2023, following a precipitous decline in 2022, as global investors pursue additional growth opportunities against a backdrop of political instability, rising interest rates, and inflationary pressures. Despite current geopolitical and macroeconomic conditions, the region’s dynamic market potential, international interest, and growth prospects in specific sectors have contributed to corporate consolidation and strategic partnerships, which are expected to drive deal volume in the near future.
Setting the Scene
Following an unprecedented year for M&A activity in Latin America in 2021, which saw over US $168 billion in deals, 2022 represented a 36% drop in activity when compared to the same period last year. According to Bloomberg figures, 2022 deal volume in the region totaled approximately US $107 billion. Figures seen in 2021 were bolstered by direct government stimulus in certain countries due to the pandemic, new macro trends, low interest rates, and distressed investment opportunities. The landscape changed in 2022 with complexities such as high interest rates, decreased liquidity to emerging economies, and regional unrest as a result of election cycles taking center stage. Latin America saw the election of leftist Presidents Gustavo Petro and Luiz Inácio Lula da Silva in Colombia and Brazil, respectively, as well as the ousting of former Peruvian President Pedro Castillo, which likely impacted overall transaction volume in 2022.
Despite the known risks, companies and investors still see opportunity in Latin America. A wide range of deal types are slated to increase over the next two years in the region. Private equity buyouts are projected to increase the most in this period, followed by private equity sales, sales of corporate carve-outs, cross-border deals, and acquisitions. Activity in the first half of 2023 already shows promise. From the January to May period, the region recorded approximately 673 transactions with Brazil, Mexico, and Chile leading deal volume over Argentina, Colombia, and Peru.
Select Country Insights: Brazil & Mexico
Historically, Brazil has led the region in M&A deal volume, with 390 conducted in 2022, compared to 104 and 66 in Mexico and Colombia, respectively. Despite a turbulent presidential election in late 2022 that saw the return to power of President Luiz Inácio Lula da Silva, the country is expected to continue to attract investment, especially in the areas of energy and natural resources, financial services, and technology. However, business leaders will be cautious and rely on scenario planning as unpredictable policy shifts could manifest due to the recently elected government. In 2022, two sectors accounted for 66% of deal value in Brazil: energy and natural resources, and manufacturing and services. A year earlier, health and retail deals were particularly popular. One of the largest acquisitions saw Brazilian hospital chain Rede D’or purchasing insurer SulAmerica for roughly US $2.6 billion. The scope deal combined Brazil’s largest hospital network with one of its major independent insurance companies. In 2023, as investors and companies prepare for uncertainty, deals are expected to continue in industries that are more dependent on exports, i.e. energy and natural resources. In March 2023, ArcelorMittal, a leading global steel and mining company, completed its acquisition of Brazilian steelmaker Companhia Siderúrgica do Pecém (CSP) for roughly US $2.2 billion. The acquisition aims to increase steelmaking capacity and provides an opportunity to form a new production center for low-carbon steel, in line with the state of Ceará’s plans to develop a low-cost, green hydrogen hub. On the technology front, expansion strategies in the software, internet, IT banking, and investment sectors are drawing increased attention. The country’s fintech revolution is creating significant opportunities to invest by providing innovative solutions to the banking sector, as well as affordable and accessible financial services to an underserved market with vast potential and consumer demand. In one of the most significant fintech deals this year, Visa, the world’s largest payment processor, agreed to acquire Brazil’s Pismo, a cloud-based platform for banking and payments, for US $1.0 billion in cash. The June 2023 Pismo deal marks the largest fintech exit in Latin America since Brazilian fintech giant Nubank went public in late 2021.
Mexico remains the second largest market for deals in the region and is on track to surpass Brazil as the most attractive country for M&A in Latin America over the next two years (79% of investors and companies rated it as an attractive place to do business, compared to Brazil’s 69%). In 2022, the industrials sector saw the most activity, driving more transactions in transportation, logistics, and supply chain, as Mexico benefits from the effects of nearshoring. The trend, which propels global businesses to relocate supply chains to geographically closer regions, favorably impacts U.S. investment in Mexico. The Latin American country could see a US $155 billion surge in exports to the U.S. (over 10% of Mexico’s GDP) in the next five years. Looking ahead, the metals, automotive and machinery, and electronics sectors stand to be the greatest beneficiaries as Mexico leverages its proximity to the U.S. and supply chains shift away from markets in Asia. Similar to Brazil, fintech could also lead to strategic acquisitions in Mexico. In April 2023, Mexican retail, logistics, and distribution conglomerate, FEMSA, announced it successfully closed on the acquisition of fintech startup NetPay, also based in Mexico. The acquisition is expected to increase FEMSA’s share in the fintech segment, extending its digital payments portfolio into business-to-business transactions.
The Bottom Line
The M&A landscape in Latin America is poised for growth; however, the region’s markets will be forced to navigate a challenging environment of high interest rates, increasing inflation and political volatility. Long-standing issues of uncertain governance and insufficient due diligence will be closely monitored as companies and investors target deals. Despite the challenges, Latin America has solid opportunities to increase its share of deal volume among emerging markets as investors back out of Russia as a result of the war in Ukraine and supply chains move away from China. The region’s proximity to the U.S., ongoing adoption of global trends, as well as the size and demographics of the economies of Brazil and Mexico all stand to drive M&A activity going forward. Moreover, trends in types of deals, specifically in the areas of technology (internet, software, and IT services), financial services, energy & natural resources, and manufacturing, will continue to present attractive investment opportunities.