Energy and infrastructure boost Latin American & Caribbean M&A

M&A activity in Latin America and the Caribbean proved robust in the third quarter, bucking the global trend of declining deal activity

The value of M&A in Latin America and the Caribbean totaled US$18.1 billion during the three months to the end of September 2019, a 17% increase on the same quarter of last year. Deal volumes held steady, with 150 transactions recorded over the period, compared to 151 in the third quarter of 2018. This was in contrast to the global M&A picture: both global volume and value fell significantly year on year for Q3.

The strength of M&A in Latin America and the Caribbean reflects a number of different drivers. Certainly, reforms in Brazil, the region’s largest economy, appear to have encouraged dealmaking, with markets reassured by proposals for lower taxes and public sector restraint. Progress in negotiations to ensure the passage of a new trade deal between the US, Mexico and Canada have also provided a boost.

Hopes for improved economic performance across the region are another positive, as the International Monetary Fund has predicted an acceleration in GDP growth to 1.8% in 2020, up from an expected 0.2% in 2019.

EMU has legs

The energy, mining and utilities (EMU) sector helped lead the way in Latin America over the third quarter with 24 deals worth a total of US$4.3 billion. This excludes the announced sale by US-based Sempra Energy of its Peruvian asset, Luz del Sur, to China’s Yangtze Power in a transaction announced on the final day of the quarter. The US$4.2 billion deal almost doubles the headline EMU figure and is one of the largest-ever deals struck by a Chinese firm in the region.

Prospects for further M&A in the EMU sector now look encouraging. Early in the fourth quarter, Sempra has already announced plans to sell Chilquinta Energia in Chile to China’s State Grid for US$2.2 billion.

Conditions should also support further M&A activity in the infrastructure sector, where dealmaking was also strong during the third quarter. While data from Inframation shows there were only 24 deals in this sector during the third quarter, down from 30 in 2018, the value of infrastructure M&A rose 70% year on year to US$6.7 billion.

Much of the action is taking place in areas directly linked to energy markets, with increasingly stiff competition for assets such as power transmission networks and gas pipelines. More broadly, the promise by several governments in the region, including the new administration in Brazil, to invest in a wide range of infrastructure projects, from airports to digital assets, can be a catalyst for M&A. Underinvestment in such areas has frequently been identified as holding back the region’s economy.

Financial services draws interest

Elsewhere, the largest deal in Latin America during the third quarter was an internal restructuring under which the Brazilian supermarket group GPA and Colombia’s Exito supermarket chain, both subsidiaries of France-based Casino Group, announced plans to combine in a US$4.7 billion (including net debt) transaction.

While the consumer sector saw deal values reach US$7.4 billion during the third quarter—ahead of infrastructure and only just behind EMU—the GPA-Exito combination accounted for more than half of that total. It also represented the majority of the US$6.2 billion worth of M&A registered in Colombia over the quarter, the highest quarterly figure on record for the country.

Other areas of notable activity for third quarter M&A included Latin America’s financial services sector. It recorded 20 deals over the three months to the end of September, collectively worth US$3.9 billion. That was an 81% increase in volume terms compared to the same period of last year, though deal value was down by 11%.

Santander Bank led the way with the decision to take full ownership of its Mexican business, paying US$1.7 billion for a 16.68% stake in the business. The Brazilian fintech business Nubank also made headlines, unveiling a US$400 million venture capital funding round with international investors, one of the largest-ever such rounds in the region’s history.

Eyes on Brazil

The Nubank deal took Brazilian M&A to 90 announced deals during the third quarter, with a collective value of US$7.3 billion. That was well ahead of last year’s US$4.4 billion from 77 deals—and cements Brazil’s status as Latin America’s most active M&A market.

The extent to which Brazil’s new political leadership can stabilize the country’s economy and rebuild investor confidence will now be a key factor influencing the region’s M&A activity in the short to medium term.

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