Mexican domestic dealmaking under pressure but outbound deals flourish

Trump’s trade policies are causing foreign investors to be wary, while a volatile peso is pushing Mexican firms to secure assets abroad

Mexican M&A is at a crossroads. An uncertain political environment, volatile currency and unstable relationship with the US signal an uncertain future for dealmaking within the country. And while the first three quarters of 2017’s value have seen an 18.4% uptick compared to the same period in 2016, volume is still well short of 2016 numbers, with Q3 2017 volume barely above half of Q3 2016’s volume.

Trump, trade and taxes

Local and foreign investors are waiting to see the impact of President Trump’s trade policies on the Mexican economy. President Trump’s stated intention to renegotiate the North American Free Trade Agreement (NAFTA) and his suggestion to impose a 20 percent tax on all imports from Mexico are causing hesitancy among dealmakers. Mexico’s current tariff-free access to the US market under the agreement has been an important draw for international investors looking for a gateway into the US.

Mexico is heavily reliant on the US for trade, with approximately 80 percent of Mexico’s exports directed at its northern neighbor. Meanwhile, the US has traditionally been the largest investor into Mexico’s M&A market. A souring of political relations is sure to negatively impact dealmaking, at least in the short-term.

Shifting strategies

On the back of Trump’s unpredictable trade plans, the peso dropped 10 percent against the dollar in the year leading to February 2017, before rallying slightly at around 19 pesos to the dollar at the time of this writing. Against this backdrop of currency volatility, overseas transactions have become a strategy for Mexican firms to secure investment in a more favorable climate. With many deals set in dollars or at a fixed exchange rate, dealmakers are able to secure reliable returns on their investment.

Outbound deal volume spiked in Q3 to reach its highest quarterly volume on record, with 12 announced deals during the quarter. Deal value experienced a similar uptick, with US$4.39 billion announced up from just $0.39 billion in Q2.

Dealmakers will be closely watching how Trump’s policies toward Mexico unfold over the coming months, particularly his stance on the 23-year old NAFTA agreement. Given Mexico’s heavy reliance on the US, the importance of maintaining healthy political and economic ties with its main trading partner cannot be overstated. This will be a determining factor in the success of Mexican dealmaking in the final quarter of 2017 and beyond.

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