MARKET TALK: Q2 2023 OUTLOOK
After a slump last year, M&A activity is expected to increase as more companies downsize and buyers take advantage of lower prices. The catch? Financing deals is expensive.
By Charles Newbery and Rodrigo Alonso Cruz
Mergers and acquisitions activity in Latin America and the Caribbean is poised to increase in the second quarter of 2023, as buyers look for growth in key sectors and sellers seek to streamline their businesses, analysts and executives say.
But the pickup from a decline last year and a sluggish start to this year likely will be slow, warns Alessio Mazzanti, managing director of the Miami-based boutique investment bank LatamIB.
A surge in global inflation last year unleashed a sharp hike in interest rates that has tightened access to capital and slowed global economic growth. This has put a damper on dealmaking. “There is less capital available for the region, and it is more expensive to invest,” Mazzanti says. “International players are being more cautious.”
This wariness stems both from the rising cost of finance globally and an increase in local political uncertainty, including the recent presidential elections in Brazil and Colombia, a failed coup in Brazil and the ouster of Peru’s president. Argentina has an election in October this year, and Mexico in 2024.
“The sentiment is less positive,” he says.
The number of M&A deals fell to 121 in the first six weeks of 2023 from 218 in the year-earlier period, while volume tumbled 72% to $3.1 billion from $11.1 billion over the same period according to data from Refinitiv.
Activity is expected to recover this year for several reasons. The first is that many family-owned businesses in the region may sell assets to shield themselves from the global uncertainty. This would be a change from the diversification strategy of many family groups before, when they expanded within the region to reduce exposure to volatility in any one market, Mazzanti says.
“As the situation in the region on the whole is not well defined, the motivation is to disinvest,” he says.
A second driver will come from international companies downsizing their holdings in Latin America to focus on their home markets or their most profitable assets in the region, or to use the proceeds to pay down now more expensive debts, he adds.
This is the case with Enel, for example. The Italian electric utility said last November that it plans to sell a significant part of its Latin American business, exiting Argentina and Peru entirely and disposing of some of Brazilian assets to streamline its international businesses.
“We know of a number of big companies that have operations in multiple countries that are considering disinvesting some operations for the issue of optimization,” Mazzanti says.
Regardless, deals are taking longer to close because of the struggle to raise capital for purchases. It took New Zealand’s Fonterra Co-operative Group more than a year to close a deal with Peru’s Grupo Gloria for its Chilean dairy producer Soprole. New York-based Citi has been seeking a buyer for just as long for Citibanamex, its consumer banking business in Mexico.
“There are opportunities in Latin America, but there are fewer investors.”
– Alessio Mazzanti
“There are opportunities in Latin America, but there are fewer investors,” Mazzanti says.
This is an opportunity, of course, for companies with surplus money to buy on the cheap in key growth industries like agribusiness, e-commerce, renewable energy, telecoms and some technologies.
Minu, an on-demand pay provider in Mexico, is looking at possible acquisitions to grow its client base and add new services, says CEO Nima Pourshasb.
“There are many very good assets and at a very good price,” he says.
Colombian cleaning services company Hogarú and its Mexican counterpart Homely are looking at M&A opportunities in Latin America after agreeing to merge the businesses in January, says Hogarú CEO Juan Cadavid.
The focus will be on buying companies that were set up in the 1970s and 80s. These older companies, with their loyal clients and long-term contracts, have the potential for growth from an infusion of technology.
“We see a lot of potential for consolidation, to use all the technology we have built and manage to capture those deficiencies in an industry that is very atomized,” Cadavid says.
Healthcare could also see more deals, as companies recover from the COVID-19 pandemic and consider expansion plans again. Chilean healthcare technology start-up Healthatom plans to raise up to $30 million in its next fundraising round before the end of 2023, some of which could help drive its expansion in Latin America, says CEO Roberto León.
Despite the global economic slowdown this year and fears of recession, León says the opportunities for M&A are “very good” for buyers with excess capital. After expanding in Mexico and Colombia, Healthatom is looking to enter Central America and then Argentina and Ecuador, he says. LF