European and Latin American dealmakers continue to weather economic and political challenges that are reshaping markets. In Europe, uncertainty surrounding the UK referendum as well as regulatory and tax concerns have dampened dealmaking. In Latin America, lower commodity prices, currency fluctuation, as well as recession and political developments in certain markets have affected M&A activity.
But Latin America as a region remains full of opportunities specially for investors with an eye for the long term. Lower exchange rates, a growing middle class with increased buying power and discretionary spending in Latin America continue to draw interest from European investors. Strategic investors have also been capitalizing on opportunities to acquire distressed assets at lower prices.
At the same time, Europe has been the target of a growing number of Latin American companies. Due to similarities in language and culture, Spain in particular has served as a gateway for so-called “multi-Latinas” exploring the continent. In fact, Latin American investors served as a shock absorber during Spain’s economic downturn.
Despite challenges that have resulted in lower M&A activity between the two regions over the last five years, opportunities in the consumer staples, financials, energy, industrial, telecommunications, healthcare and other key sectors will drive deal activity as markets rebound.
In this report, we take a look at cross-border M&A in Europe and Latin America, as well as some of the drivers that have kept deals flowing. We hope you find this a useful resource as you explore M&A opportunities between the two regions. The last period assessed is FY16, which covers July 2015 to June 2016.
Latin America M&A snapshot, FY12-FY16
M&A activity in Latin America saw a decline in FY16. Deal volume totaled 1,217, down from 1,365 in FY15, representing an 11 percent drop. This can be attributed, in part, to an ongoing recession in Brazil and weak economic performance in Mexico — the region’s two largest M&A markets.
Deal values, however, rose eight percent from USD91 billion in FY15 to USD98 billion in FY16. Lower exchange rates brought about by a stronger US dollar meant Latin American assets were cheaper to acquire. Other developments such as asset consolidation, restructuring in certain industries as well as corruption scandals have spurred local companies to sell off distressed assets at attractive prices.
Still, dealmaking is expected to pick up as key markets recover. Regulatory developments are in place to attract investment. In Mexico, President Enrique Peña Nieto’s policy reforms empower regulators to take down monopolies in the communications sector, and open the energy sector to private investment for the first time in 75 years.
Meanwhile, in Peru, the government has launched a fiscal stimulus program to give the economy a much-needed boost following weak external demand and lower export metal prices. Global demand for Peru’s commodity exports is expected to pick up, resulting in a positive outlook for equity prices and deal activity.
Europe M&A snapshot, FY12-FY16
Except for a dip in deal activity in FY13 — when investor concerns over recession in much of the continent resulted in a lackluster period for dealmaking — the last few fiscal years have been a busy period for cross-border M&A in Europe. In FY16, there were 4,184 inbound and outbound deals worth a total of USD673 billion. These represented an increase of 3 percent in volume and 40 percent in value over FY15.
Global M&A activity in Europe has been driven largely by acquirers from the US and China. The US alone accounted for 57 percent of inbound activity over a five-year period. Uncertainty in the lead-up to Brexit, the continuing slowdown in China’s economic growth, among others, have dampened deal activity in the latter part of FY16.
European investors such as Spain, the UK and France executed 637 deals worth a total of USD36 billion in Latin America. Notably, Brazil continued to be a top target of European investment despite its shrinking economy; the devaluation in the real may have contributed to M&A activity because potential targets were cheaper to acquire. Latin America’s energy, consumer staples and products, industrial and raw materials sectors provided attractive opportunities for European companies.
A growing number of Latin American companies have begun exploring European markets. From FY15 to FY16, deal spending by Latin American acquirers in Europe has doubled. Spain has been a particularly attractive target due to cultural similarities, a robust infrastructure and a geostrategic position that make the country a natural gateway for Latin American companies expanding to Europe. Mexican and Brazilian companies were active in Spain’s financial, food, construction and cement sectors.