South America

M&A landscape uncertain in turbulent election season

M&A foreign investment Latin America

South America’s richness in natural resources such as gas and oil, as well as its thriving legal mining industries, keeps it an attractive destination for foreign investment. According to studies carried out by Deloitte, countries that received the highest levels of investment in 2017-18 were Brazil, Mexico and Chile.

Despite the fact that at the end of 2017 law firm Baker McKenzie forecasted that M&A activity in Latin America would see a 15% increase this year, it seems that more recently, investors have been treading with caution ahead of this year’s presidential elections. The coming months will see Mexico, Colombia and Brazil elect new presidents.

First up this year was Chile, whose new president Sebastian Piñera took office in March. Next in line is Colombia, whose general election will take place on on the 27th of this month, followed by Mexico in July and finally Brazil in October.

Senior M&A analyst Gaston Acuna, who works with local advisor Fynsa, told Forbes that Chile’s political and economic stability will encourage larger investments. This, along with new President Piñera’s intentions to reduce corporate taxes, has encouraged foreign investment in Chilean businesses, reported Rafael Wilhelm, director of local investment bank Banmerchant. 

On the other hand, throughout the months leading up to the general elections at the end of May, Colombia has already begun to see the effects of investor uncertainty. On April 5th, it was reported that the country’s oil regulator had postponed a deal involving the auction of 15 onshore exploration blocks. The caution surrounding natural resources such as oil and gas has also been echoed by the presidential candidates themselves. Gustavo Petro, for example, has suggested the need to turn focus to other exports such as avocados.

According to a Madrid-based banker in conversation with Forbes, the Colombian government’s plan to sell its 32.5% share in Spanish company Telefonica could also be put on hold. However, it could be deemed that merger and acquisition experts are less cautious about this year’s elections than they were around the time of the 2016 peace referendum and the agreement with ex-guerrilla group FARC.

In arguably the least politically stable country, Brazil, investor caution will mostly apply to government sectors, as they are the most likely to be particularly volatile this year. Despite this, the recent end to Brazil’s economic recession and last year’s 1% increase in GDP growth have seen investors place their bets on the Portuguese-speaking country once more.

This comes following a difficult year last year for major corporations in Brazil, who suffered pressure from corruption probes and high levels of debt, forcing them to sell some of their assets. As a result, the value of merger and acquisition deals in Brazil now stands at $61.77 billion, up 33% from 2016.

This year, industries such as that of technology are unlikely to suffer, reported Ricardo Chamon, a partner at Brazilian law firm Chamon Santana Advogados. Roderick Greenless, head of investment banking at Itau BBA SA, also told news agency Reuters that Brazil “will still see a lot of deals in infrastructure and energy, but the recovery may stimulate acquisitions in retail and customer industries too.”

Despite current concerns over whether the North American Free Trade Agreement will see improvements for Mexico, along with the rumour that it may be delayed until 2019, it is possible that Mexico will experience a sudden boost in merger and acquisition deals before the July elections.

Nevertheless, following the election of a new President, the country could well see an M&A investment decrease. Leftist poll-leading candidate Andres Manuel Lopes Obrador, who plans to bring the country’s natural resources under national control, has spoken of his plans to bring oil auctions and the privatisation of electricity sectors to a hault, as well as the construction of a new airport. The project, worth $13 billion, could be a major foreign investment opportunity.

In sum, this year’s M&A investment forecast in Latin America is particularly difficult to predict. Following a positive start for some countries, the unfolding of the 2018 presidential races could, and might already, represent a blow to investor confidence across the continent.

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