M&A activity has been on the rise in Mexico this year, making it the second-busiest market for deals in Latin America in the first half. This shouldn’t come as a surprise. Companies are expanding operations in Mexico and the United States to take advantage of the prospects for trade growth following the launch of the United States-Mexico-Canada Agreement (USMCA).
“Some companies in the retail sector are already looking for opportunities in the southern states of the United States, where there is a greater presence of Hispanics,” says Hernán Silván, managing director and head of advisory corporate investment Banking at BBVA México. “This can generate synergies with Mexican products.”
Industrial and manufacturing companies are also buying companies to expand outside Mexico, Silván says.
One is Mexican energy and food producer Xignux. In June, the Monterrey-based company teamed up with the Boston-based industrial giant General Electric to acquire SPX Transformer Solutions, the largest US manufacturer of power transformers, for $645 million.
Like with Xignux, the goal of most acquisitions this year is to expand operations – or reach – to capitalize on an expected rise in trade in North America after the USMCA took effect in July 2020. Canada, Mexico and the United States have annual trade of $1.2 trillion, one of the largest free trade regions in the world. Trade flows are poised for growth as the three economies revive from a downturn last year after the onset of the COVID-19 pandemic.
In the energy sector, foreign companies have been moving into Mexico. China Power Investment Corp. has acquired Mexico’s largest renewable power company Zuma Energía, while the US infrastructure investment firm Global Infrastructure Partners has bought the Mexican power producer Saavi Energía from British emerging markets investor Actis. In the food sector, Mexican beverage and retail company Coca-Cola Femsa has agreed to buy Penn Jersey Paper, a food packaging, equipment and supplies company based in Philadelphia, after acquiring the Brazilian craft beer maker Therezópolis. Mexican baker Grupo Bimbo is looking at more opportunities in the United States after acquiring US-based gluten-free, vegan and organic snack company Emmy’s Organics.
In Mexico alone, M&A activity rose to 97 deals with a value of $8.1 billion in the first eight months of this year, up 37% from 71 deals with a value of $1.3 billion in the year-earlier period, according to Refinitiv, a data provider. The activity by that point of this year was already more than the 95 deals with a value of $5 billion in all of 2019.
Indeed, Mexico was the second busiest market in Latin America and the Caribbean for M&A deals in the first half of this year after Brazil, according to Dealogic, another data provider. This came as M&A deal volumes surged in Latin American and the Caribbean to $72 billion in the first half of this year from $14.8 billion in the year-earlier period.
A growth driver, of course, has been Mexico’s – and the world’s – economic recovery from the pandemic, which had stalled many deals in the retail, consumer goods and restaurant sectors. Mexican clothing retailer Grupo Axo, for example, scrapped plans to acquire assets in Mexico and elsewhere in the region in March this year after sales fell during the pandemic.
The biggest gains this year have been in consumer goods, healthcare and infrastructure, with financial technology also seeing more activity.
In August, Bimbo acquired the bakery operations of Switzerland’s Aryzta in Brazil, while Mexican telecommunications company Transtelco snapped up its troubled peer Maxcom Telecomunicaciones. Mexican fintech firm Konfío agreed to buy 100% of local card payments processing company Sr. Pago, its third acquisition since 2019.
Deal making, however, has slacked off in the energy industry.
“The current regulatory conditions in the Mexican energy sector have significantly decreased M&A activity and foreign direct investment in the sector,” Silván says. “Many transactions in the areas of renewable energy or downstream [oil and natural gas] have been put on hold because there is still a large gap between the prices that buyers are willing to pay [for assets], considering the current regulatory risk, compared with the expectation that potential sellers have.”
Indeed, investments in wind power projects in Mexico are on track to tumble 61% to $500 million in 2021 from $1.3 billion in 2020, according to figures from the Mexican wind energy association.
Despite this, foreign direct investment in Mexico increased 2.6% to $18.4 billion in the first half of 2021 from the year-earlier period, led by higher investment in manufacturing, mining, financial services and insurance, the Mexican Economy Ministry said in August. About 51% of the foreign investment came from the United States and 9.1% came from Spain, trailed by the United Kingdom, Germany and Luxembourg.
While the pandemic is an easing concern as vaccination programs are rolled out and mobility restrictions loosened across Latin America, M&A activity faces a host of new challenges going forward, led by economic, political and social volatility. Presidential elections in Chile this November and in Brazil and Colombia in 2022 and Mexico in 2024 could sideline some deals as companies wait to see what the new policies could be and how they may affect the economy and their businesses.
With the political changes so far in the region, such as a shift to the left in Peru, “we have seen less confidence of investors from the region,” leaving only those investors with an appetite for risk in exchange for higher returns still in the game, Silván says.
This can be seen in middle-market companies, at least in some sectors, he says. The appetite for deals has shifted from investors “who are very competitive in cost of capital” to those “who are willing to assume certain risks but who need a premium for this,” Silván says. “In Mexico, this has increased the spread between the bid and ask [prices], which has made it difficult for more M&A transactions to take place.”
Private equity funds, too, are being more selective in their investments by taking less risk, avoiding highly regulated industries and investing in more defensive companies, or those with stable sales and earnings during economic ups and downs, Silván says. He adds that most of the capital for M&A in the region has been coming from Asia and the United States, less so from Europe.
“We continue to see a lot of private equity fund activity,” such as by the global players Advent International and BlackRock as well as by Mexico Infrastructure Partners (MIP), he says.
BlackRock divested some of its social infrastructure assets last year, but this year the New York-based investment management firm acquired a stake in Grupo Axo, which will use the funds to expand its digital sales channels for its apparel in Latin America. MIP acquired OVT, a Mexican road concessionaire, and subsequently raised $176 million through the sale of shares in a local trust to finance the construction of five highway projects. Silván expects the deal flow to increase as private equity funds, just like many companies, bet on the growth prospects of USMCA and region’s economic recovery.
“This integration of North America promoted by the USMCA will continue to promote cross-border activity and foreign investment in this region,” Silván says.