Latin American M&A bankers are bracing for a year of lower valuations, as potential buyers look to capitalize on the region’s volatility, LatinFinance understands.
At the end of 2015, Latin American M&A volumes totaled $89.7bn over 1,331 transactions, a dip on 2014’s $123.27bn over 1,407 transactions, according to Dealogic.
Deal flow this year is expected to be weaker than in 2015, with sell-side advisors informing clients to be cautious and avoid undervaluing assets amidst market uncertainty, one banker said.
International firms, meanwhile, are expected to sell many of their Latin American assets in the current environment, he said.
US power generation firm Duke Energy last week announced that it may exit Latin America. Sources said the company could complete a sale before the end of this year. Credit Suisse and JPMorgan are said to be advising the company. Sources at the banks declined to comment.
On the buy side, particularly in strained industries like energy and oil and gas, are testing the market with lower valuations and looking at the assets of leveraged companies, a second M&A banker said.
For example, Brazilian construction company Odebrecht is thought to have rejected last month a bid from electricity generator ContourGlobal to buy the Chaglla hydropower facility in Peru. Odebrecht’s advisors deemed the offer “inadequate,” said a source near the deal.
Meanwhile, Brazil’s state-owned energy company Petrobras is entertaining bids for its Argentinian assets and other non-core businesses, such as petrochemicals firm Braskem and fuel distributor BR Distribuidora.
“It’s no surprise. Some companies in Latin America are heavily leveraged and the buy side is using this as a chance to pounce on really good assets at lower valuations,” the first banker said. “For sellers, Latin America’s growth has slowed and exchange rates are weak, so in some cases it makes sense to exit the region.”
A lack of competition in bids has also limited deal prices, further favoring the buy side, the second banker said.
Brookfield Asset Management last month bought the Colombian government’s 57.61% stake in electricity generator Isagen for COP6.49tn ($1.96bn). Brookfield was the only prequalified bidder left in the auction, after Chile’s Colbun exited the bidding process.
Similarly, the Canadian asset manager withdrew its bid to buy a 24.4% stake in Brazilian infrastructure investor Invepar from local construction company OAS, hindering the chances of a competitive auction process.
“In this environment, the buyers are likely to be firms willing to take higher risks with a long-term strategy in mind,” the second source said. “In the case of Brookfield, we’re talking about a buyer that has evaluated the price and invested heavily in the region.”