Category: M&A

Mexico will likely see a shift towards greater M&A activity in 2009, characterized by smaller deals than in the past two years, Carlos Vara, co-head of LatAm investment banking at Citi, tells LatinFinance. “We have probably the most important, in terms of the number of deals, M&A pipeline we have had in at least six years,” says the Mexico City-based banker. The 18-20 deals Citi has in the works in Mexico are not the large transactions from the likes of Cemex ($15.3bn) or Gigante ($1.7bn) that characterized 2007 and early 2008. Rather, they are transactions under $1bn, where clients have money on hand, a steady cashflow and substantial financing is not a precondition. Vara notes that an increase in such smaller clients would have been happening in Mexico with or without the financing constraints affecting the largest players. “It’s different than last year, where you could put together league tables of $10bn-plus with three deals. Now it will take 10-12 deals to get to that figure,” he says. This scenario should last well into 2009, with perhaps a couple of large stock-for-stock deal as exceptions, he adds. Bankers at other shops recently noted that the M&A market has slammed shut due the credit crisis and is unlikely to reopen for months.

Lima-based Quimpac says Mexichem has given up on buying Prodesal, a caustic soda firm it owns in Colombia, after analyzing unfavorable conditions of the global markets. “The parties involved have agreed to initiate steps to conclude the transaction in a friendly manner,” Quimpac says in a letter to Conasev. In March, Mexchem announced it had agreed to acquire Prodesal, but in August Colombia’s Superintendent of Industry and Commerce objected to the deal, saying it would potentially hurt competition. But it then reversed the decision a month later when the buyer agreed to sell a plant it owns in Colombia that produces sodium hypochlorite. Neither party discloses the advisors names, or deal value. Prodesal reports annual sales of $45m in 2007 and Ebitda of $12m. Mexichem, meanwhile, says Q3 sales were MXP23bn, a 41% increase versus the corresponding period of 2007.

The Bank of America-Merrill Lynch merger involves keeping at least part of the latter’s LatAm business, according to senior investment banking executives at the target firm. While it is not clear how much or which parts of the franchise BofA plans to retain, CEO Ken Lewis made it clear through an internal memo circulated last week that he wants to re-enter a region BofA largely fled in 2006, by retaining a substantial portion of the dedicated LatAm and EM effort. He has appointed Sonia Dula, head of Merrill’s LatAm investment banking, to lead the integration of the business into the combined entity. She is supported by other senior investment banking officials in her effort to “right-size” LatAm staff to help cut costs and make strategic adjustments. The executives claim that these are related more to redrawing the global investment banking model and cost structure of all firms, rather than BofA’s weak stomach for riskier business lines. Merrill’s LatAm business includes investment banking, capital markets, sales and trading, project finance, proprietary investing, research, and private banking. It has a substantial Mexico office and a larger Brazil operation, with some 200 people in Sao Paulo. This includes a team of expensive bankers hired earlier this year from Credit Suisse and UBS. Just prior to Merrill’s sale to BofA, Alexandre Bettamio, head of Brazil investment banking, was named CEO of Merrill Lynch Brazil. Merrill also has locally-based bankers and salespeople in Colombia and Argentina, as well as wealth management offices in Uruguay, Chile and Panama. Dula was not available for comment. A Merrill spokeswoman fielding calls to James Quigley, chairman for LatAm and Canada, declined to comment on any aspect of the integration with BofA until a shareholder vote, with no set date, takes place.

Several high profile M&A transactions have fallen victim to difficult market conditions in the region. Among those initiated, but not completed are Votorantim’s acquisition of a 28% stake in Aracruz belonging to the Lorentzen Group. The deal was officially put on ice on Friday when VCP management told investors that closing had been suspended due to market conditions. The result bodes ill for Lorentzen, which had signed a document with VCP’s parent Votorantim to sell the stake for $1.7bn in mid-September. The stock then fell, and was down some 54% versus mid-September by Friday, when the deal was said to be off. VCP executives say the deal has not been canceled and people close to Lorentzen say its contract protects it well from material adverse changes, which suggests that it could have some legal recourse. Others that have fallen include Cyrela’s $1.1bn acquisition of Agra Empreendimentos, to be paid for in shares, though the companies say it fell apart because of regional incompatibilities. And last month Mexico’s Minera Autlan gave up on selling itself following several months of deliberating over pitches from an array of global suitors. Some 46 deals over $50m in size are scheduled to close between October 20 and December 31, according to Dealogic. They are worth a combined $32bn and include Bunge’s acquisition of Fertilizantes Fosfatados, for $4.1bn and a $7.5bn purchase of Brazsil Telecom and its subsidiaries by Telemar, according to the data tracker.

Investors of Gafisa and Tenda will today vote on the companies’ proposed union, which involves full incorporation of Tenda, the low income housing specialist, into Gafisa’s own low income vehicle called FIT. Tenda CFO Ricardo Perpetuo declines to comment on the expected outcome of the deal but notes things have moved along smoothly with the transaction. The all share deal, valued at the time of its announcement on September 1 at BRL990m, has proceeded without interruption, despite a series of protest letters from UK and US investors led by Foreign & Colonial’s EM equities fund, which complained to the Bovespa’s senior management that the deal snubs Tenda’s minority shareholders and their right to an independent valuation of the acquiring entity. Gafisa is down 32% since September 1 while Tenda’s stock is off 71% since then.

M&A has been by far the most resilient and lucrative LatAm business this year, but bankers say markets turmoil is starting to bite. “M&A business will stop for at least the next three months,” Corrado Varoli, a founding partner of advisory and asset management boutique G5 Advisors in Sao Paulo, tells LatinFinance. “This is an environment where people don’t want to assign valuations to assets,” says Varoli, echoing the words of senior M&A bankers at bulge bracket firms active in Brazil. Luiz Muniz, head of Rothschild Brazil, says pure M&A activity has been declining and will continue to fall substantially in coming months. “In order for transactions to take place you need to have predictability and people need to be comfortable with the future outlook,” he notes, adding that both are now lacking. Dearth of debt financing adds to the low level of conviction in deals, he notes. Muniz says some transactions will still get done, especially those relying less on cash and more on equity, but in general he sees his shop’s business as being geared towards balance sheet management, restructuring and changes in ownership structure. Varoli predicts a resumption of activity once stability prevails. Shifts in the market framework like those happening today are typically followed by active periods for M&A as new types of valuations, targets and opportunities emerge. Aside from CSN’s recently announced sale of Namisa to a Japanese consortium for $3.12bn, there have been few deals concluded and several that have been canceled thanks to market volatility, including the sale of a controlling stake in Aracruz to Votorantim. “Any deal that gets done in this environment is one that has to happen,” says Varoli. In most other cases, buyers will look to find a way out of paying for an asset at old valuations.

Mexico’s Grupo Modelo has initiated an arbitration process against Anheuser-Busch and subsidiaries because it was not consulted about a merger with InBev. “The investment agreement . . . forbids Anheuser-Busch from doing anything that could result in the transfer of its shares in Modelo and [subsidiary] Diblo to a competitor in the beer business,” Modelo says in a statement. “The agreement also states that Anheuser-Busch can’t do anything that results in the transfer of shares in Modelo and Diblo without previously offering the shares to Modelo’s majority shareholders,” it adds. Anheuser-Busch responds by saying that the claims made are without merit and that it expects the arbitration will not impact the completion of the merger, which is expected to close by the end of the year. Anheuser-Busch owns 50% of Modelo. JPMorgan and Deutsche are advising Inbev. Goldman Sachs and Citi are advising Anheuser-Busch.

Banco do Brasil (BdB) is evaluating the acquisition of loan portfolios of small local banks worth BRL3bn, according a presentation made Wednesday by executives. In the last 18 months, the bank has purchased loan portfolios worth BRL1.5bn from local rivals, and the current crisis presents the opportunity for additional purchases, according to the presentation. The bank does not offer any additional details on the current acquisitions under study. BdB and other institutions are taking advantage of a recent liquidity-boosting measure approved by the central bank in which it increased a deduction on time deposits for banks purchasing credit portfolios from smaller rivals to 70% from 40%.

Votorantim Celulose e Papel’s (VCP) planned acquisition of a 28% stake in Aracruz from Arapar has been delayed due in part to a vicious selloff in the target’s shares, say company officials. The deal, originally set to close October 6, is now being revisited by VCP parent Votorantim and Aracruz’s board. Aracruz last week announced a loss related to a speculative FX hedge that could total $1bn. The company’s stock price has fallen some 41% since the announcement, to close at BRL5.00 yesterday. Since the takeover was designed to take place as a $1.6bn share swap, originally estimated at a ratio of 0.22-0.24 Aracruz shares for each VCP share, the change in Aracruz’s price substantially affects terms. IR officers at VCP say they do not know of a new date for the closure, but are sure the deal is set to go ahead, albeit it a new level. VCP is in the process of arranging a $1.8bn bridge loan with JPMorgan to cover the cost of the new shares to be issued to VCP. Signing of the loan is heard to have been suspended until the M&A is finalized.