M&A and investment in Latin America's natural resources sector




FW moderates a discussion between Raquel Bierzwinsky, an attorney at Chadbourne & Parke LLP, Alejandro D'Ambrosio, a partner at Ernst & Young, and Luis Antonio Menezes da Silva, a partner at Villemor, Trigueiro, Sauer e Advogados Associado, about M&A and investment in Latin America's natural resources sector.

FW: How would you characterise M&A and investment activity in Latin America’s natural resources sector over the last 12-18 months? 

Bierzwinsky: We have seen a flurry of investment in the natural resources sector in Latin America and an increased interest by North American and European investors, as well as Chinese companies. For Mexico and Brazil, the region's largest economies, while investment in the last 12 months does not match the numbers of the past few years, it continues to be very solid. Both countries still have a tremendous need for infrastructure to tap into and develop their vast natural resources. The massive pre-salt offshore fields in Brazil – Tupi – and the most recent onshore findings in Mexico – Chicontepec – call for billions of dollars in investments and, while the oil sector is controlled in both countries by state-owned agencies Petroleos Brasileiros (Petrobras) and Petroleos Mexicanos (Pemex), the supply of technology, equipment and services to develop such resources requires significant participation by private entities.

D'Ambrosio: The South American region’s economic activity is mainly driven by the exploitation of its vast natural resources, directly impacting in the level of investments, both local and foreign, as well as M&A activity. As proof of this, measured in deals, close to 25 percent of all announced transactions in the last 12 months took place within the natural resources sectors. Considering transaction value, participation is much higher. M&A activity in this sector has been steadily growing through recent years. Nevertheless, during the last 12 months it experienced a slight slowdown, in response to the worldwide business environment. Over 60 percent of the natural resources M&A activity is generated on a cross-border basis. It is also worth mentioning that these deals are mainly driven by strategic players.

Menezes: Latin America has historically been quite an attractive market for investors, especially with respect to natural resources. Although there are still challenges in some of the countries due to political risks, such obstacles have not, in the past decade, been enough to deter investments in the natural resources segment. As they are long term projects, their sponsors are keen to carry them out, provided that the risks are compensated by higher rates of return. In this scenario, M&A is one mechanism by which to make solid investments and it is seen as an alternative for investors with some presence in the market to grow rapidly, rather than starting from the scratch. M&A transactions in the natural resources segment over the last few years have increased significantly, mainly for economic and geopolitical reasons. Such trends have also been influenced by the enormous consumption appetite of China, which has become a dominant player in the search of new sources of natural resources. Besides, Europe’s debt crisis, combined with more stable economic growth and a commitment to fiscal and economic policies in most of the Latin America countries has opened a window of opportunity to investors.

FW: Which countries and sectors seem to be particularly attractive to dealmakers, and why? 

D'Ambrosio: We can divide the region into three tiers, according to their share on announced deals count. In the 12-month period ended 31 October 2012, Brazil, Colombia and Peru led with almost 65 percent of total deals, and Argentina and Chile accounted for approximately 30 percent. Other South American countries counted for the remaining 5 percent. Within Natural Resources, Metals & Mining, together with Oil & Gas have been the most active sectors from a deal volume perspective, accounting for 50 percent and 21 percent of all announced deals, respectively. The Agriculture & Livestock sector followed with 12 percent of total deals.

Menezes: Currently, due mainly to political reasons, it seems like Brazil, Colombia, Chile, Peru and Mexico are the most attractive countries in Latin America for natural resources. These countries combine attractive natural resources with a more stable economy and political environment. Bolivia and Venezuela could be very interesting countries regarding natural resources; however, recent political decisions have dampened the willingness of investors to take a risk to operate in these markets. Recent years have been quite beneficial for Brazil regarding natural resources, mainly with the discovery of potentially gigantic oil reserves within an exploratory frontier that is known as the ‘pre-salt’ zone. This name derives from the fact that these reserves are situated below a thick layer of salt, at a depth of around 7000m. With the current blocks under exploration, industry experts expect to increase the current proven oil reserve from 14 billion BOE (barrels of oil equivalent) to 60 Billion BOE, and there is much more to come. Brazil is also one of the biggest producers of key minerals such as iron and gold.

Bierzwinsky: The renewable energy sector and the oil & gas sectors seem to be particularly booming in Latin America. Countries like Mexico, Brazil, Peru and Chile are seeing significant interest and investment in wind, solar and hydro projects. The reasons include the fact that certain regions in these countries enjoy some of the best resources in the world for these types of projects, as well as the fact that investment in renewables in Europe and the US is drying up due to the economic constraints and the phasing out of governmental incentives. For example, the state of Oaxaca in Mexico has an estimated wind potential of over 10,000MW. The Istmo de Tehuantepec region in that state presents some particularly advantageous conditions for wind power projects, as the average wind speed in Oaxaca has been recorded above 9m/s and the measured load factor is above 50 percent. That compensates for lack of sufficient government incentives for investors. In Peru, the government has taken an active role in attracting investment in renewable energy projects. The Renewable Energy Law enacted in May 2008 provides the framework for investment in and development of projects with renewable energy resources (RER). The Ministry of Energy and Mines has been conducting international bidding processes for solar, wind and hydro projects. Renewable energy generation facilities, if connected to the National Interconnected Electric System, are granted priority in the dispatch of electricity and they are offered fixed-rate, 20-year power supply agreements, for a specific output, with built-in annual tariff adjustment mechanisms. The development of large hydro plants in Peru has also been a priority for the government. The Cerro del Águila, 500 MW run-of-the-river hydroelectric plant in central Peru is one of the recent examples of projects under development.

FW: Have any political or economic incentives been introduced to entice investors and businesses to Latin America’s natural resources sector?

Menezes: Depending on the necessity to improve attractiveness, several types of incentives might be adopted. Brazil can be seen as an example. Although its taxation system is extremely burdensome and quite complex, the Brazilian Government created the Repetro regime, aimed at reducing taxes at federal and state levels in order to boost the import of goods and machinery. Likewise, in order to boost the development of the industry in Brazil, the government has laid down rules of local content policies to E&P activities and other economic segments, thus incentivising foreign entities that run operations at the supply chain to make direct investments in the country. 

Bierzwinsky: Economic growth and stability in Brazil, Colombia, Chile, Mexico and Peru have led the governments in those countries to seek foreign direct investment in the development of natural resources and infrastructure. In the energy sector, Mexico has, for several years, opened energy generation to private investment through CFE's IPP projects, in both conventional and renewable energy. With the enactment in November 2008 of the Law for the Use of Renewable Energies and Financing of Energy Transition (Mexico's Renewable Energy Law), the Mexican government took the first steps in promoting the diversification of sources of energy through the use of renewables developed and operated by private entities. However, renewable technology IPPs are not subject to Mexico's Renewable Energy Law, but rather continue to be subject to the Electric Energy Public Service Law, which governs generation from conventional power sources. While Mexico's Renewable Energy Law has provided some incentives for the development of renewable energy projects, it does not provide for a significant overhaul of the electricity sector. However, the Mexican government has adopted certain schemes to support the investment and development of privately-owned renewable projects, including 100 percent depreciation in the first year for all renewable energy capital investments and the abatement of annual governmental fees. Most renewable energy projects in Mexico, particularly wind, are being developed as ‘inside the fence’ projects under the ‘self-supply’ (autoabastecimiento) scheme. Since the 1990s, Brazil has promoted private investment in the energy sector, particularly in the hydro and biofuels sector. However recent changes to electricity tariffs, which came as a surprise to many in the market, have dampened investor confidence in the sector. In the oil & gas sector, the new offshore ‘pre-salt’ oil discoveries require huge capital investments and are attracting international oil services providers and investors from around the world who are bringing much needed technical expertise and financial resources. In Peru, the government, through its investment agency - ProInversión - continues its long-standing policy of attracting private investment in the energy and oil & gas sectors. 

D'Ambrosio: Incentives depend on country specific policies and cannot be characterised on a region-wide basis. Colombia, for instance, has been actively promoting economic activities during the latest three administrations, through specific market oriented incentives. This has been key for the large amounts of investments in the country, which has also been steadily growing over the past few years. The most important policies adopted by Colombian governments have been the enactment of free trade agreements, enhancement of justice and law enforcement, democracy and respect for institutions. Political and economic incentives can be analysed by observing the positions of Latin American countries within the World Bank’s ‘Doing Business’ Index. Here, Chile leads the region, ranking 37th. Colombia’s efforts have resulted in it ascending to 42nd place in 2012 from 66th in 2007. Peru has also improved its ranking, climbing from 65th place in 2007 to 43rd in 2012. Brazil and Argentina, however, are still close to the bottom of the Latin American rankings, occupying the 130th and the 124th places respectively.

FW: What deal strategies and negotiation techniques are acquirers using to identify targets and close transactions? 

Bierzwinsky: In the renewables sector, M&A activity often involves acquisition by deep-pocketed energy or infrastructure companies of early stage development companies. The acquisition is then followed by project financing or other funding and a subsequent sell-down of equity for substantial returns after the risk profile of the project has been reduced. In transactions between competitors, there is increased attention being paid to anti-monopoly issues in jurisdictions such as Brazil that have moved to a pre-clearance regulatory scheme, the result being that US transactional concepts are being introduced into M&A agreements. In transactions involving consolidation or reorganisation of Latin America investments held by international investors, there is increased attention being paid to corporate governance and minority protection issues by Latin American regulators, creating additional deal hurdles as valuation and deal structures receive enhanced scrutiny. Fairness opinions, independent valuations, independent committee approval and similar concepts are increasingly being introduced into Latin American M&A transactions.

D'Ambrosio: Although it differs from country to country, depending on current business and the regulatory environment, transaction opportunities in terms of asset price, in certain countries such as Argentina, Ecuador, and Venezuela are still dominating deal flow, while the consolidation of business at high prices can be observed in other countries such as Brazil, Chile and even Colombia. Joint Ventures between players in particular industries can come about as a means of combining value and mitigating the exposures of specific countries. Usually, global players consider joint ventures with local growing players who can provide infrastructure such as plants, distribution networks and local connections to global players. Vertical integration through partnerships are also one way of sharing value and mitigate risks.

Menezes: Companies that have high rates of return or historical strong growth are the preferred target ones, despite the costs associated with their acquisition. Also, green field areas have been very attractive, as long as they have a long-term revenue stream adequate for monetisation of the investments made. There are no specific recipes for M&A in Brazil, other than the regular precautions that must be taken prior to acquisition – the required due diligence process for instance. In some cases, when the target company has as its main asset the technical personnel, a prerequisite for the acquisition is the maintenance of those technicians, which includes non-solicitation and non-compete provisions. There are some templates normally adopted in economic segments, such as the E&P sector, that provide guidance to the negotiations. The funding of the target companies may vary and it is common to start with a private placement which is structured afterward through an IPO when the business has achieved some maturity. Also, the so-called project bond has been a successful means of financing a project, mainly in Peru – and is starting in Brazil.

FW: In your experience, do foreign acquirers do enough to properly manage and understand the key risks involved in these types of deals? What aspects of due diligence are often overlooked or rushed? 

D'Ambrosio: According to our regional experience, foreign acquirers might not always properly assess or understand key risks, and therefore not be properly prepared to manage them. Typical underestimation may include insufficient due diligence prior to investing; overloads of legal formalities and bureaucracy; unexpected taxes, social security, labour and environmental issues; and government intervention in certain highly regulated activities. Other factors often overlooked include market volatility; the quality of available information; inefficient post acquisition monitoring; and the miscalculation of deal execution time.

Menezes: Although international-standard contracts are quite commonly used in Latin American M&A, there is also a necessity for firms and investors to better understand the legal and political environment of the specific jurisdiction involved. Our experience demonstrates that it is crucial to have counsels familiar with the applicable legislation, and accounting and business practice of each country in order to achieve a successful closing. It is common to see foreign investors starting a discussion without proper local assistance and, in the middle of negotiations, realise that it may either jeopardise or delay the closing of the transaction. Real estate, environmental, and tax and labour matters are sometimes overlooked and may generate later discussions which can end up changing the economical evaluation of the project.

Bierzwinsky: International investors entering certain Latin America jurisdictions for the first time often underestimate the impact of contingencies, such as tax and labour claims, on valuation. They also are often insufficiently mindful of local law veil-piercing concepts in structuring their preliminary deal terms, especially in deals involving significant equity purchases.

FW: How important is local knowledge when it comes to dealing with the regional challenges of investing in Latin America? 

Menezes: The importance of having local counsel in each project’s jurisdiction is paramount, regardless if the governing law is well known. The reasons for this are directly related to differences in the state of the law – that is civil law vs. common law; legal customs, such as the type of public agreements used by each local government for determined activities; taxation and respective incentives; and, also, accounting rules such as IFRS USGAAP. Furthermore, knowledge of common practices and the proper way to handle negotiations, may, depending on the jurisdiction, be as important as knowledge of the applicable legislation. Local counsel also presents a simple, however considerable, advantage on the language aspect.

Bierzwinsky: Local knowledge is critical to effectively deal with the particular challenges that investors may face in each country. An investor must be familiar with the political, financial and cultural environment of the country where it wishes to invest to form realistic expectations in respect of regulatory requirements, repatriation of funds and foreign exchange controls, corporate requirements, access to local markets, and sources of funding, to name a few.

D'Ambrosio: Local knowledge is key for successfully investing in Latin America since, although there are some regional challenges, country-specific conditions must be thoroughly known before embarking on deal making in each country. Reliable advice from experts with local and regional knowledge and proven experience should be a must in the foreign investor’s checklist, not only for accomplishing the due diligence phase but also at the very beginning when opportunities arise, through to planning and execution. Structuring the transaction is also an important task that should not be overlooked.

FW: How do you see deal activity in the region’s natural resources sector unfolding over the coming months and years? Can we expect deal flow to increase? What barriers might stand in the way? 

Bierzwinsky: Everything in the most developed countries in the region seems to point to an increase in deal flow, particularly given the difficulties facing the US and European economies. European, North American and Asian investors have increasingly become more knowledgeable of, and comfortable with, the investment regimes in the region and are putting substantial resources into opportunities given the availability of resources. We are also starting to hear about potential investments by investors from the Middle East, in particular Qatar and the UAE, in the oil & gas sector. Some of the barriers that may deter or delay investment in the region include, first, Environmental permitting – countries are becoming stricter in their assessment and granting of environmental impact authorisations. Several important projects, including, most prominently, HidroAysén in Chile, have faced roadblocks that have put into question the viability of the project. The second barrier comes in the form of local community issues and sensitivities – sustainability of local communities is increasingly becoming an issue at the forefront of projects involving the use of natural resources in Latin America. A third barrier is government policy. While, most countries in Latin America welcome and encourage private investment, Argentina, Bolivia, Ecuador and Venezuela have taken active measures to nationalize or expropriate enterprises with investments in natural resources. However, the circumstances surrounding these nationalizations or expropriations vary.

D'Ambrosio: Although worldwide M&A activity has been quite unstable lately, a characteristic trend has been observed, whereby investors have been orienting M&A activity towards high-growth emerging markets. South America plays a critical role as a result of its vast natural resources reserves paired with its outstanding strategic advantages. We expect to see an increase in deal activity involving the natural resources sector across Latin America. Chinese companies will continue to drive transactions in Oil & Gas, Mining and Agriculture. Canadian companies are active in Oil & Gas and Mining. Japanese companies are also expected to return to natural resources.

Menezes: Latin America is facing a very fruitful period regarding natural resources. It is clear that most countries are willing to receive investors and are establishing a business friendly political and economic environment. Colombia is experiencing a good period in its oil industry, where over 200 different companies hold E&P stakes, as is Peru. Brazil, with the huge potential that lies in its pre-salt layer, is expecting massive investments in the upstream sector. Additionally, Venezuela, notwithstanding its political environment, is still an attractive country in which to operate. Uruguay is also willing to become a player in the oil segment and Argentina, despite the recent expropriation of Repsol YPF’s control stake, cannot be totally disregarded as an alternative for investment. As for alternative energy sources, Latin America, together with the Central America region, are the world’s cleanest regions regarding energy sources, and enormous investments are being made to take advantage of the great hydroelectric potential.


Raquel Bierzwinsky is an attorney at Chadbourne & Parke LLP and advises US and international clients in the areas of project finance, international finance and mergers & acquisitions, with a particular emphasis on Latin America. She represents project developers, sponsors, commercial lenders, and multilateral and bilateral agencies in energy and infrastructure project financings, as well as in acquisitions and dispositions of projects. Ms Bierzwinsky can be contacted on +1 212 408 5219 or by email: rbierzwinsky@chadbourne.com.

Alejandro D'Ambrosio is a partner at Ernst & Young, based in Buenos Aires, Argentina. He provides professional advice in transactions including M&A lead advice on the buy and sell side, business valuations, financial, accounting, tax and social security due diligence, and tax structuring involving assets in all Latin America countries. Mr D’Ambrosio has extensive experience in Natural Resources transactions, in particular related to oil & gas, mining, agriculture and different types of power generation, among other industries. He can be contacted on +54 11 4318 1545 or by email: alejandro.dambrosio@ar.ey.com. 

Luis Antonio Menezes da Silva is a partner at Villemor, Trigueiro, Sauer e Advogados Associados, based in Rio de Janeiro. He practices in a range of areas of law, with a special emphasis on corporate, regulatory and the oil & gas sector. With extensive experience in infrastructure and M&A projects, Mr Menezes is ranked as an expert on Brazil’s oil & gas sector by Chambers and Partners. He can be contacted on +55 21 3806 3495 or by email: luismenezes@villemor.com.br.

© Financier Worldwide



Raquel Bierzwinsky

Chadbourne & Parke LLP 


Alejandro D'Ambrosio

Ernst & Young


Luis Antonio Menezes da Silva

Villemor, Trigueiro, Sauer e Advogados Associado

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