M&A trends in Argentina
June 2019 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
June 2019 Issue
Ever since taking office in December 2015, Argentina’s current administration has directed its efforts toward creating a more investor-friendly environment. Governmental efforts have included several regulatory reforms aimed at creating incentives that would attract investments into the country.
Partly as a consequence of these efforts, during 2016 and 2017, M&A activity slowly began to respond. From a very low number of transactions in 2014 and 2015, activity picked up pace. According to figures, Argentina ended up in second place, after Brazil, in terms of the number of M&A transactions in South America during 2017.
At the end of 2017, expectations were high for 2018. Unfortunately, the inability to control certain macroeconomic factors negatively affected the upward trend, leading to fewer M&A deals being completed.
During the second and third quarters of 2018, the international financial market started to doubt Argentina’s financial strength in facing its foreign debt obligations. This motivated the International Monetary Fund (IMF) to grant an extraordinary loan to guarantee Argentina’s repayment capacity. However, notwithstanding support from the IMF and the US, the loss of market confidence resulted in a rapid devaluation of the Argentine peso during 2018.
The depreciation of the Argentine currency, among other factors, had a negative impact on ongoing M&A negotiations, reopening discussions on purchase price and delaying acquisition processes. In line with this, Argentina fell to third place with regard to the number of transactions closed in 2018, as Chile climbed to second place. Despite this, the total amount invested during the year was in fact higher than 2017, mainly due to the closing of a large merger in the telecommunications, media and technology sector.
How M&A players will react during 2019
During 2019, general elections will be held in Argentina to elect the country’s new president for the next four years. Also, a portion of the members of the National Congress and the governors of most provinces will be elected. In general, election years tend to cause a slowdown in M&A activity. Moreover, there is uncertainty as to how the elections will unfold.
On the flip side, the fact that Argentine assets have depreciated may create an incentive for certain types of investors to turn to Argentina for investment opportunities at competitive prices. This may be particularly true for strategic investors, which are usually less sensitive to market cycles. Investments may also come from companies already operating in the country that may want to expand their business or increase productivity by taking advantage of potential synergies at lower costs.
Although lower prices may dissuade potential sellers from entering into M&A transactions, the fact that Argentina is currently undergoing a general decline in its economic activity, coupled with very high costs of financing, may make financing through equity attractive for these players.
As in previous years, it is expected that the hottest areas for M&A investment will be energy and natural resources, telecommunications, media and technology, manufacturing and agribusiness, food and beverage.
With regard to the energy sector, between 2016 and 2018, the Argentine Secretariat of Energy awarded approximately 150 long-term power purchase agreements (PPAs) and additionally fostered large consumers of electricity to enter into corporate PPAs. More tenders to award ‘government’ PPAs are expected during 2019 and the corporate PPA market is continuing to expand.
Public policies passed in 2015 to encourage the use of renewable sources of energy have triggered a boom in M&A transactions involving renewable projects structured through single purpose vehicles. Many of the projects awarded PPAs during the last couple of years due to the challenges of raising the capital necessary through capital markets are looking for equity partners in order to meet their financial needs.
In addition, the Argentine Secretariat of Energy has recently launched a tender to award the construction, operation and maintenance of approximately 900km of high-tension transmission lines through a public-private partnership (PPP) contract. This tender is the first of many stages through which the government intends to substantially expand the Argentine transmission system and has gained the attention of several international players.
As far as the oil and gas sector is concerned, Argentina is a major player in the South American hydrocarbon market. According to the 2018 edition of the BP Statistical Review of World Energy, Argentina is the largest producer of natural gas and the fourth largest for crude oil in South America, based on 2017 statistics. Hydrocarbons, especially natural gas, have historically accounted for a large portion of the Argentine energy matrix.
Recent reports that Argentina has among the largest volume of shale gas reserves in the world have had a groundbreaking impact on Argentina’s position as a global energy player. According to the US Energy Information Administration and Advanced Resources International, Argentina has the second-largest shale gas resources in the world and the fourth-largest shale oil resources (27 billion barrels).
More than 50 percent of these unconventional resources are located in the Neuquén Basin, especially in the Vaca Muerta Formation, which promises to be a colossal non-conventional shale resource, without precedent. The Vaca Muerta Formation has enormous potential in the country and currently has a high level of productivity that evidences that assets are in good shape, making it attractive for investors, despite economic drawbacks.
In addition to its favourable geology, the Neuquén Basin has attributes that favour unconventional development, such as a long history of oil and gas operations, an established and thriving service sector, and good access to domestic and international markets.
During the last quarter of 2018, after nearly three decades, the Secretariat of Energy launched Argentina’s first round of licences for offshore exploration. The goal is to expand exploration for long-term production growth in what is considered one of the world’s practically unexplored offshore areas. The bid auction was held in April 2019 and will cover approximately 225,000 square kilometres, in three specific areas.
Regarding the mining sector, investments are expected to continue during 2019 in connection with the exploration of lithium, which has already been relatively active in 2018.
The telecommunications, media and technology sector has also been very active in the last year with regard to M&A activity, and the expectation is that this will continue.
After the approval of the merger between Telecom, one of the incumbent telecommunications companies providing telephony and internet services, Cablevision, the main cable operator in the country, and Fibertel, one of the main local ISPs, led to the creation of a company with capacity to offer quadruple play services, it is expected that there will be further transactions aimed at financing current medium-sized telecoms operators aspiring to consolidate their position in the market.
In addition, the fact that there is a clear need to increase radio bases in the country has also led, and will likely continue to lead, to M&A driven by investments from tower companies. In this case, M&A transactions usually involve real estate.
With regard to the agribusiness sector, in recent years there has been increasing interest in the purchase of rural land and the manufacturers of primary products, such as meat processing companies and companies in the dairy industry.
In addition, interest seems to be growing for investments in the pharmaceutical and medical services industry, with a number of transactions taking place during 2018 and others expected this year. In general, it is expected that there will be strong growth in Latin America in these markets over the next few years.
Pablo García Morillo is a partner and María Laura Bolatti Cristófaro is an associate at Marval, O’Farrell and Mairal. Mr García Morillo can be contacted on +54 (11) 4310 0190 or by email: firstname.lastname@example.org. Ms Bolatti Cristófaro can be contacted on +54 (11) 4310 0100 ext. 2106 or by email: email@example.com.
© Financier Worldwide
Pablo García Morillo and María Laura Bolatti Cristófaro
Marval, O’Farrell and Mairal