The impact of multilatinas in Latin American dealmaking

Introduction

The past few years have been challenging for Latin American M&A and global M&A at large. The year 2022 brought an aggregate drop in transaction value of 42.12 per cent in Latin American deals, followed by a drop of 24.37 per cent in 2023.^[2] At the time of writing, with 2024 drawing to a close, a third consecutive drop is expected for 2024.

This is in line with global trends. Most regions worldwide have experienced modest growth in recent years. Factors such as geopolitical tensions, political instability, high inflation and elevated interest rates have contributed to this phenomenon.

However, while Latin America offers attractive investment opportunities, the region’s economic performance has lagged behind other parts of the world. In particular, Latin America’s GDP growth has been relatively weak compared to that of Southeast Asia, East Asia and the Pacific region, sub-Saharan Africa, Central Asia, and the Europe the Middle East and North Africa region.^[3]

Some perceive multilatinas to be more resilient than other market players and, therefore, to play a more prominent role in M&A activity during difficult periods. Reviewing the activity of some of Latin America’s largest companies^[4] over the past year seems to largely support this intuition.

Greater tolerance to political risk

Multilatinas have two unique characteristics, which are not shared by other types of buyers, that should put them in a comparatively better position to tolerate political risk.

First, multilatinas tend to be strategic rather than financial buyers: they are in the game for continued and long-term profits, with long-term investment horizons that are, in some cases, indefinite. They, therefore, cast their eyes more on the intrinsic nature of the business and how it fits into their own landscape than on how the political environment will look like in five years when they start to face pressure from investors to divest. A long investment horizon is usually considered one of the main factors when assessing tolerance to political risk as it allows for better navigation of the uncertainties caused by a particular political cycle and for the gains to be seized when the winds for investors turn more favourable.

Second, multilatinas are often already present in the jurisdictions in which they are trying to close a deal or, if not present, often share cultural values with those jurisdictions that allow them to differentiate when political risk is likely to affect their business or when it will most likely allow them to scare away the competition and negotiate a great price. This natural proximity with the risk gives them better tools to distinguish between real political risk and unwarranted noise.

One transaction supporting this view is América Móvil’s doubling down on its investment in ClaroVTR, increasing its ownership to over 91 per cent of ClaroVTR.^[5] This transaction demonstrates América Móvil’s long-term vision in which it is betting on the future value of building up as a regional telecom.

Other notable examples include:

• Parque Arauco and Mallplaza being readily available to acquire from Falabella attractive commercial real estate assets in Chile and Peru;^[6]
• Quiñenco taking from Grupo Cartes over 100 per cent of the shares of Bebidas del Paraguay, Distribuidora del Paraguay and Enex Paraguay;^[7] and
• Televisa acquiring AT&T’s minority stake in Sky Mexico.^[8]

In all these cases, multilatinas have invested heavily in assets that may be subject to political risk but are highly complementary to their existing business in the region, taking a view that synergies offset potential political risk downside.

Finally, when multilatinas are large, they tend to be more influential than other investors and are generally well positioned to discuss policy, and governments are more likely to take their views into account.

Less affected by high interest rates

When it comes to financing M&A transactions, multilatinas should generally be more resilient in the face of economic downturns when compared to financial buyers, such as private equity funds. Because financial buyers heavily depend on external financing to acquire assets, companies are at a disadvantage when interest rates rise and there is reduced credit availability owing to economic stagnation. By contrast, some multilatinas are characterised by their significant size, diversification and strong cash flows, which puts them in a better position to participate in the market with less dependency on leverage.

Multilatinas often finance asset or company acquisitions with resources that are mostly derived from their own operations and, in a smaller proportion, with external debt obtained either from bank loans or by accessing capital markets. They can also be viewed as having lower credit risk by financing acquisitions against their full balance sheet or offering collateral that is distinct from and exceeds, the value of the acquired company or assets.

In other cases, multilatinas, as strategic buyers, use their own shares to pay for the acquisition price – a currency that is not typically available to financial buyers. For example, this financing and payment strategy was used by Carrefour in the acquisition of the BIG Group in Brazil, in which 70 per cent of the acquisition price was paid in cash and 30 per cent in newly issued shares of the subsidiary Carrefour Brazil^[9] or by Patria in its merger with Moneda Asset Management, where a component of the consideration was paid in Patria shares.^[10] This tool is seldom used in Latin America and could prove very valuable for multilatinas in the future.

By contrast, financial buyers tend to depend heavily on leverage to finance M&A transactions. In particular, private equity funds tend to rely on the contributions of their investors and on financial leverage to achieve the higher rates of returns demanded by their investors. In this regard, financial buyers usually structure their transactions in accordance with a leveraged buyout model, where projections of future cash flows become essential to determine whether the target company will have the capacity to repay the debt incurred for its acquisition. The capacity of these buyers to offer credit support outside the leveraged buyout structure is limited, which may in turn result in a higher cost of credit.

Greater geographical diversification within Latin America

Geographical diversification is a key element taken into account by most investors.

In the wake of the covid-19 pandemic, multilatinas have revitalised their geographical expansion and diversification efforts within Latin America. This strategic move aims to boost efficiency, access new markets and diversify revenue streams, thereby accelerating growth.

Foreign direct investment from Latin American companies abroad reached US$47.7 billion, marking the second-highest figure in the past decade, surpassed only by the record set in 2022.^[11] Of that investment, 65 per cent was directed towards the Latin American region itself.^[12] Brazil emerged as the leading investor, contributing 50 per cent of the total investment, followed by Mexico, Chile, Colombia and Argentina.^[13]

In every jurisdiction, when examining the jurisdictions in which different Latin American buyers invest, the first investment destination is another Latin American country.^[14] Several cross-border transactions in recent years showcase this trend:

• Mexican food company Grupo Bimbo signed an agreement to acquire Brazilian bakery company Wickbold, which owns important brands such as ‘Wickbold’ and ‘Seven Boys’ and holds a significant market share in packaged bread, sweet bread and cookies.^[15] This transaction will enable Grupo Bimbo to improve its position in large cities in southern Brazil.
• Dominican private asset management firm Inicia acquired Brazilian steel producer Gerdau’s 49.85 per cent stake in Gerdau Diaco in Colombia and 50 per cent stake in Gerdau Metaldom in the Dominican Republic, thereby consolidating Inicia’s investment in the Dominican Republic and its regional presence in Colombia.^[16]
• ASAI Capital Holdings from Bolivia acquired Peruvian consumer goods company Alicorp’s milling business in Bolivia, Peru and Uruguay, thereby expanding its operations in the region.^[17]
• Chilean conglomerate Quiñenco acquired a 45 per cent interest in both Bebidas del Paraguay and Distribuidora del Paraguay from Sudameris Bank.^[18]
• América Móvil’s investment in Chilean mobile company ClaroVTR took its ownership in ClaroVTR to over 91 per cent.^[19]
• STRACON Group, a mining services provider based in Peru, acquired all shares and units of AMECO’s equipment rental companies in Chile and Peru from Fluor Corporation, thereby diversifying its operations across the Americas, from Chile to Canada.^[20]

These examples illustrate the robust foreign investment and consolidation efforts by multilatinas across various economic sectors in Latin America.

Investment in more diversified industries

Multilatinas also play an important role in transacting in types of deals and industries beyond traditional sectors preferred by foreign investors. While many foreign investors tend to focus on sectors such as energy and infrastructure, multilatinas diversify into a wide range of industries, including technology, consumer goods and food services. Since these companies are deeply integrated into their local markets, they are well equipped to adapt to market changes and take advantage of opportunities that arise during recessions.

A good example is Grupo Sura, a Colombian financial powerhouse that recently agreed to transfer its investment in food business Grupo Nutresa for shares in Grupo Sura and Grupo Argos.^[21] This highlights how multilatinas reposition themselves through strategic asset exchanges even during difficult economic climates, thereby improving their market position and financial flexibility.

Another example is Colombian online hardware and building materials marketplace Tul’s merger with Brazilian counterpart Sooper.^[22] Tul provided experience in Spanish-speaking markets such as Mexico and Colombia, while Sooper provided a deep understanding of the Brazilian market. Their combined portfolio now includes 82,000 products and serves 10,000 customers.

Other examples include the following:

• Chile’s leading fuel distributor Copec acquired the fast-food chain Streat Burger, integrating Streat Burger into its service stations and expanding its independent locations to several cities in Chile.^[23]
• Brazilian CRM company Syonet, which specialises in car dealerships, merged with Lead Force, a marketing start-up in the automotive industry, thereby expanding its presence in Mexico.^[24]
• Grupo Bimbo’s acquisition in Wickbold strengthened its position in cities in southern Brazil.^[25]

Greater interest in lower mid-market M&A

Over the past few years, lower amounts of M&A activity have also caused some serial buyers to focus more on their core markets and less on their international expansion strategies. Large well-known funds are now receiving a larger portion of fundraising than in the past, with the top 25 most successful fundraisers collecting ‘41 percent of aggregate commitments to closed-end funds’.^[26] These entities focus on big-ticket targets, which are largely available in more mature markets such as the United States.

This has inevitably left a lot of space to grow and invest in the Latin American lower-middle market segment. In 2023, the average transaction ticket for M&A transactions in the region (excluding venture capital) was US$30.4 million (when including venture capital, the average drops to US$22.9 million).^[27] When looking at cross-border private equity transactions, the average increases to US$61.4 million.^[28] When focusing on well-known global names, the average ticket increases dramatically. For example, UK-based private equity fund Actis made six investments in Latin America in 2023 with an average ticket of US$400 million, and General Atlantic made three investments in the region with an average ticket of US$342 million.^[29]

Then who is investing in the lower-ticket transactions?

In 2023, private equity transactions accounted for only 5.5 per cent of transaction activity, venture capital transactions accounted for 28 per cent and other types of M&A transactions, including both stock and asset acquisitions, accounted for the remaining 66.5 per cent.^[30]

Although a higher number of private equity transactions may have been expected, these figures point to an interesting phenomenon: over the past few years, private equity funds have been building regional portfolio companies that are now major players in dealmaking in several sectors. These portfolio companies now have increasingly strong management teams and internal M&A acquisition strategies. The level of independence from their private equity sponsors varies but private equity funds could be viewed as key creators of future multilatinas.

For now, these companies generally remain with strong ties with their private equity sponsors and may not share the dynamics of true strategic investors as true multilatinas do. Consequently, the above figures may under-represent private equity activity in the Latin American region because it has been occurring indirectly through their portfolio companies.^[31]

Nevertheless, there is a case to be made for the overweighing of strategic investors, and among them multilatinas, in lower-ticket transactions. Investment strategies for multilatinas are highly focused on obtaining synergies they may then leverage in their own business. In this scenario, the size of the target is not as relevant as when a company’s main driver is deploying its fund, accessing cash flows and obtaining a large return over investment.

Continued fostering of innovation in Latin America

Multilatinas have been key players in the development of Latin America’s entrepreneurial ecosystem and have brought innovation and efficiencies to the market.

When global M&A volumes are down, the trend is much deeper in venture capital transactions, where transaction volumes have plummeted since the record highs of year 2021.^[32] Behind the lower volumes, venture capitalists are being much more selective in picking their targets, doing more diligence and targeting certain sectors, such as biotech, climate tech and industrial solutions, much more than others.

In this context, the role of multilatinas and their corporate venture capital divisions is increasingly important. The investments of multilatinas in start-ups and innovative companies are radically different than those of normal venture capitalists. The deployment of capital in venture capital is often part of the investment of multilatinas in research and development, and multilatinas tend to have a much more targeted approach, investing in solutions that clearly complement their mainstream lines of business. This makes their investments more resistant to economic and industry cycles.

Research for this chapter found that at least 18 out of Latin America’s top 100 largest companies, as listed by the Latin American Corporate Counsel Association (LACCA), have incorporated new and distinct corporate venture capital companies and divisions that focus in innovative investments in the region,^[33] and there are many more that did not make the LACCA list that are also incredibly active.^[34] This promises a breath of fresh air for the Latin American innovation environment.

There are several examples of multilatinas deploying their corporate venture capital strategies in the region.

• Petrobras joined forces with BNDES to structure a corporate venture capital fund to support micro, small and medium-sized technology-based companies.^[35] They plan to invest over US$100 million in corporate venture capital according to its new strategic plan. This joint venture is a clear sign that multilatinas have in mind their social role in the region.
• Femsa Ventures led investment rounds in Colombian target company Celes, an artificial intelligence platform that aims to improve the cash flow of small businesses by optimising inventory management and supply chain.^[36] This investment is complementary to Femsa Ventures’ main distribution business, in which relationships and healthy economics of their associated small and medium-sized businesses is vital.
• Bancolombia, which has its main offices in Colombia and Central America, is another success story: it has invested in around 30 start-ups through its venture capital fund Bancolombia Ventures.^[37] The start-ups belong to different industries, including fintech. It has also invested in capital markets applications that enable electronic securities trading, and in property technology to find synergies by granting mortgage loans with a positive impact for low-income families.
• The social role of these investment is also clear in Cencosud Ventures investment in Vopero, a Uruguayan start-up focused in circular fashion, by recycling and selling used clothing.^[38] In this investment, Cencosud is investing in a strategy that allows them to hedge against trends that may prove damaging to the fashion industry, such as fast fashion.
• In the past few years, CMPC Ventures has been investing in companies that offer innovative solutions that may expand the uses of pulp and wood in the future. Among its investments are its investments in Strong by Form, a Chilean company that creates wood-based composites for lightweight high-performance applications in the construction, furniture and automotive sectors;^[39] Modvion, a Swedish manufacturer of wooden windfarm turbines;^[40] Pulpex, a UK company that makes sustainable packaging solutions, such as bottles, out of pulp;^[41] and Woamy, a Finnish company that makes cellulose-based foams that can also be used in the packaging sector.^[42]

These examples demonstrate that multilatinas are using corporate venture capital to search for added-value solutions that may boost demand of their mainstream business in the future and are not afraid to go global in the search for these products.

This dynamic is consistent in all sectors. For example, Copec WIND Ventures has invested in Optibus,^[43] a US company providing AI-based logistics solutions that may prove useful for its main fuel and food distribution business, and SQM Lithium Ventures has invested in Altilium, a UK-based company developing sustainable, low carbon battery materials.^[44]

Multilatinas have also been joining forces to foster innovation. Kamay Ventures is a joint effort by Coca-Cola, Grupo Bimbo, Grupo Arcor and Overboost to promote innovation in solutions that contribute to the digitisation of the different stages of the production process.^[45] In the past year, it has invested in Bacu, a Colombian company providing innovative solutions in the restaurant business;^[46] Nude, a Brazilian start-up that is making strides in the plant-based food sector;^[47] Sensify, an Argentinean company that has developed a system to monitor refrigerated inventory and other assets in real time;^[48] and Kilimo, an Argentina company focused in developing and providing innovative solution for water safety and high efficiency irrigation systems for agriculture.^[49] Kamay Ventures demonstrates how multilatinas can innovate and collaborate to make investments across Latin America that will provide added value to their mainstream business while also boosting their efforts in reducing their carbon footprint and combating climate change.

In this regard, Argentinean powerhouse Mercado Libre has played a key role in this environment. Its investments in fostering innovation have been plentiful and consistent throughout the years. In recent years, it has invested (along with Falabella Ventures) in Simetrik and Félix Pago, a digital solution to wire money through WhatsApp.^[50]

All these examples show a refreshingly positive trend that is hoped to continue in the future.

Conclusion

Multilatinas demonstrate remarkable resilience and adaptability, navigating the complex, volatile economic landscapes in Latin America by leveraging their unique synergies and strategic advantages. This has allowed them to maintain an active role in M&A activity despite challenging conditions. It is hoped that this trend will continue to strengthen in the future.

Endnotes