High Commodity Prices, Comparative Calm Keeping Investors Interested In Latam M&A

The logo of Mexican airline Aeromexico is pictured on a sign at the Benito Juarez International airport in Mexico City, Mexico February 1, 2022. Reuters / LUIS CORTES

Latin American bankers expect investors to overlook political worries in the region this year and keep investing in local companies, buoyed by strong commodities prices and a comfortable distance from geopolitical risks in eastern Europe.

The volume of mergers and acquisitions in the region fell 30% in the first quarter from a year ago, while share offerings fell 69%, with rising interest rates and volatile markets hurting on both fronts, bankers and lawyers said.

"Volatile markets impacted valuations and delayed deals," said Felipe Bittencourt, head of advisory at Vinci Partners. He said he expects lower M&A and equity issues volume in the region this year, as higher interest rates raise the required rates of return for capital invested in companies.

However, several deal advisors said the opportunity for returns far from the war roiling Ukraine and its neighbors had kept investors engaged in Latin American markets. Bankers see a growing flow of deals among healthcare, energy and tech companies, including fintechs.

"Despite recent problems in Europe and our upcoming elections, corporate and investor sentiment remain positive. We should have more deals," said Brazil-based Luiz Muniz, partner and head of Latin America at Rothschild & Co.

He pointed out a healthcare deal is again topping the regional tables: hospital chain SA Rede D'Or Sao Luiz SA agreed in February to acquire insurer Sul America SA for 13 billion reais ($2.81 billion).

Another highlight of first-quarter dealmaking was the restructuring of airline Aeromexico, in which Apollo Global Management became the largest shareholder alongside Delta Air Lines Inc.

Bankers are hoping presidential elections in Brazil, the region's largest economy, will not throw off momentum, as leftist former President Luiz Inacio Lula da Silva, now leading the polls, has tapped centrist running mate Geraldo Alckmin, signaling a coalition with moderate economic policies.

The drop in new equity issues last quarter tracked a global retreat, as interest rates rose in the United States and Latin American countries.

Analysts see ongoing headwinds for initial public offerings (IPOs), but an easier rebound for follow-on offerings, which dominated first-quarter issuances. Energy and commodities companies such as power holding Equatorial Energia SA and food processor BRF SA were among the larger issues.

"Clients expect higher discounts in share offerings as investors are more cautious," said Pedro Juliano, head of investment banking in Brazil at JPMorgan Chase & Co.

Even an October election approaching in Brazil, investors expect the government to keep pushing to privatize power utility Centrais Eletricas Brasileiras SA, or Eletrobras, in a deal close to $15 billion.

Latin America M&A league table

Advisor Deals value ($ million) # of deals

Rothschild & Co 8,016 8

Itau Unibanco 3,451 13

Vinci Partners 3,251 4

Olimpia Partners 3,103 1

Banco BTG Pactual 2,970 13

Citi 2,537 4

Evercore Partners 1,501 4

Alix Partners 1,485 1

FTI Consulting 1,485 1

Moelis & Co 1,485 1