The M&A Market in Mexico
Introduction
In this article we will address the M&A (Mergers and Acquisitions) Market in Mexico. After the economic disruption caused by the COVID-19 pandemic in 2020, the year 2022, which we have already left behind, has been consolidated as the year of recovery.
Regionally, Brazil, Mexico and Chile led M&A transactions in Latin America. The Brazilian market, according to TTR (Transactional Track Record) data, ended the year in first place. However, it recorded a 12% decrease compared to 2021. Otherwise, Mexico and Chile led the growth figures with an increase of 6% and 1%, respectively.
Among Mexican operations, outstands the merger of Televisa's media and content business with Univision, the acquisition of Ricolino by Mondelez International, the acquisition of Roca Acero by Steel Dynamics and of Urbvan by SWVL, among others.
In the following, we will discuss the economic context of the Mexican market in recent months, the factors that have influenced the results of 2022, the industries that have stood out, as well as the trends that will mark the year 2023.
1. Economic Context
The Mexican economy is among the fifteen largest in the world and ranks second in Latin America. The country has almost 130 million inhabitants and a key geographic location that acts as a bridge between the United States and the region.
The country suffered an economic contraction in 2020 because of the Covid-19 pandemic, a situation for which Mexico was no exception, as the coronavirus pandemic caused a strong socioeconomic impact worldwide.
After a drop of 8.1% in 2020, the country began a period of recovery, marked by inflation and uncertainty. In 2021, it grew by 4.8%, then by 3% in 2022. According to OCDE (Organization for Economic Cooperation and Development) forecasts, that real GDP growth is expected to slow to 1.6% in 2023, but with a rebound to 2.1% in 2024.
Mexico's growth, as published by the World Bank, is supported by its trade openness, a strong export manufacturing base connected to global value chains incorporated with the United States of America, and a stable macroeconomic framework.
However, to make its recovery successful, durable and sustained over time, it must address some of the challenges that existed before the pandemic, such as socioeconomic inequality and inclusion, as well as regulatory and competition issues.
2. Foreign Direct Investment (FDI) in Mexico
This type of investment facilitates the employment creation in the country, increases development, attracts foreign exchange, stimulates competition and exports, as well as the knowledge transfer and new technologies.
In 2022, Mexico registered US$35.922 billion in IED, which represents the best foreign capital investment figure in seven years. Compared to 2021 alone, it grew by 12% (then it stood at US$31,544 million dollars).
A breakdown of this data, depending on the subject behind the operation shows that the IED registered during 2022 came mostly from Mexican companies with foreign capital participation (3,485), followed by trust contracts (5,739) and, in last place, foreign legal entities (24).
In addition, according to data published by the Mexican Ministry of Economy, the activity of transnational companies whose headquarters are located in the country and generate investment through their subsidiaries abroad are particularly relevant.
In terms of territories, the five states that lead in FDI are: Mexico City, Nuevo Leon, Jalisco, Baja California and Chihuahua.
3. The Mexican M&A Market, in figures
The M&A market in Mexico closed 2022 with a total of 422 transactions and a mobilized capital of approximately US$16,036 million dollars, according to the TTR (Transactional Track Record) report.
These data are similar to those recorded in the same period of 2021 with a slight difference: more transactions have been recorded, but with a lower value. And the fact is that in 2021 the year closed with 394 transactions and a mobilized capital of US$19.400 million dollars.
If we look at the data prior to the coronavirus pandemic, we see that the total number of transactions closed in 2019 was below the figures for 2021 and 2022, with 312. However, at that time the value exceeded the total reached in 2022, with US$18.900 million.
In terms of sectors, in the Mexican market, the Internet, Software and IT Services, in addition to the Software Specific Industry sector, are the most active in 2022, with a total of 57 and 48 transactions. This represents an increase of 58% and 2% regarding the year of 2021.
In the cross-border market, Mexican companies have clearly bet on investment operations in the United States of America, followed by Colombia and Switzerland. In turn, the United States of America is the country that has made the most acquisitions in Mexico (131), followed by Brazil (23). The USA also leads in terms of the amount of these operations, with US$6.090 million dollars.
4. Factors and industries that stand out in M&A Transactions
There are several factors that, in one way or another, have influenced M&A transactions in Mexico in 2022. It has been the year of the return to normality, after the coronavirus outbreak, due to the end of sanitary restrictions.
In the last period of 2022, specifically in the third quarter of the year, GDP finally reached pre-pandemic levels after the major economic contraction experienced in the second quarter of 2020.
In this context, investments grew by 12% over the previous year. Most of this growth was in the manufacturing sector, which accounted for 36% of total investment. It is precisely this industry that is key to the Mexican economy, as it is the pivot for much of the country's economic growth and development. Translated into figures, it represents approximately 18% of GDP.
The most recent data reflect that in 2021 alone, this sector accounted for US$12.560 million dollars in foreign direct investment and a workforce of more than 8 million workers.
As we can see, economic activity coming from abroad, through foreign investment and also by exports, has a very important weight in Mexico's economy. Moreover, in this context, the country is a great beneficiary of relocation or nearshoring, by those companies seeking to move their production to be closer to their final destination. This situation has been boosted by the pandemic and Mexico that is very well positioned as a country, due to its geographical location and the fact that it is part of the Treaty between Mexico, the United States and Canada (T-MEC).
Another of the determining factors with special influence on Mexico's economic activity is the economic situation in the United States of America. The slowdown of its economy and its monetary policy are issues that, as in the past, will have a decisive influence in 2023. To this will be added the evolution of inflation and interest rates.
At an international level, Mexico has no significant direct or indirect trade with Russia and Ukraine, but the evolution of this conflict will also condition global inflationary pressures, economic uncertainty and market volatility in 2023.
5. VAHG's M&A Operations
As a multidisciplinary, business-oriented law firm, our team takes great care to understand business models in order to properly advise and prepare agreements that reflect the intentions of the parties and facilitate the creation of new companies as well as the growth of existing ones when they enter into a joint venture or merger.
Currently, our clients are divided between domestic (35%) and foreign (65%). Our M&A practice consists of advising them in connection with the purchase or sale of companies, businesses or assets. We also advise on spin-offs, joint ventures and strategic alliances, issuances and placement of shares.
Some of the transactions in which we have recently participated:
Joint venture between one of the most specialized hospitals in the city and a private university with high academic demands, with the purpose of creating a new Mexican company whose main objective will be the restructuring and operation of two hospitals, as well as providing the opportunity to several medical students to perform their studies in the hospital with the most skilled doctors with great prestige in the medical field.
Statutory audit for the first Mexican company to be listed on the Nasdaq stock exchange, and negotiations for the acquisition of participation in companies in which this company invests.
Counsel to a 100% Mexican investment fund in the selection and qualification of potential investors, in the capital subscription offer, in the acquisition of real estate, as well as in its conversion to fintech under Mexican law.
Counsel and negotiation in the legal and accounting restructuring of a corporate group with majority foreign capital, in order to streamline operations, increase liquidity and reduce the debt of Mexican companies.
Counsel to a corporate group of Jalisco origin, mainly focused on the real estate sector, in order to analyze the legal alternatives regarding the viability of maintaining its status as a private equity fund or its transformation into a Financial Technology Institution ("ITF").
Statutory audit to determine feasibility and corrective actions to formalize the sale of shares of certain Mexican companies with majority foreign investment. Negotiation and implementation of formalities to successfully complete the transaction.
Counsel to a Mexican Corporation, leader in the localization services market, for the sale of its intangible assets and client portfolio to a foreign investment fund. Negotiation and implementation of formalities to formalize the sale of assets.
Conclusion
Mexico's geographical location, its openness to trade, a legal framework that facilitates investment, good conditions for relocation, as well as a consolidated manufacturing and logistics industry make it a strategic country for business activity.
Its internal conditions and its relationship with the outside world favor all types of corporate activities such as the sale and purchase of companies, businesses, assets, as well as mergers and acquisitions, joint ventures and share placements, among other operations.
Our outlook for 2023 in the M&A field in Mexico is optimistic, because, despite a slight economic slowdown is forecast, M&A activity will be maintained, as it is key for companies both nationally and internationally. Specially, in the technology and industrial sector, where commercial and operational synergies will be sought for the progress of companies, as well as digital transformation in order to streamline processes and adapt supply and services to new market trends.