Latin America’s M&A activity grew 18% to USD 37.7bn in 1H24 compared to the same period of 2023, according to Mergermaket data. The trend was in line with global M&A volume growth of 21% to USD 1.7trn in the same period.

The region’s two largest markets grew their M&A volumes at different paces. In 1H24, Brazil’s M&A volume grew 66% YoY to USD 18.7bn. Mexico’s M&A volume was of USD 10bn in 1H24, up 32% YoY.

Expectations for 2H24, however, don’t reflect the discrepancy verified in 1H24 as Mexicans are more optimistic than Brazilians on M&A activity for the rest of the year, according to financial and legal advisors and a researcher interviewed by this news service.

Friendshoring and Generation Change

Comparing Brazil and Mexico, the investment climate is in fact better in Mexico, says Lia Valls Pereira, senior fellow at international relations think tank CEBRI and associate researcher at the institute of economics IBRE of Fundacao Getulio Vargas (FGV).

“The effects of ‘friendshoring’ are starting to appear in Mexico but this trend will not affect Brazil,” she says. In the 2000s, Mexico suffered an exodus of investments to China and now these investments are coming back, the researcher says. Friendshoring refers to outsourcing production to countries with good relations with the US as opposed to China, whose relations with the US have soured in recent years.

Arlington, Virginia-based investment bank Seale & Associates has more M&A mandates for 2H24 in Mexico than in recent years, says Managing Director Sergio Garcia del Bosque. “We see 2024 as a good year.”

While capital markets remain difficult for IPOs and private equity fundraising, Mexico is seen as a more mature and sophisticated M&A market in Latin America, Garcia del Bosque says. Additionally, there is a generational change of leaders in large family businesses – which make up most of the companies in Mexico – with a more shareholder-friendly vision and a greater interest in going public, says Juan Manuel Fernandez, head of investment banking at Santander in Mexico.

For the expert, this transition is aligned with the interest that the country is arousing globally. “We see international investors with a fairly positive view of Mexico in relation to the rest of the region,” Fernandez says. “Anything that is in the market will be seen with good eyes if it is a good story.”

The US elections could temporarily affect the MXN/USD exchange rate, mostly because of potential comments that former US President Donald Trump could make related to the North American Free Trade Agreement (NAFTA) and migration, Garcia del Bosque says.

Nearshoring is more than a circumstantial situation, says Bruno Ferrari, managing partner at Mexico City-based investment bank Cross Finanz. “Mexico, Canada and China are the main commercial partners of the US. With the current crisis in the relationship with China, Mexico became a natural partner for the US.”

Outbound M&A is also expected to grow, with Mexican companies making acquisitions abroad, says Garcia del Bosque. Inbound M&A from Chinese companies is entirely new and is part of the nearshoring phenomenon, Santander’s Fernandez says.

The Mexican peso has strengthened, reaching its highest exchange rate to the USD in seven years in May. “The fact that the peso has been so strong has had a temporary impact, especially by US companies that prefer to wait before making a deal,” says Ariel Fischman, director at investment banking and advisory firm 414 Capital.

Blank Spreadsheet

Potential investors in Brazil are facing several uncertainties this year, says Bia Kowalewski, M&A and corporate governance coordinator at Sao Paulo-based law firm Silveiro Advogados. While a weak BRL has made assets in Brazil seem cheap, a slowdown in growth is expected this year, she says.

Brazil’s GDP growth rate is expected to fall to 2.1% in 2024 from 2.9% in 2023, according to the Brazilian central bank.

The first shock that paralyzed M&A in Brazil were the floods in the state of Rio Grande do Sul as of the end of April, a tragedy comparable to Hurricane Katrina in the US in 2005, says Kowalewski. Only two weeks ago, interest in M&A started to return, she adds.

The second half of 2024 is likely to be similar to 1H24 in terms of M&A, say Kowalewski and Flavia Conrado, partner at Setter, a Sao Paulo-based M&A advisory, consultancy and investment firm.

“Despite a slight improvement in 1H24 compared to 2H23, the number of transactions is still low and the impression I have is that 2H24 should not be very different from 1H24,” Conrado says. “There is still a lot of uncertainty about fiscal and tax aspects,” she says, adding that the economic policy itself is unclear. According to Mergermaket data, there were 357 deals in Brazil in 1H24 and 354 in 2H23.

Brazil has a half-passed tax reform whose rates have yet to be defined, Kowalewski says. “Anyone who wants to do business in Brazil has a blank Excel spreadsheet in front of them because they don’t know how much they will pay in taxes,” the lawyer says. The tax and fiscal reform will delay foreign investment in Brazil, Kowalewski asserts.

Other concerns cited by the experts were high inflation with still high interest rates.

Despite the uncertainties, M&A activity survives in Brazil because many companies are in a tight spot and need to sell, Kowalewski says. “The country is still attractive, the assets are good and reasonably priced for the buyer market,” she adds. “However, when someone makes an investment decision to come to Brazil, a case must be made that it is better to invest in Brazil than in Mexico, Chile and Panama, which has enormous tax benefits for industrialization,” the lawyer says. “Global instabilities and this lack of peace affect markets that are suppliers of raw materials in terms of access to financing,” Kowalewski says.

Institutional Framework and Lithium

Chile continues to maintain an institutional framework that attracts foreign investment, says Susan Loren Rojas, ProChile Trade Commissioner. ProChile is a Santiago-based Ministry of Foreign Affairs institution that promotes Chilean goods and services.

In June 2023, the Chilean government presented its National Lithium Strategy. “The government expects that in the medium term, the main investments in the country will be on lithium,” Rojas says. Asian investment, mainly from China, are also tapping into sectors such as energy, mining and agro-industrial,” she says.