Fernando J. Pino Ceverino is an associate at Marvel, O’Farrell & Mairal and co-author of this article. Mr. Cerverino’s practice focuses on M&As, private equity, capital markets, and banking and finance.
- On December 10, 2015, Mauricio Macri was elected president ending 12 years of Peronist Kirchner rule. The new government implemented a set of regulations purported to eliminate certain foreign exchange restrictions and soften others, reactivate the economy, and allow the possibility of accessing the foreign financial market for genuine financing.
- As part of the pro-market policy, the Executive Branch issued Decree No. 272/2015 (published in the Official Gazette on 1/13/2016), which eliminated or reduced withholding tax on exports of certain agricultural products and on the livestock sector aiming to boost the agribusiness market, which generates the largest inflow of US Dollars in Argentina.
- The government has also reduced and, in some cases, eliminated public services sector subsidies, leading to a sharp increase of public utility services tariffs (energy, transport, water and gas), some of which had been frozen since 2002, aiming to reduce the fiscal deficit of 5.8% of GDP and 7.1% of GDP registered in 2015, if all debts are computed, left by the former administration before leaving office in December 2015.
- The new administration has presented the promotion of energy generation from renewable sources as a goal for the future. The new regime establishes a target for 2025, whereby 20% of electricity consumed in Argentina must be generated by renewable sources. By 2017, 8% of electricity consumption must be generated by renewable sources.
- Macri’s administration has also announced “Plan Belgrano,” a $16 billion infrastructure project, embracing the construction of railroads, roads and highways, housing projects and port facilities along the Paraguay-Paraná waterway in the north region of Argentina.
- The relationship between China and Argentina keeps moving towards a promising future. Currently, there are approximately 85 cooperation and commercial agreements in effect between Argentina and China.
- The new Capital Markets Law No. 26,831, enacted in January 28, 2013, introduced a new concept of mandatory tender offer for change of control of companies listed in the Buenos Aires Stock Exchange.
- The new Civil and Commercial Code (“CCC”), effective as of August 1, 2015, includes a chapter on preliminary contracts negotiations, and letters of intent so far not regulated in local legislation, which provides a more secure and complete legal basis to pre-contractual negotiations, especially in the context of M&A transactions.
- The new chairman of the Antitrust Commission announced several amendments to the Antitrust law to solve current pressing matters in the merger control process, including new thresholds, a possible change to a pre-closing approval system, fast-track systems for accelerated review of cases in which there are no overlaps of markets, and the implementation of a leniency program.
- On April 19, 2016, Argentina successfully sold $16.5 billion in bonds, making its return to the global debt markets after 15 years. This offering is the largest ever emerging market bond sale. Despite Argentina’s history of default, Argentina received almost $70 billion in orders from institutional investors, more than four times the initial offer, reaching a 7.5% yield for a 10-year bond.
- On April 22, 2016, Argentina completed payment to its holdouts’ creditors, ending a 14-year legal dispute. This will allow Argentina to reactivate the economy and to access international financial markets again, following the financial crisis of 2001.
- Presidential election, paradigm shift and new economic environment
On December 10, 2015, Mauricio Macri was elected president, ending 12 years of Peronist Kirchner rule. The assumption of the new President came along with a paradigm shift and the incoming government has already implemented several measures such as the softening of some foreign exchange restrictions and reaching an agreement with the holdouts that ended a longstanding debt dispute, permitting Argentina to access international financial markets again. There has also been a dramatic shift in Argentina’s foreign policy, ending a decade of international isolation and partnerships with populist regimes. In this regard, the new administration is now regaining an active foreign policy agenda and a leading role representing Latin America in the G-20, together with Mexico and Brazil. These measures confirm Macri’s promise to boost South America’s second-largest economy, and reflect a positive turn towards a “pro-market” approach.
- Relaxation of foreign exchange restrictions
The new government, during late 2015 and the first quarter of 2016, implemented a set of regulations to eliminate certain foreign exchange restrictions and soften others, reactivate the economy, and allow the possibility of accessing the foreign financial market for genuine financing.
On December 17, 2015, the Central Bank of Argentina issued Communication “A” 5850, which modified the existing regimes related to, among others: (i) the purchase of external assets by Argentine residents for investment purposes; (ii) travel and tourism, and family assistance; (iii) arbitration and foreign currency swap; (iv) financial indebtedness (i.e., repatriation obligation, mandatory deposit, minimum waiting period, prepayment); and (v) imports of goods and services.
In connection with the financial indebtedness reform, among other changes (i) the mandatory waiting period was reduced from 365 to 120 calendar days and the mandatory deposit was reduced from 30% to 0%; and (ii) the obligation to transfer and sell financial indebtedness proceeds in the foreign exchange market was removed with regards to any new foreign financial indebtedness incurred by the foreign financial sector, the non-financial private sector and local governments. However, the transfer and sale of funds in the local foreign exchange market will be necessary for the debtor to repay principal or interest through the local foreign exchange market.
Later, through Communication “A” 5899 dated February 4, 2016, the Central Bank introduced additional changes including, among others: (i) the possibility for non-Argentine residents to repatriate direct investments (participations of more than 10% on the capital stock of local companies or real estate investments) without requiring prior approval from the Central Bank and without having to demonstrate the prior transfer of the investment funds to Argentina and compliance with a minimum waiting period; and (ii) the possibility for non-Argentine residents to repatriate portfolio investments (all other investments which do not qualify as direct investments), subject to compliance with a 120-day waiting period, without requiring prior approval from the Central Bank and without having to demonstrate the prior transfer of the investment funds.
- Dispute with the holdouts comes to an end
In January 2005, Argentina began a process of debt restructuring that allowed it to resume payment on the majority of the sovereign bonds that defaulted in 2002. A second debt restructuring in 2010 brought the percentage of bonds out of default to 93%, though ongoing disputes with holdouts (a small minority of creditors who refused the deal of debt restructuring) remained.
In an attempt to put a definitive end to the dispute with the holdouts, the Argentine government made a settlement proposal to the holdouts, which was subject to the final approval of the Argentine Congress and to a judicial resolution by Judge Griesa ordering the lifting of certain pari passu injunctions. The settlement proposal, including the ruling out of law No. 26.017 (the “Lock Law”) and law No. 26.984 (the “Sovereign Payment Law”), was finally approved by the Argentine Congress. The Courts of Appeals of New York affirmed Griesa’s ruling on April 13, 2016, allowing Argentina to make payments with no risk of seizures.
In this context, on April 19, 2016, Argentina successfully sold $16.5 billion in bonds with a 7.5% coupon for a 10-year bond, making its return to the global debt markets after 15 years and on April 22, 2016 completed payment to its holdouts’ creditors, ending a 14-year legal dispute and emerging from default.
- Elimination and reduction of withholding tax in the agricultural and livestock industries
As part of the pro-market policy, the Executive Branch issued Decree No. 272/2015 (published in the Official Gazette on 1/13/2016), which eliminated or reduced withholding tax on exports of certain agricultural products and on the livestock sector. Withholding taxes on exports of wheat, corn, beef and other regional products (which prior to the decree went from 15% to 23%) were eliminated. Withholding taxes on soybean exports were not eliminated, while a 35 per cent tax on soya exports will be cut by 5 percentage points a year starting on 2016, from 35% to 30%. Also, the softening of the strongly regulated foreign exchange market has almost eliminated the difference between the so-called “official” and “blue” foreign exchange markets, thus allowing exporters to repatriate the proceeds obtained from their sales abroad and liquidate them locally into Argentine Pesos at an official exchange rate that has increased. These measures have contributed to overcome the crisis of the agricultural and livestock industries, which so far in 2016 have produced the highest inflow of US Dollars from these sectors in recent years.
- Reduction and elimination of public services sector subsidies
The government has also started to conduct the reduction and elimination of public services sector subsidies as part of its new policies, leading to an increase of public utility services tariffs, some of which had been frozen since 2002. In fact, Resolution No. 1/2016 of the National Electricity Regulatory Authority has already established increases of between 22% and 378% for fixed energy charges and between 143% and 900% for variable energy charges, according to consumption level. Heavily subsidized transport, water and gas tariffs have also increased to reduce the impact of inflation on the public service industries. The above mentioned subsidies policies, had had a negative impact on Argentina’s primary deficit, which expanded to 5.4% of GDP in 2015, up from 3.8% in 2014. The Macri administration has announced plans (including significant cuts in subsidies) to reduce the primary deficit to 4.8% of GDP by the end of this year, 3.3% by 2017, 1.8% by 2018 and 0.3% by 2019.
- Appeal to renewable power projects
Regarding energy and environmental policies, the new administration has presented the promotion of energy generation from renewable sources as a goal for the future. Argentina, whose levels of electricity consumption have increased substantially in recent years, is currently facing the challenge of expanding its power generation capacity and aims to achieve this by meeting renewable standards. This means that both conventional (large hydro power, natural gas combined cycles and nuclear) and non-conventional renewable power projects will be welcomed in the coming years. The new regime establishes a target for 2025, whereby 20% of electricity consumed in Argentina must be generated by renewable sources (wind, solar thermal, solar photovoltaic, geothermal, tidal, wave, marine currents, hydro —up to 50 MW installed capacity— biomass, exhaust gases, biogas and biofuels). By 2017, 8% of electricity consumption must be generated by renewable sources.
- Promising future for China-Argentina affairs
China has strengthened its presence, in general, in Latin America and in particular in Argentina. In January 2015, the China–CELAC forum was created and emerges as a regional proposal to channel Chinese investments in an appropriate institutional framework. The relationship between China and Argentina keeps moving towards a promising future. Currently, there are approximately 85 cooperation and commercial agreements in effect between Argentina and China. In this context, the government has announced that it will revise and adapt the agreements entered into with China in view of the deepening of the cooperation between both countries. Chinese investments in Argentina are likely to be focused on energy, infrastructure, mining and agribusiness.
- New mandatory tender offer for change of control of companies listed in the Buenos Aires Stock Exchange
In the specific field of M&As, the new Capital Markets Law No. 26,831, enacted on January 28, 2013, introduced a new concept of mandatory tender offer for change of control of companies listed in the Buenos Aires Stock Exchange. Under current regulations, the purchaser is required to launch a mandatory public tender offer for all of the outstanding target’s shares within 10 days of purchaser “reaching the firm decision to acquire the controlling interest in the target.” The price that the potential purchaser will offer for the shares of the float must be “fair” price as determined by the Argentine Securities Commission (“CNV”) by weighing the following 4 different valuation methods: (i) discounted cash flow; (ii) VPP (book value); (iii) multiples considering comparable companies or businesses; and (iv) average market price for the last 6 months.
The resulting price, which cannot be lower than the price paid by the purchaser for the control shares, should be backed by two fairness opinions from independent valuators. There are no precedents as to how the CNV will in practice apply the price criteria set forth above in determining the fairness of the price offered, since the first three M&A transactions triggering a mandatory offer publicly announced will be in principle completed during 2016 (sale of Telecom Italia’s control in Telecom Argentina S.A. (completed), sale of Petrobras Argentina (announced), and sale of Solvay Indupa S.A. (announced)).
- Regulation of preliminary contracts negotiations
The new Civil and Commercial Code (“CCC”), approved by the Argentine Congress and effective as of August 1, 2015, includes a chapter on preliminary contracts negotiations, so far not regulated in local legislation. The new regulation provides that the parties are free to conduct preliminary negotiations in view of the contract formation and to abandon them at any time. However, the parties have to act in good faith in order to avoid an unjustifiably frustration of preliminary negotiations, and also maintain confidentiality of confidential information disclosed during negotiations. Any breach of these obligations may lead to responsibility for damages. The chapter also contains provisions on letters of intent. In this regard, the CCC provides that the instruments by means of which the parties express their consent to negotiate on a certain basis are limited to matters related a future contract are subjected to restrictive interpretation and they can only have a binding effect when they meet its requirements. This legal novelty provides a more secure and complete legal basis to pre-contractual negotiations, especially in the context of M&A transactions.
- Auspicious changes in the antitrust clearance process
As regards the antitrust clearance process, the new chairman of the Antitrust Commission announced several amendments to the Antitrust law to solve current pressing matters in the merger control process. The changes would include a new threshold, which would be automatically recalculated based on certain specific criteria or by means of a Presidential Decree and would therefore avoid a notification threshold that remains static (such as the one currently in place of Argentine Pesos 200 million). The current non-suspensory nature of the merger control system is also under consideration, since it is expected that the authority may be moving to a pre-closing system. Changes would also be implemented to speed up the review timeframe to achieve completion of review prior to closing, which would facilitate swift approval of non-problematic competition cases. Additionally, a fast-track system is being considered for accelerated review of cases in which there are no overlaps of markets. As regards anticompetitive conducts, the implementation of a leniency program is being considered, which would be a great leap forward for the procurement of evidence.
- M&A Trends
The recent policies adopted by the new government definitely create a new environment for investments. In consonance with President Macri’s “market-friendly” view, many sectors of the Argentine economy have already been benefited by more flexible regulations, which are particularly attractive for foreign investors.
In recent years, the few operations of M&A (housed largely in medium-sized companies) have been the result, in many cases, of worldwide sales that dragged in Argentine subsidiaries. Others, on regulated markets, were the result of foreign investors divesting in the country with buyers (usually local) that leverage investment opportunities in assets at historically low levels.
A necessary first step to attract new investments was the settlement with the holdouts and access to international finance which was completed in April 22, 2016. In that new context, local and foreign companies will be able to have access to new funding sources and also private equity and hedge funds will look towards investment opportunities in Argentina, which were so far very limited.
With the advent of the new government, there is great expectation for M&As and project finance operations to re-emerge. In fact, the implementation of regulations purported to soften the foreign exchange restrictions is one of the most important action to appeal for a new cycle of investments.
These recent measures have helped to restore investors’ interest in many sectors of the Argentine economy. In particular, there is great expectation about energy and infrastructure projects developments, even though the fall in oil prices has decreased an interest in unconventional hydrocarbon exploitation for the moment. Another challenging opportunity for investors is the renewable sources sector, as the country is facing the challenge to expand its power generation capacity by meeting its renewable standards.
Also, as the result of the increase of public services tariffs, the current M&A trend in the public utilities sector—in general driven by international utilities companies pulling out of the country by selling their participations to local groups—may change substantially in the future.
As a result of the above mentioned, a first look at the current post-elections local M&A market shows private equity funds (“PEF”) in need of disinvesting due to the aging of their Argentine portfolios and mid-sized companies or multinationals’ subsidiaries that have struggled to survive through the Argentine crisis, are now ready to play in the selling team. Expecting a 2016 low or nil-growth economy, these players are mainly focused on maintaining a stringent cost discipline to improve margins, envisioning a bullish market for M&As expecting to start in the last quarter of 2016 or the first of 2017.
Conversely, a buyers’ team is starting to be formed. A new wave of PEFs, that have been reluctant to invest in Argentine assets since 2008, are presently in the process of fund-raising to invest in the country. Local large-sized companies and multinationals are also planning M&A transactions for 2017. Their drivers are either to consolidate across sectors that they own, expansion and growth by focusing on a combination of new products and services and/or gaining market share in the local markets. As to hedge funds, after investing in Argentine financial assets during most of 2015, now they are starting to focus on taking stakes mainly in the utilities, Oil&Gas, other targets in regulated markets and infrastructure M&A related projects.
In terms of valuation of Argentine assets, the last decade of the Kirchners’ economic policies dramatically eroded value from Argentine assets. However, as a consequence of Macri’s policies, there is a great deal of Argentine companies with low PE ratios but high expected growth in earnings, with low risk (and a low cost of equity) and with high ROE. Hence, an attractive M&A market for local and foreign investors. In terms of EBITDA multiples, based on recent market data, purchasers have paid between 6.5x to 9x (2015 EBITDA) in M&A transactions of mid-to large size companies closed during the first quarter of 2016.
All in all, the economic environment is now more predictable and stable, and promises the start of a new virtuous circle with many business opportunities.
- Global M&A volume in Q1 exceeded US$700 billion, the second highest start to the year since 2011, but lower than the quarterly volume of the record-setting levels of 2015.
- Europe accounted for one quarter of Q1 deal activity, relative to a near-term historical average of only 15%. China was another strong performer in Q1, driving 22% of global deal activity (compared to a recent average of 14%). Notably, Europe and China together produced nearly half of the quarter’s deal activity (compared to a recent average of 30%).
- Cross-border M&A activity accounted for 43% of global deal volume in Q1, significantly higher than recent levels. Six of the 10 largest deals in Q1 were cross-border transactions, accounting for half of the quarter‘s US$300 billion in cross-border deal volume. Cross-border deals involving a Chinese acquiror jumped to over US$80 billion, more than 25% of all cross-border deal activity in the quarter.
- Cross-border M&A in the Materials sector had its strongest quarter of the past year. Cross-border activity also continued to build momentum in the Energy & Power and Retail sectors, with a second consecutive quarter of growth. The Industrials sector produced the largest amount of cross-border volume in Q1, approaching US$60 billion.
- Stock market volatility, concerns about a slowing Chinese economy, low commodity prices, and a challenging regulatory environment for certain larger transactions in the United States could be tempering forces in 2016. However, acquirers continue to maintain large cash balances (carried at virtually zero return) and attractive acquisition currency in the form of their stock, and most corporate borrowers can obtain relatively attractive financing terms. Coupled with the continued drive for global scale and synergies and consolidation in key industries, this environment remains conducive for robust M&A activity.
- The latest issue of the Cyril Amarchand Mangaldas Budget Assayer, a comprehensive analysis of the Union Budget for FY 2016-17, takes a close look at the provisions of the Budget with special emphasis on “Startup India” and “Make in India” initiatives of the Indian Central Government.
- Despite a slowdown in global growth from 3.4% in 2014 to 3.1% in 2015, the growth of the Indian GDP has accelerated to 7.6% compared to around 6% in the last three years. Inflation has also been controlled to some extent, and the FM has set the fiscal deficit target at an ambitious 3.5 % of GDP, lower than the 3.9% in 2015-16.
- The Budget focuses on infrastructure development in the agricultural and rural sectors in its pursuit of speedier economic development, and promises various benefits to the small taxpayers and farmers. Focused attention has been paid to employment generation and social welfare including healthcare and affordable housing. The FM has also attempted to address the biggest criticisms of the NDA government in this term, i.e., the lack of attention to the plight of the agrarian sector.
- The Government has made efforts to deliver on its promise of an investor friendly tax regime. The ghost of ‘legacy cases’ may yet be laid to rest, as the FM offers a chance of settlement in the guise of ‘dispute resolution’ to the companies fighting such cases. As promised, the Budget also contains a slew of proposals aimed at simplification of tax laws and reduction in tax litigation, both on direct and indirect tax front.
- While the corporate sector is relieved about the deferral of POEM but is apprehensive about the impending GAAR and the proposed phase-out of incentives to businesses, consumers feel burdened by the levy of additional cess on taxable services and on purchase of cars. However, the market sentiment so far has been positive.
The Cyril Amarchand Mangaldas Budget Assayer can be found here.