Advisory Board

  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Peter Clarke
  • Barry Diller
  • IAC/InterActiveCorp
  • Fu Chengyu
  • China National Petrochemical Corporation (Sinopec Group)
  • Richard J. Gnodde
  • Goldman Sachs International
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V.
  • Jiang Jianqing
  • Industrial and Commercial Bank of China, Ltd. (ICBC)
  • Handel Lee
  • King & Wood Mallesons
  • Richard Li
  • PCCW Limited
  • Pacific Century Group
  • Liew Mun Leong
  • CapitaLand Limited
  • Martin Lipton
  • New York University
  • Wachtell, Lipton, Rosen & Katz
  • Liu Mingkang
  • China Banking Regulatory Commission (CBRC)
  • Dinesh C. Paliwal
  • Harman International Industries
  • Leon Pasternak
  • Bank of America Merrill Lynch
  • Tim Payne
  • Brunswick Group
  • Joseph R. Perella
  • Perella Weinberg Partners
  • Baron David de Rothschild
  • N M Rothschild & Sons Limited
  • Dilhan Pillay Sandrasegara
  • Temasek Holdings
  • Shao Ning
  • State-owned Assets Supervision and Administration Commission of the State Council of China (SASAC)
  • John W. Snow
  • Cerberus Capital Management, L.P.
  • Former U.S. Secretary of Treasury
  • Bharat Vasani
  • Tata Group
  • Wang Junfeng
  • King & Wood Mallesons
  • Wang Kejin
  • China Banking Regulatory Commission (CBRC)
  • Wei Jiafu
  • China Ocean Shipping Group Company (COSCO)
  • Yang Chao
  • China Life Insurance Co. Ltd.
  • Zhu Min
  • International Monetary Fund

Legal Roundtable

  • Dimitry Afanasiev
  • Egorov Puginsky Afanasiev and Partners (Moscow)
  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Johan Aalto
  • Hannes Snellman Attorneys Ltd (Finland)
  • Nigel P. G. Boardman
  • Slaughter and May (London)
  • Willem J.L. Calkoen
  • NautaDutilh N.V. (Rotterdam)
  • Peter Callens
  • Loyens & Loeff (Brussels)
  • Bertrand Cardi
  • Darrois Villey Maillot & Brochier (Paris)
  • Santiago Carregal
  • Marval, O’Farrell & Mairal (Buenos Aires)
  • Martín Carrizosa
  • Philippi Prietocarrizosa & Uría (Bogotá)
  • Carlos G. Cordero G.
  • Aleman, Cordero, Galindo & Lee (Panama)
  • Ewen Crouch
  • Allens (Sydney)
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Rachel Eng
  • WongPartnership (Singapore)
  • Sergio Erede
  • BonelliErede (Milan)
  • Kenichi Fujinawa
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Manuel Galicia Romero
  • Galicia Abogados (Mexico City)
  • Danny Gilbert
  • Gilbert + Tobin (Sydney)
  • Vladimíra Glatzová
  • Glatzová & Co. (Prague)
  • Juan Miguel Goenechea
  • Uría Menéndez (Madrid)
  • Andrey A. Goltsblat
  • Goltsblat BLP (Moscow)
  • Juan Francisco Gutiérrez I.
  • Philippi Prietocarrizosa & Uría (Santiago)
  • Fang He
  • Jun He Law Offices (Beijing)
  • Christian Herbst
  • Schönherr (Vienna)
  • Lodewijk Hijmans van den Bergh
  • Royal Ahold (Amsterdam)
  • Hein Hooghoudt
  • NautaDutilh N.V. (Amsterdam)
  • Sameer Huda
  • Hadef & Partners (Dubai)
  • Masakazu Iwakura
  • Nishimura & Asahi (Tokyo)
  • Christof Jäckle
  • Hengeler Mueller (Frankfurt)
  • Michael Mervyn Katz
  • Edward Nathan Sonnenbergs (Johannesburg)
  • Handel Lee
  • King & Wood Mallesons (Beijing)
  • Martin Lipton
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Alain Maillot
  • Darrois Villey Maillot Brochier (Paris)
  • Antônio Corrêa Meyer
  • Machado, Meyer, Sendacz e Opice (São Paulo)
  • Sergio Michelsen Jaramillo
  • Brigard & Urrutia (Bogotá)
  • Zia Mody
  • AZB & Partners (Mumbai)
  • Christopher Murray
  • Osler (Toronto)
  • Francisco Antunes Maciel Müssnich
  • Barbosa, Müssnich & Aragão (Rio de Janeiro)
  • I. Berl Nadler
  • Davies Ward Phillips & Vineberg LLP (Toronto)
  • Umberto Nicodano
  • BonelliErede (Milan)
  • Brian O'Gorman
  • Arthur Cox (Dublin)
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Sang-Yeol Park
  • Park & Partners (Seoul)
  • José Antonio Payet Puccio
  • Payet Rey Cauvi (Lima)
  • Kees Peijster
  • COFRA Holding AG (Zug)
  • Juan Martín Perrotto
  • Uría & Menéndez (Madrid/Beijing)
  • Philip Podzebenko
  • Herbert Smith Freehills (Sydney)
  • Geert Potjewijd
  • De Brauw Blackstone Westbroek (Amsterdam/Beijing)
  • Qi Adam Li
  • Jun He Law Offices (Shanghai)
  • Biörn Riese
  • Mannheimer Swartling (Stockholm)
  • Mark Rigotti
  • Herbert Smith Freehills (Sydney)
  • Rafael Robles Miaja
  • Robles Miaja (Mexico City)
  • Alberto Saravalle
  • BonelliErede (Milan)
  • Maximilian Schiessl
  • Hengeler Mueller (Düsseldorf)
  • Cyril S. Shroff
  • Cyril Amarchand Mangaldas (Mumbai)
  • Shardul S. Shroff
  • Shardul Amarchand Mangaldas & Co.(New Delhi)
  • Klaus Søgaard
  • Gorrissen Federspiel (Denmark)
  • Ezekiel Solomon
  • Allens (Sydney)
  • Emanuel P. Strehle
  • Hengeler Mueller (Munich)
  • David E. Tadmor
  • Tadmor & Co. (Tel Aviv)
  • Kevin J. Thomson
  • Barrick Gold Corporation (Toronto)
  • Yu Wakae
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Wang Junfeng
  • King & Wood Mallesons (Beijing)
  • Tomasz Wardynski
  • Wardynski & Partners (Warsaw)
  • Rolf Watter
  • Bär & Karrer AG (Zürich)
  • Xiao Wei
  • Jun He Law Offices (Beijing)
  • Xu Ping
  • King & Wood Mallesons (Beijing)
  • Shuji Yanase
  • OK Corporation (Tokyo)
  • Alvin Yeo
  • WongPartnership LLP (Singapore)

Founding Directors

  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz
  • Nigel P.G. Boardman
  • Slaughter and May
  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz
  • Peter Williamson
  • Cambridge Judge Business School
  • Franny Yao
  • Ernst & Young

Argentina

ARGENTINE UPDATE – Trends and Developments in Argentine M&A

Santiago Carregal is a partner at Marval, O’ Farrell & Mairal and a member of XBMA’s Legal Roundtable.  In addition to handling many of the most significant cross-border M&A transactions in Argentina, he is widely recognized for his expertise in Argentine commercial, banking and capital markets transactions. He serves as a professor of post-graduate studies in banking and finance at Universidad de Buenos Aires, Universidad Austral and Universidad Católica Argentina.

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.

 

Highlights: 

  • 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. 

 

MAIN ARTICLE 

  1. 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.

  1. 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.

  1. 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. 

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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)).

  1. 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.

  1. 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.

  1. 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.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

ARGENTINE UPDATE – Trends and Developments in Argentine M&A

Editors’ Note:  Santiago Carregal is a partner at Marval, O’ Farrell & Mairal and a member of XBMA’s Legal Roundtable.  In addition to handling many of the most significant cross-border M&A transactions in Argentina, he serves as a professor of post-graduate studies in banking and finance at Universidad de Buenos Aires, Universidad Austral and Universidad Católica Argentina.  He is widely recognized for his expertise in Argentine commercial, banking and capital markets transactions.

KEY POINTS:

  • Despite Argentina’s high inflation and a lack of certain structural reforms, there has been an increase in the M&A activity in the country during 2011. This increase has mainly been driven by strategic investors and to a lesser degree by venture capital and private equity funds attracted by Argentina’s GDP robust growth and the high yield on the rate of returns that Argentina is offering to foreign investors in certain key sectors of the economy such as agribusiness, renewable energy and biofuels, mining, food production, distribution and processing, software and information technology, logistics and infrastructure, telecommunications, pharmaceutical and retail business.
  • During 2011 there has been an impressive influx of Chinese investment into the hydrocarbon sector, as well as in other strategic sectors such as financial services.  The largest transactions occurring in 2011 include the acquisition by Sinopec of Occidental Petroleum and the purchase of Standard Bank by ICBC.   Other BRIC investors, such as Brazil’s Banco do Brasil, and India’s Essar Aegis, also accounted for some of the most important recent M&A transactions.
  • Concurrently with the increasing appetite for raw materials, there is a continuing trend of M&A in the highly regulated public services sector, driven by international utilities companies selling their participations generally to local groups, as increases of tariffs of public utilities services in Argentina continue to fall behind the inflationary process and devaluation of the Argentine peso.  This trend may change in the near future as the Argentine Government has recently announced the reduction and/or elimination of energy subsidies, which in turn may lead to an increase of public utility services tariffs.
  • The Cristina Fernandezde Kirchner administration, re-elected on October 23, recently imposed new requirements on oil, mining and insurance companies, ending exemptions that enabled them to convert most of their Argentine profits into foreign currencies outside the country.  Until the new regulation, oil and natural gas companies were allowed to keep up to 70% of their export proceeds offshore, mining companies could keep up to 100% of their export proceeds offshore and insurance companies were allowed to keep 50% of their investments and funds outside the country.  While the new regulation is not expected to cause any meaningful changes in the oil, mining and insurance companies’ day-to-day operations, it is not clear how these new capital controls and regulatory changes may affect the investment and M&A activity in these sectors in the years to come.
  • Additionally, in an attempt to slow accelerating capital flight from the country, on October 28, 2011 the Central Bank of Argentina issued a new requirement for non-Argentine investors to repatriate Argentine pesos collected in Argentina as a consequence of a sale or liquidation of the direct investment, capital reduction and reimbursement of capital contributions inArgentina.  Pursuant to the new regulation, a non-Argentine investor will not be allowed to have access to the FX market to purchase foreign currency with Argentine pesos collected in Argentina and transfer it abroad as a result of a subsequent sale or liquidation of an investment or capital reduction or reimbursement, unless the foreign investor evidences that the funds originally paid for such investment or disbursement for the capital contribution, as applicable, were transferred to Argentina and sold in the FX Market.  Prior to the new regulation, the non-Argentine investor was not obliged to demonstrate that the funds paid for its investment or disbursement for its capital contribution had been transferred and sold in the FX Market  (i.e. brought to Argentina and sold for Argentine pesos) in order to be allowed to repatriate (i.e. have access to the FX Market to purchase foreign currency with Argentine pesos and transfer it abroad) the funds collected in Argentina as a consequence of a subsequent sale or liquidation of such investment, or capital reduction or reimbursement.  From a practical standpoint, foreign investors will be allowed to settle the transactions outside of Argentina, although if they sell their investment for pesos in Argentina –which is very unusual- they will not be able to acquire foreign currency in the country unless they demonstrate that the funds paid originally for its investment were transferred and sold in the FX Market.

MAIN ARTICLE:

M&A trends

During late 2010 and the first semester of 2011 there has been an increase in M&A activity in Argentina, mainly driven by strategic investors and to a lesser degree by venture capital and private equity funds attracted by Argentina’s GDP growth and the high yield on the rate of returns that Argentina is offering to foreign investors in certain key sectors of the economy, such as agribusiness, renewable energy and biofuels, mining, food production, distribution and processing, software and information technology, logistics and infrastructure, telecommunications, pharmaceutical and retail business.

Most of these M&A transactions involved strategic investors from BRIC countries that have turned their attention to Argentina’s vast natural resources.  As an example, during 2011 there has been an impressive influx of Chinese investment into the hydrocarbon sector (CNNOC and Sinopen), as well as acquisitions in other strategic sectors such as financial services (ICBC). In turn, Brazilian (among others, Banco do Brasil) and Indian (Essar Aegis) investors also participated in most of the largest transactions occurring in 2011.

The presidential elections held in October 2011 and the financial crisis affecting developed countries added some uncertainty during the second semester of 2011, but inflationary issues, rather than elections, caused a slow-down in M&A activity at the year’s close.  As a result, since July there have been small to mid-sized acquisitions, while larger transactions were sprinkled about.

In general, traditional long-term investors usually acquire total control of targeted companies. Recently; however, in a few cases we have seen traditional investors structuring two-tier acquisitions by purchasing equity control for a fixed cash price while having a call option on the equity balance retained by sellers, exercisable at a price resulting from an earn-out formula. The latter acquisition structure is more commonly seen in venture capital and M&A transactions. Minority investments are rare in Argentina and usually only seen in cases of government-regulated sectors such as energy and broadcasting and in some private equity and venture capital M&A transactions where funds co-invest (as a strategic partner) together with the controlling purchaser of the target company. In the latter cases, such funds look for high-yield, medium-term rates of return in their invested capital, using not more than 10 percent of their limited partners committed capital.

In addition to the earn-out’s components in the purchase price, international listed and unlisted funds are also offering mixed purchase price packages to sellers which include part of the price being paid in cash and part paid in stock of the listed or parent unlisted controlling company of the purchaser.  In the agribusiness and real estate sectors, it is also common to find private equity and venture capital funds contracting with local independent management and operation companies to run their acquired businesses in Argentina.

Since the 2001 economic crisis in Argentina, M&A transactions are mostly unleveraged since the cost of local debt is still high, with only some exceptions mainly relating to the acquisition by local investors of governed regulated or internationally listed utilities, such as the case of the purchase by the Petersen Group of a minority stake in oil company YPF. Multilaterals often take a portion of the equity of the target company and provide leverage to the purchaser to pay the purchase price or to carry out post-money investments to expand the business of the target company.

Transactions which are deemed to be economic concentrations must be notified and require the authorization of the Antitrust Commission.  Notification must be made prior to or within one week of the first to occur of either (i) the date that any transfer effectively occurs, or (ii) the publication of any cash tender or exchange offer.  Currently, the proceedings to obtain antitrust authorization normally take between 12 and 18 months depending on the complexity of the transaction from a competitive stand-point.

While there is a continuous trend of M&A activity in the most competitive sectors of the economy, there is also M&A activity in the highly regulated public services sector, driven by international utilities companies pulling out of the country by selling their participations to local groups, as increases of tariffs of public utilities services in Argentina, some of which have been frozen since 2002, continue to fall behind the inflationary process and devaluation of the Argentine peso.  However, President Cristina Kirchner, re-elected on October 23, recently announced that her government will review its energy subsidies, including water, natural gas, and electricity subsidies for reductions and possibly eliminations, as Argentina faces a more difficult world economic situation in the months ahead.  The announcement may lead to an increase of public services tariffs, which may cause the current M&A trend in the public utilities sector to change substantially in the future.

New Regulations affecting repatriation of foreign investments

  1. Hydrocarbons and Mining Industry

On October 26, 2011, the Argentine Government reinstated the obligation of hydrocarbon companies (producers of crude oil and its derivatives, natural gas and liquid petroleum gas) and mining companies to sell the foreign currency proceeds of their exports in the local foreign exchange market.

In Argentina, simultaneously with the freeze of bank deposits and the establishment of restrictions on cross border transfers in the 2001 crisis, one of the main measures adopted by the Argentine Government was the reinstatement of the obligation to repatriate export proceeds (which has always been one of the first sources of foreign currency and a tool used to maintain the value of the Peso against the US Dollar).

However, the hydrocarbons and Mining industry were benefited by certain exemptions to such obligation.

Since December 22, 2002, producers of crude oil, natural gas and liquid petroleum gas were no longer required to repatriate 70% of the foreign currency proceeds of their exports of freely disposable crude oil and its derivatives.

Also, since February 27, 2003, any mining company which has qualified for the foreign exchange stability regime during the period March 27, 1991 – December 12, 2001, was exempted from the obligation to repatriate the foreign currency proceeds of exports of mining goods.  Since June 17, 2004, mining companies that qualified for the stability regime after June 27, 2004 were also exempted from the obligation to repatriate to Argentina their export proceeds.

As from October 26, 2011, such benefits were lifted by the Argentine Government and therefore, hydrocarbon and mining companies are now obliged to sell in the local foreign exchange market the foreign currency proceeds of their exports.

  1. Insurance Industry

Pursuant to a resolution issued by the Argentine Superintendency of Insurance, within a 50 day-period counted as from October 27, Argentine insurance companies must transfer any investment or cash kept abroad to Argentina. After such period, insurance companies may not make any investment or keep cash abroad. For that purpose, the insurance companies must submit an affidavit of any investment kept abroad within a 10-day period.

However, investments may be kept abroad only if expressly authorized by the Federal Superintendency of Insurance provided that there is no local investment available to reasonably support the commitment of the insurance company.

  1. Repatriation of Foreign Direct Investments

As from October 28, 2011 (the “Effective Date”), in order for a non-Argentine investor to be allowed to have access to the local foreign exchange market (“FX Market”) to purchase foreign currency with Argentine pesos collected in Argentina and transfer it abroad as a result of a subsequent sale or liquidation of an investment or capital reduction or reimbursement, the non-Argentine investor must evidence that the funds originally paid for such investment or disbursement for the capital contribution, as applicable, were transferred to Argentina and sold in the FX Market (the “Transfer Requirement”).

Until the Effective Date, a non-Argentine direct investor could repatriate funds in Argentine pesos collected in Argentina as a result of the sale or liquidation of its investment or a capital reduction or reimbursement, provided only that a minimum waiting period of 365 days had elapsed since the investment had been made. As from the Effective Date, the Transfer Requirement has to be complied with too.

The Communication sets a “burden” to be met by any non-Argentine resident who may need to purchase foreign currency in the FX Market to repatriate Argentine-Peso denominated funds collected as a result of the sale or liquidation of an investment. Conversely, if the foreign investor believes that it will not need to repatriate, it is not required to comply with the Transfer Requirement, and therefore, the purchase price of such investment and any capital contribution may be kept abroad.

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Over the second semester of 2010 to date, significant M&A transactions in Argentina include the following:

  • Aegis Netherlands II B.V. and Aegis Services Australia Pty. Ltd. (from the Essar and Aegis Group) acquired D.A.S.’ and Y&R Inversiones Publicitarias S.A.’s shares in Actionline de Argentina S.A. and Sur Contact Center S.A., taking its first step into the Latin American BPO and marketing communications business.
  • Banco do Brasil S.A., the major Latin-American bank controlled by the Brazilian Federal Government, acquired 51% of the stockholding of Banco Patagonia S.A., the forth major Argentine private financial entity.
  • Banco Supervielle S.A., Grupo Supervielle S.A. and Banco Regional de Cuyo S.A. acquired GE Capital Corporation’s and GE Capital International Holdings Corporation’s shares in GE Compañía Financiera S.A. (GE Money Argentina) (currently, Cordial Compañía Financiera S.A.).
  • Bridas Corporation, an independent oil and gas holding company based in Argentina, acquired Exxon Mobil International Holdings Inc.’s shares in Southern Cone International Holdings Llc. (ultimately, Esso Petrolera Argentina S.A., Esso Standard Paraguay S.R.L. and Esso Standard Oil Company -Uruguay- S.A.).
  • China Petrochemical Corporation (SINOPEC), China’s largest oil company and Asia’s largest oil refiner, acquired the Argentine oil and gas business from Occidental Petroleum Corporation, an international oil and gas exploration and production company.
  • Dufry A.G., a global travel retailer with operations in 45 countries, acquired Interbaires S.A., the leading travel retailer inArgentina that operates duty free shops in the five main airports of Argentina.
  • Frigorífico Regional Industrias Alimenticias Reconquista S.A. (from the Vicentín Group), an Argentine company dedicated to the production and processing of beef, acquired Finexcor S.R.L.’s (from the Cargill Group) meat processing unit located in Nelson, Province of Santa Fe. In addition, Compañía Bernal S.A. acquired Finexcor S.R.L.’s meat processing unit located in Bernal, Province of Buenos Aires.
  • Glaxosmithkline PLC., a global pharmaceutical, biologics, vaccines and consumer healthcare company, acquired Laboratorios Phoenix S.A.C. y F., an Argentine pharmaceutical company focused on the development, marketing and sale of branded generic products.
  • SABMiller PLC., one of the world’s largest brewers with presence in six continents, acquired through two affiliated entities, all of the shares of Cervecería Argentina Sociedad Anónima Isenbeck (from the Warsteiner Group), the third largest brewer in Argentina.
  • The China National Offshore Oil Corporation (CNOOC International LTD.), who operates as an investment holding company which, through its subsidiaries, owns and operates oil and gas reserves, acquired from Bridas Energy Holdings LTD. a 50% stake in Argentina’s Bridas Corporation, aBuenos Aires based oil and gas exploration and production company.
  • Zurich Financial Services Group, through a holding company, acquired 51% of the stockholding of Santander Río Seguros S.A., one of the largest insurance companies in Argentina.
The views expressed herein are solely those of the author and have not been endorsed, confirmed or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

XBMA – Quarterly Review for Q1 2011

Editor’s Note: This is an example of the type of post and content the XBMA Forum seeks to showcase.

The attached slides summarize trends in cross-border M&A and strategic investment activity throughout the first quarter of 2011.

 

Highlights:

  • Global M&A volume for Q1 2011 was US$671.8 billion, up 29.5% as compared to Q1 2010.
  • Cross-border transactions have rebounded substantially from 2009: 38% of Q1 2011 global M&A was cross-border — up slightly from 37% in 2010 and up significantly from the low of 26.8% in 2009.
  • Canada and Australia’s shares of global M&A each more than double their respective shares of world GDP, perhaps reflecting the large number of deals involving natural resources.
  • Distressed deals have exceeded US$75 billion per annum since 2009.
  • Energy M&A remains the most active among cross-border transactions – reflecting the ongoing pressure to acquire natural resources to fuel emerging economies and the churn created by political instability in the Middle East and by the widespread adoption of technological improvements in the natural gas industry – with Materials and Financials cross-border M&A in the second tier.

XBMA Quarterly Review for Q1 2011

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