ARGENTINE UPDATE – Trends and Developments in Argentine M&A
- 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.
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
- 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.
- 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.
- 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.
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.