MEXICO: An Introduction to Corporate/M&A

Practice Area Overview  

Mexico: Corporate/M&A 

As the fifteenth largest economy worldwide and the second largest economy in Latin America, Mexico has positioned itself as a competitive jurisdiction for investment opportunities. Among other advantages, it offers a strategic geographical position, highly committed human capital - characterised by the OECD and the WTO as one of the hardest-working workforces globally - to generate economic growth. Among other sectors that have accredited success rates in Mexico, various real estate investments have been yielding high annual returns on investment for the past several years; exports have been running steadily at about 30% of overall GDP. Moreover, Mexico is a manufacturing-centric economy geared towards exporting, which experts believe positions it as being as attractive as China but with an enhanced geographic location for international trade.

Despite these advantages, Mexico’s current federal administration - the first left-wing government the country has had - along with its macroeconomic policies, has brought uncertainty to the Mexican economy. Examples of this include the implementation of policies regarding the energy reform, which had been generating significant direct investment in Mexico; the cancellation of major infrastructure projects such as the new Mexico City Airport, which was well underway; several landmark energy projects and manufacturing plants; and the commencement of projects, the viability and utility of which have, at best, been heavily questioned, such as the Santa Lucía Airport, the Tren Maya, the Dos Bocas Refinery, and the Banco del Bienestar. That said, there have also been some positive notes of AMLO's government that deserve mention, such as some prosecution cases against allegedly corrupt officers from prior administrations, and the conclusion of the USMCA, enacted in July 2020.

According to public sources, in 2019 there were approximately 170 M&A transactions in Mexico with a consolidated value in the range of USD16 billion. In this regard, the most relevant sectors that showed M&A activity in Mexico in 2019 were the industrial, financial, mining and real estate sectors, with consumer goods, retail and IT following close behind. 24 transactions took place in the industrial sector, followed by 21 in both the financial and mining sectors and 20 in real estate. Two considerable deals also involved infrastructure operators and developers. No tender offers for publicly traded companies were launched during 2019, and no initial public offerings were made either.

Originally, there were mixed opinions amongst expert analysts as to expectations in the M&A sector in 2020. On the one hand, there was an expectation that M&A activity would grow due to the markets having more certainty on the structural objectives of the Mexican government and the effects of such goals on Mexico’s economy in the second year of AMLO’s administration; the prospect of a significant increase in public spending as promised by the Mexican government (which at the time of writing has not materialised); the entry into force of the USMCA; the potential downgrade of Mexico’s rating from investment grade, which would lead to certain funds being required to consider the sale of their positions in Mexico; and the buyers’ market that would exist in light of the technical economic recession that was already happening in the country by the beginning of 2020. On the other hand, other expert analysts forecast a decrease in M&A transactions, mainly due to the weak condition of the Mexican economy, which has generated significant decreases in private spending and a notable reduction of investors' appetite in the Mexican market.

During the first quarter of 2020, foreign direct investment in Mexico grew 1.7% with respect to the first quarter of 2019 for an aggregate amount of approximately USD10.3 billion, 76% of which derived from the reinvestment of profits (an atypical behaviour), while according to the Ministry of Economy, new investments amounted to 22% of the total foreign direct investment in Mexico. The foregoing investments were made in manufacturing (44.1%), insurance and financial services (25%), commerce (8.3%), power generation, gas and water (5.1%), mining (4.8%) and construction (4.4%).

Be that as it may, since mid-March the COVID-19 pandemic has deeply affected the global economy, Mexico being no exception, thus creating a climate of additional economic uncertainty and highly threatening economic conditions for our country, which currently faces a profound recession in 2020 conservatively forecast at ten percent of its total gross domestic product. Notwithstanding the foregoing, we believe that the current economic and geopolitical contexts are likely to afford opportunities to certain investors. Therefore, we believe Mexico will remain a target for foreign investment, though perhaps of a different nature. Direct investment in the country is expected to equal USD6.5 billion by the end of August 2020 according to analysts’ expectations. Moreover, foreign direct investment is projected to reach around USD6.9 billion in 2021 and around USD7.8 billion in 2022 according to some econometric models.

Among the sectors that are likely to represent some interesting business opportunities for local and foreign investors, we highlight the following: manufacturing and exports, long-term infrastructure, restructurings and insolvency, banking, and finance (including fintech), and consumer goods and retail.

Specifically, we believe that the technology sector, including fintech, is likely to remain particularly active, and will continue to create a waterfall effect in M&A and strategic alliance transactions in Mexico and worldwide.

Mexico's investment opportunities will come with relevant challenges for investors, such as changes to the existing legal framework, the long-term effects of COVID-19 and the worldwide economic turmoil, as well as the local political environment in general. We are looking forward to navigating through this new test.