PANAMA: An Introduction to Corporate/M&A
Before we delve into the trends and developments in the Panamanian corporate and M&A markets, we should note that Panama’s strategic location as a major shipping and trade hub maintains the country as an appealing destination for foreign investment. Panama’s strong and growing economy is a result of the relatively stable political and legal system, as well as its pro-business policies. Additionally, there is an active interest in attracting foreign investment through the creation of special economic zones, free trade agreements, simplifying investment procedures, and offering tax incentives, among other things.
Key M&A Sectors
The country’s strategic location, diversity and sustained economic performance across several key industries and sectors makes Panama’s market attractive for M&A activity. In recent years, telecommunications, energy, retail, private education and the food industry have led M&A activity in Panama, with several landmark transactions. The country has also seen increased activity in the banking and finance sector, as consolidation of major local banks has been a consistent trend and certain foreign investors have acquired stakes in Panama’s strong and well-capitalised banks.
Over the last few years, the Panamanian M&A market has been focused on the telecommunications and renewable energy sectors. The focus on the telecommunications sector is driven by general efforts to enact new regulations that will improve the connectivity and reduce the “digital gap” within the Panamanian population. As a result, there have been several high-profile M&A transactions in the telecom sector, such as Liberty’s Latin America’s acquisition of Cable & Wireless, Millicom’s Acquisition of Cable Onda and Telefonica Móviles’ operations and, as of 2022, the acquisition of Claro Panamá by Cable & Wireless.
In addition, the country’s significant potential for renewable energy generation, particularly in areas such as hydroelectric, wind, and solar power, has made this sector a great target for M&A deals. The regulatory framework for this sector allows the development of the industry and creates attractive investment opportunities. Other increased M&A trends were observed in the private education, food and retail sectors, as many foreign investors have found interesting targets with high growth potential in these respective markets.
Deal Structure and Participants
As in other jurisdictions, M&A deals in Panama are generally structured as either asset deals, mergers or share purchase transactions.
The question of how to structure the deal often depends on the particular characteristics of the target company and the underlying assets. Buyers will often prefer an asset deal because it allows them to easily carve out unwanted assets, while simultaneously mitigating risks to some extent. However, tax considerations can have the effect of shifting the balance in favour of a share transaction.
Share deals also offer the benefit of simplicity, which results in lower transactional expenses for both parties. Further, from an operational standpoint, acquiring the target company as a going concern can make for a smoother transition. Another key consideration in designing a deal structure is often not only the immediate tax costs of the transaction, but the resulting tax structure going forward, bringing into consideration issues such as the ability to push down debt and the treatment of goodwill.
On the other side of M&A deals, investment funds, such as private equity funds, venture capital funds, and hedge funds, are becoming more and more involved as buyers in M&A deals in Panama. The involvement and participation of these types of sophisticated buyers is a great asset to any target, since their involvement can provide several benefits, such as access to capital, industry expertise, and operational support.
Representations and Warranties Insurance
Besides the trends and developments we have mentioned in the negotiation aspect of deals, it is important to note an increase in the use of representations and warranties insurance (RWI) in Panamanian M&A deals. A few years ago, this specific type of insurance was not widely available in the local market, thus making it extremely expensive and limited to larger deals that could be underwritten abroad. After the pandemic, and particularly as transactions become more and more complex, the market understood the need to include this type of insurance as part of the overall M&A transaction. Now, there is an array of options from which to choose and local insurance companies are willing to participate in the due diligence process.
The use of RWI can provide several benefits for all the parties involved. For the buyer, it can provide a level of protection against losses that may occur due to a misrepresentation by the seller and from the seller’s standpoint, the use of this insurance allows it to cap the seller’s liability, limits the need for an escrow holdback and facilitates the closing of the deal by providing a higher level of comfort to both parties.
Looking Ahead
Looking ahead, Panama will hold presidential elections in 2024, which are expected to have some impact on the corporate market, including M&A transactions. However, Panama now has a long history of democratic transitions between governments, which provides strong reassurance that current economic and business policies will remain stable, continuing to facilitate Panama’s overall stability and its openness to foreign investment.
Finally, according to the World Bank, Panama’s 2022 GDP growth forecast was 6.2%, reflecting the end of the COVID-19 era, and the projections made place Panama’s economic growth at 5.0% for the years 2023 and 2024, which is the highest in Central America. The expected growth projection is advantageous for the attraction of foreign investment, especially in the mergers and acquisitions market, thus signalling a robust recovery of the Panamanian economy.