MEXICO: An Introduction to Corporate/M&A

With the pandemic behind of us (or at least most of its economic impacts), the looming question for the majority of M&A practitioners in Mexico is: what will 2023 and the remainder of this administration end up looking like in terms of M&A activity?

After a record-breaking 2021, 2022 ended up being a relatively robust year for M&A. Despite a sluggish start of the year, so far all indications are that Mexico’s M&A activity in 2023 will remain steady, despite a global slowdown.

As is well known, M&A activity in Mexico is heavily influenced by its relationship with the United States, which has generally been perceived as one of the key drivers for foreign direct investment in the country. Mexico recently became the number one foreign trade partner of the US and that in itself is a big catalyst for foreign investment in the country. Despite the frosty relationship of our current administration with the United States, “near-shoring” continues to be a trending topic across boardrooms and corporates, and something that keeps the spirits high across practitioners. Near-shoring is not a fad, it is real and is happening all over the country.

Turbulence within some of our southern neighbours and the Latin America region generally has also benefited Mexico and, despite our own internal obstacles, well positioned it in the eyes of many global funds looking to invest in the region.

In recent years our federal government has adopted a number of regulatory measures that have curtailed private participants’ activities in several areas of economic activity that have also resulted in general questions about rule of law in the country. However, the judicial branch, specifically Mexico’s Supreme Court, has proven its resilience and has so far been successful in halting some of the most controversial of these reforms, providing comfort to investors and corporates investing or looking to invest in Mexico. We also have not seen important changes in the legal framework applicable to corporate/M&A transactions, which is a significant assurance to foreign players.

Global headwinds have not been easy to navigate, though. Recession fears, high inflation and high interest rates, increasing borrowing costs and decreasing returns to investors have not helped pave the way for more M&A transactions. The “super Peso” has also made Mexican targets more expensive for non-Mexican players. In our view, this has forced potential buyers to act more cautiously and heighten due diligence. On the other hand, we have not seen a shortage of interest in key assets and several large strategic deals have been closed so far. The activity in the middle market has also remained steady.

Generally, we believe that Mexico’s stable fiscal policy, demography and geographic advantages will continue to make Mexico an attractive destination for global investors, private equity funds and strategic investors. We also believe that “near-shoring” will have a significant impact on M&A activity for the coming years, specifically in the industrial and manufacturing sectors.

Here are some current trends that we are looking at in the M&A Market:

Middle Market is the new “crown-jewel” 

The number of big-ticket transactions in Mexico has been relatively small so far in 2023. This has forced key players and advisers to focus on the middle market (transactions ranging from between USD30 million to USD250 million). To strengthen this trend, we have also seen some large institutional investors lower their minimum thresholds to be able to make deals that would have previously thought to be too small.

Regulatory approvals are not to be taken lightly 

We have seen a worldwide trend from regulators heightening the scrutiny of transactions and Mexico has been no exception. Clearance for transactions, even when not sensitive from a regulatory perspective, is taking much longer than usual. This should be carefully considered by potential buyers and sellers when evaluating targets and the time it takes to implement strategic M&A transactions.

R&W Insurance used to be the future, but is now the present

Representations and warranties insurance has been a common fixture in global M&A transactions for some years now. However, in Mexico it has not achieved the popularity as in other markets, particularly in the US. Having said this, we have reached a point in which it is customary for M&A players in both the buy and sell side to request this feature. We feel strongly that R&W Insurance will be mainstream.

Near-shoring is here to stay  

Some say that it is all about location. Mexico’s proximity to the United States and the ongoing tensions between the United Stated and China will undoubtedly create opportunities in the M&A market. The extent to which Mexico can really seize the opportunity is yet to be seen.

Mexican REITs (Fibras) have been important M&A players

We are seeing several important Mexican REIT or “Fibras” achieving a level of maturity that comes with the need to rotate certain assets, specifically industrial real estate. In addition, several real estate CKDs are reaching their investment deadlines. Last but not least, we are seeing an increased interest from funds to invest alongside local developers in real estate platforms to benefit from the near-shoring effect. We believe that all these factors are coming together to make real estate an interesting and dynamic M&A sector.

Everyone is expecting a rebound in Startups and VC Investments

2023 has not been a good year for venture capital and startups. Despite the boom in tech investments that was brought by COVID-19, both the number and volume of transactions have decreased significantly in 2023. We expect, however, that M&A activity in this this sector will rebound towards the end of 2023, pushed by the recent hype in artificial intelligence.

Limited exit options for PE Funds 

The Mexican IPO Market has been, as a practical matter, closed for the last couple of years. Although we believe it is something that the private equity funds have already discounted, it is still a barrier for PE exits, which continues to be a limitation for further private equity market.

Caution is the new normal 

We continue to see M&A players being extremely cautious and prioritising among M&A opportunities. This has caused transactions to take longer than usual to take off and should also be a factor to consider in the general timing of transactions.