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Latin America M&A Surges in Best
March, 06th 2010

Takeovers in Latin America are off to the best start in at least a decade, bucking a global slump, as economic recoveries in Brazil and Mexico spur consolidation in the telecommunications, food and commodities industries.

America Movil SABs $25.7 billion purchase of Carso Global Telecom SAB in Mexico was the largest in the region this year and the second biggest globally. Latin America tallied 192 announced deals worth $72 billion since Jan. 1, the most in Bloomberg data going back 10 years and the only region to see an increase in transactions this year from the end of 2009.

More than a third of 2010s transactions were in Brazil, where the economy is rebounding from a recession, the currency is up 32 percent against the dollar in the past 12 months and interest rates are at record lows. The region may have its best year for acquisitions since 2007, said Udi Margulies, head of Latin American M&A for Barclays Capital in New York. That year takeovers in the region totaled $123.5 billion.

International companies are increasingly interested in investing in resource-rich Latin America, said Nicolas Aguzin, the regions chief executive officer for New York-based JPMorgan Chase & Co. At the same time, Latin American companies are expanding abroad to become global leaders in their sector.

Deal Volume Falls

Mexican and Brazilian companies were the top acquirers in the region with $55 billion worth of deals. Buyers in Latin America paid 7.44 times earnings before interest, taxes, amortization and depreciation, the lowest ratio for any area except Asia, data compiled by Bloomberg show. In the U.S., buyers paid on average 10.87 times Ebitda.

Buyers from Europe also acquired companies in Latin America this year, including Heineken NV of Amsterdam and Royal Dutch Shell PLC.

Global M&A volume fell 27 percent to $1.81 trillion last year, the lowest level since 2003, as the financial crisis froze credit. Latin American deals volume declined 9.5 percent to $115 billion.

The region is having its best overall quarter since the last three months of 2006, when there were $98.6 billion worth of deals, Bloomberg data show.

Takeovers are increasing as economists surveyed by the central bank forecast Brazils economy, Latin Americas largest, will grow 5.5 percent this year after shrinking each of the first three quarters last year from the same period in 2008.

Mexican Growth

Mexicos government raised its estimate last month for 2010 economic growth to 3.9 percent from 3 percent, citing signs of a recovery in domestic and international demand. Gross domestic product shrank 6.5 percent last year, the countrys worst annual slump since 1932.

The increased competition for local assets and the regions declining risk perception is driving acquisition prices up, said Martin Sanchez, the head of Latin America mergers and acquisitions at Bank of America Corp. in New York.

Investor optimism over Brazils recovery has been tempered by concern that China, the countrys biggest trading partner, may further curb bank lending to slow growth. Brazils presidential elections in October and the end of economic stimulus programs worldwide may reduce visibility for the second half of this year, said Charles Stewart, Morgan Stanleys head of Latin American investment banking in Sao Paulo, who relocated from New York in 2008.

Resource Play

America Movils purchase of Carso Global Telecom in January was the second biggest globally after Prudential Plcs $35.5 billion acquisition of American International Group Inc.s Asian life insurance unit AIA Group Ltd. Heineken bought Fomento Economico Mexicano SAB, Mexicos second-largest brewer, the same month for about $7.7 billion to tap faster growth in Latin America.

Rio de Janeiro-based Vale SA, the worlds largest iron-ore producer, bought the Brazilian fertilizer assets of White Plains, New York-based Bunge Ltd. for $3.8 billion in cash. Royal Dutch Shell formed a $12 billion ethanol joint venture with Barra Bonita, Brazil-based Cosan SA Industria & Comercio to share control of the worlds largest sugar cane processor.

International investors are looking for opportunities in Brazil, said Daniel Weinstein, co-head of investment banking for Goldman Sachs Group Inc. in Sao Paulo. At the same time, local companies are looking for synergies abroad and they are consolidating locally to access capital at a lower cost.

M&A Fees

Credit Suisse Group AG of Zurich, the largest Swiss bank, won the most M&A business in the region since the start of the year with seven deals worth $46 billion, followed by Spains Banco Santander SA and JPMorgan. In 2009, Credit Suisse was second after Santander.

Investment banks earned $1.1 billion in M&A fees in the region last year, up from $992 million in 2008, according to estimates from New York-based research firm Freeman & Co. Globally, total M&A fees in 2009 were $22.2 billion.

This should be a strong year for M&A in the region and for Brazil in particular thanks to the availability of financing, the currencys relative strength and the commodities boom, said Margulies.

Marcello Hallake, a New York-based partner at Thompson & Knight LLP of Dallas, expects companies that process natural resources, such as ethanol and iron ore, as well as consumer- related industries to contribute to merger activity in Brazil. His law firm specializes in advising the energy industry and is about to open an office in Rio de Janeiro

President Luiz Inacio Lula da Silvas plan to make Rio de Janeiro-based Petroleo Brasileiro SA the sole operator of the pre-salt oil fields may delay some transactions in the sector, he said. Still, it wont constrain long-term interest in Brazils oil industry, Hallake said.

Oil Assets

Most oil companies are still interested in having a presence in Brazil despite the governments increasing control over the nations huge oil reserves, he said.

Chinas reliance on Brazilian commodities is also driving investments, said Stewart of Morgan Stanley, which has doubled its staff in Brazil since 2006 to 162 bankers. After Petrobras made the biggest discovery of crude in the Americas since 1976, China Development Bank lent $10 billion to the company in exchange for 100,000 barrels a day for the next 10 years.

If you believe in China, almost by definition you believe in Brazil, said Stewart.

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