Contributed By Santamarina y Steta SC
The world is constantly changing. Political environment, trade, immigration, consumer behaviour, among other circumstances, affect regional and global market trends, causing businesses worldwide to adjust their strategies constantly. In the near future, we expect the significant uncertainty across a wide variety of macroeconomic, geopolitical and financial factors to continue, resulting in substantial volatility in the equity and debt markets. To mention a few, the tensions between the US and China, Brexit and political conditions in the US, France and Germany are unlikely to be solved any time soon.
Mexico is not expected to be an exception. The socio-political landscape in Mexico is anticipated to be even more relevant than usual. Mexico is being governed for the first time ever by a left-wing regime that won the July 2018 elections by a significant majority (more than 53% in favour of Andrés Manuel López Obrador, candidate of the political party 'National Regeneration Movement' in the Presidential election, and an outright majority control in both the House of Representatives and the Senate). The implementation of the new policies of this new Government, and its effects, are yet to be seen.
In addition, a key issue for Mexico is the renegotiation of the North American Free Trade Agreement (NAFTA). Although an agreement has been reached in principle among the US, Canada and Mexico, the current integration of the Senate and House of Representatives in the US, and their relationship with the US President, exacerbates uncertainty. To the extent that there are renegotiations, their impact on Mexico and the region’s economy remain unknown and could further influence M&A activity in Mexico. All this would not necessarily be negative, given that some business sectors and geographic regions could be affected, but others may benefit from it.
Regulation Changes Will Impact the M&A Landscape
The basic guidelines that have been announced by the new President of Mexico (who took office in December 2018 for a six-year term) are to eliminate corruption, reduce poverty and increase gender equality, sustainable development and peace recovery, with financial viability and austerity. As a result, industries with a high demographic penetration that supports growth, sustainable development and reduction of poverty should do well.
The telecommunications industry may certainly be a means to permeate development in society on different fronts (eg, financial, education, health, etc). The 2013 telecommunications structural reform has proven very successful and still has a lot of potential to continue promoting growth and well-being. The reform created greater certainty for players through the introduction of an autonomous telecommunications institute (Instituto Federal de Telecomunicaciones), the creation of specialised telecommunications courts, the introduction of measures to promote more competitors, such as the ‘must carry’ and ‘must offer’ mechanisms, regulation of dominant players and the launching of great structural projects, eg, the public shared network that was the greatest infrastructure project of the prior presidential regime. The telecommunications reform allowed for 50 million people to become new broadband users, which equates to having the entire population of Colombia connected to broadband. Currently, 50% of Mexico has broadband. Also, the price of mobile telephone services has dropped by approximately 75%, which brought Mexico from one of the most expensive members of the Organization for Economic Co-operation and Development (OECD), to one of the cheapest ones with respect to mobile telephone services. The use of mobile data grew by 91%.
Although the results of the telecommunications reform are impressive, growth needs to continue at a rapid pace to keep up with technological developments and the increased use of e-commerce in all sectors. This will call for huge investment in fibre-optic. An example of this is the new backbone network (Red Troncal), a major infrastructure project expected to be launched by the current presidential regime, which also aims to foster economic development to the less favoured in terms of connectivity. The size and magnitude of this and other projects will allow joint participation through appropriate M&A mechanisms.
In addition to the socio-political dynamics of Mexico, the increased use of technologies in all sectors creates new issues that need to be properly addressed in M&A transactions. Technology is expected to continue growing. Acquirers are willing to pay large premiums to gain access to new technologies. Automatisation of activities will further allow for this trend to continue.
Another area where technology plays an active role is fintech, which is expected to continue to be an important sector.
Mexico’s new Law to Regulate Financial Technology Institutions (Ley para Regular las Instituciones de Tecnología Financiera – the Fintech Law), which took effect in March 2018, regulates the growing financial technology sector, including crowd funding, crypto-currency and electronic payment institutions. Financial technology companies and private equity funds throughout the globe had been awaiting clear rules in Mexico regarding electronic financial services. The enactment of the Fintech Law has triggered an interest from foreign and local financial technology companies and funds to invest in these sectors, through acquisitions, mergers, joint ventures and commercial agreements generally.
The new Fintech Law finally provides legal certainty around these activities, which already took place in Mexico but without any clear regulation. This new legislation will be beneficial for individuals and businesses alike in Mexico and will also create new opportunities for M&A deals. Traditional financial institutions have been acquiring fintech start-ups, for example, boosting their cashless business efforts.
The enactment of new regulation and amendments to current treaties and laws will also impact the M&A landscape in Mexico. As an example, and in the context of the renegotiation of NAFTA and of Mexico’s international commitments, substantial modifications are being introduced in the labour legal regime (including freedom of Union Association and significant minimum wage increases), which should also be considered in structuring M&A transactions, as they are playing an active role in labour relationships.
Activists are also becoming increasingly important in the M&A sector, as they focus on different aspects, eg, allowing parents to limit their children’s phone use, improving monitoring of workplace sexual harassment and board diversity. Relevant social and economic aspects that need to be considered are cyber security, privacy legislation, anti-corruption, indigenous communities (especially for investment in infrastructure), as well as harassment and discrimination.
The proposed amendment to Mexican labour legislation, which is expected to be enacted in the course of 2019, will likely result in major power vested in unions. Contrary to the common practice of an employer-protection approach, freedom of Union Association intends to open the door to a rigid competition in the employee representation arena, which may result in significant tension in union elective processes, given political tensions and third-party factors interfering with the regular course of business. This is a key issue to consider in M&A transactions since Mexico’s foreign investment is largely focused on the manufacturing industry, being the workforce a fundamental component.
On the other hand, the rise of institutionalized family offices and Mexican venture capital funds adds a new competitive dynamic in the Mexican market. Private equity funds had – and still have – a lot of cash that needs to be invested somewhere. There is pressure on chief financial officers to find ways to continue growing, and M&A is definitely on the top of the list.
Representations and warranties insurance (R&W insurance), more commonly used in US M&A deals, is becoming a useful and popular tool in Latin America as an aid to M&A transactions. In Mexico, this tool is in its initial stages and M&A participants need to become more acquainted with the product to be able to take full advantage of it. Given the avidity of users, not only in neighbouring countries but across the globe, we anticipate a growing demand in Mexico, at least for cross-border deals, which will encourage comprehensive offers from Mexican insurers.
Appropriate Legal Structures for Each Project
Mexico does not have a specific M&A statute. There are provisions scattered throughout several laws that apply to these types of transactions, and careful attention should be given to each of them, depending on the particular transaction, industry, parties and other matters. The Mexican legal provisions applicable to M&A deals are relatively flexible and generally allow the parties to tailor transactions to the underlying business agreement. However, Mexican law is both procedural and substantive and hence need to be considered carefully in M&A transactions.
The Mexican legal framework has evolved in the recent years allowing the implementation of different type of global structures and transactions that work and are perfectly enforceable under Mexican law. Transactions among private parties only, with governmental entities as partners, and which are privately or publicly financed, are freely available. Prior to the existence of such structures, it was sometimes advised to have large-scale or cross-border M&A transactions governed by non-Mexican laws and subject to the jurisdiction of non-Mexican courts. This does not necessarily hold true with the legal structures available to implement large-scale or cross-border M&A transactions, which can now be perfectly governed by Mexican law and are subject to Mexican courts. This of course represents a great benefit, as it allows the parties to try contracts under the courts corresponding to the domicile of the debtor’s assets. However, careful attention should be given to the regulation and practicalities of different issues that are uniquely regulated in Mexico. Labour, tax, competition and property issues must be thoroughly analysed, to mention a few, and their impact on assets versus shares structures varies.
Contrary to what has happened in certain jurisdictions where protectionism is having an impact on M&As, Mexico continues to be quite open to these types of transactions. It has a clear domestic legal framework, supported by an impressive network treaty that is recognised and respected as Mexican internal law with a higher hierarchy compared to Mexican local law.
As an example, and in contrast with other countries, the foreign investment review in Mexico is quite specific and the law clearly indicates which cases require prior authorisation and which do not. Mexican merger control requirements are also clearly defined. The Federal Economic Competition Law has thresholds to determine if prior authorisation is required to complete a transaction. Market participation is not a triggering event. These issues give certainty to investors thinking about Mexico, as compared to other jurisdictions, where the analysis may even have a political component.
The governmental integration and implementation of new policies, the final terms of Mexico’s free trade agreement with the US and Canada, and the global environment, all represent challenges. However, these new times also imply growth opportunities in markets and sectors that are favoured by the particular political landscape. Complex circumstances call for savvy deals that allow parties to benefit from current trends, and support growth and progress.