Colombia is without a doubt Latin America's latest economic miracle. During the past eight years the country has experienced a sustained economic expansion fostered by public policies addressed at improving national security, stressing the creation of employment, reducing poverty and stimulating economic growth. Colombia's booming economy is of course correlated with an enhanced investment climate: there is not only an internal perception of optimism in the recovery of the Colombian economy, but also international investors see in Colombia a market full of opportunities for investing their money, which has created a virtuous economic cycle.
The foregoing explains the dynamics of M&A deals in Colombia throughout 2011, when these businesses reached an approximate overall amount of $21 billion. There are several keys to Colombia's recent investment boom, as well as M&A trends developing in the country over the past few years.
Among the several economic and political keys to Colombia's sustained growth (GDP grew 4.3% in 2010 and 4.9% in 2011), there are three main factors that contribute to this economic improvement and that impact directly the M&A market: (i) increasing foreign direct investment (FDI); (ii) pursuit of international free trade and international investment agreements; and (iii) expansion and internationalisation of M&A legal services.
FDI in Colombia has notably increased since 2008 when it reached a record $10 billion. While it dropped to $7.2 billion in 2009 due to the world economic crisis, it started to recover in 2010 and for August 2011 reached $9.12 million, not long after Standard & Poor's had raised Colombia to investment-grade status. According to the World Bank's 2012 Doing Business report, Colombia is fifth worldwide in the category of protecting investors and 10th worldwide in terms of improvement of the ease of doing business between 2010 and 2011.
Colombia has five free trade agreements (FTAs) in force with Mexico, Chile, the Northern Triangle, Switzerland and Canada, plus one with the United States which will come into force in the second half of 2012. Colombia has also entered into three bilateral investment treaties, with Peru, Switzerland and Spain, plus three more that will come into force in 2012 (with China, India and the United Kingdom). The growing number of international trade and investment treaties gives confidence to foreigners and puts the country in the spotlight of international investors.
Thirdly, it is important to mention the importance of the expansion and internationalisation of M&A legal services in the country. Colombian law firms are increasingly specialising their M&A practices in order to offer sophisticated legal advice to individuals and corporations seeking to understand the legal framework for investing in the country. Also, there have been reports in Colombia's legal market that four foreign law firms are to open offices in Bogotá (Miami's Holland & Knight, the UK's Clifford Chance and the Spanish firms Cuatrecasas, Gonçalves Pereira and Garrigues Abogados). This reaffirms the fact that Colombia is becoming an increasingly attractive investment option, even for international law firms.
Due to Colombia's appealing investment climate, M&A transactions in the country have been augmented over the last couple of years. These transactions have shown some interesting trends.
One trend is for investment in specific economic sectors: the booming energy and mining sector is the unquestionable leader of FDI. The Santos administration's National Development Plan for 2010-2014 establishes the energy and mining sector as one of the five so-called locomotives of economic growth; one of the Plan's goals is to attract more national and international investment to this sector. In 2011, some of the most important deals were concentrated in energy and mining, as were the purchase of a 20% stake in Drummond by the Japanese company Itochu and the purchase of the biggest gas-transportation Colombian company Promigás by Empresa de Energía de Bogotá, Corficolombiana and a private equity fund for $790 million.
Other sectors that showed increasing activity during 2011 are the financial services and distribution sectors, with outstanding examples in deals such as the sale of 51% of Banco Colpatria to Scotiabank for $1 billion, the sale of Banco Santander's Colombian institution to the Chilean group CorpBanca for $1.23 million and the sale of 91% of the Colombian vehicle dealer PracoDidacol to the Chilean car retailer Indumotora for $80 million. There is also an increasing popularity of investment in the infrastructure sector, which will be notable in 2012.
Increasing cross-border activity
There is a strong relationship between FDI indicators and cross-border M&A, and Colombia is no exception to this rule. Colombia's enhanced investment climate offers attractive investment opportunities for foreigners and private equity funds looking to inject capital in diverse economic sectors.
Latin America in general, and the emerging markets in particular, including Colombia (one of the so-called CIVETS nations) gives investors options to do business in an unsettled economic environment faced with the Eurozone crisis and the risk of recession in the United States. Some examples of foreign buyers in M&A cross-border deals during 2011 are the French Groupe SEB, one of the world's largest manufacturers of kitchen products which acquired 99.4% of the Colombian Industrias Metalurgicas Unidas-IMUSA; the Irish company Experian that acquired a majority stake in the leading Colombian credit information services firm Computec (Datacrédito); Compass Group Services Colombia, a unit of Compass Group, acquired the entire share capital of Don Vapor, a Colombian provider of cleaning and sanitary services; and the GEM Fund which acquired 20% of Fabricato, the largest textile company in the country.
This increasing cross-border activity is also more frequently intraregional. Whereas some years ago, M&A transactions in Colombia showed a tendency to acquisitions by investors from the northern hemisphere, now more buyers and sellers in Colombian cross-border M&A are Latin-American, mainly Brazilian, Chilean and Central American. Some examples are the Chilean group CorpBanca which acquired Banco Santander in Colombia; the Peruvian Banco de Crédito which acquired 51% of the Colombian stockbroker dealer Correval for $77 million; the Chilean Indumotora that acquired the majority stake in PracoDidacol; and the acquisition by the Colombian bank Davivienda of HSBC's assets in Costa Rica, El Salvador and Honduras for $801 million.
Several recent M&A transactions have structured indirect acquisitions of Colombian targets using offshore SPVs in order to minimise tax impact for local sellers or interloper risks. For instance, in the sale of 51% of Banco Colpatria to ScotiaBank, the targets were two Panamanian companies which, in turn, are direct and indirect shareholders of Banco Colpatria. These complex M&A structures have taken advantage of the amortisation of the acquired goodwill, which must be made against taxable income in a term no shorter than five years, but depending on the nature or duration of the investment.
One difference with the Colombian market is that, whereas leveraged buyouts (LBOs) have been a worldwide tendency for financing M&A transactions, Colombia's M&A market presents less leverage and a rather high share of equity per transaction. The fact that buyers are not using significant amounts of credit to undertake acquisitions in Colombia somehow impacts positively on the country's M&A market: certainly, while LBOs sponsored by private equity firms declined globally as a result of the recent financial crisis, thus forcing acquirers to redefine their acquisition strategies, Colombia's M&A transactions have shown higher and more stable average equity contribution per transaction and well capitalised companies involved in all types of M&A deals.
As a consequence of the foregoing, 2011 only saw two significant deals involving LBOs: the repurchase of 49% of Colpatria Bank from GE Capital in June 2011 for the subsequent sale of 51% of the bank's stake to ScotiaBank, with a syndicated loan arranged by UBS; and Colombian Grupo Sura's $3.7 billion acquisition of ING assets in Colombia, Mexico, Chile, Peru and Uruguay, which could be considered an LBO since Grupo Sura financed the acquisition with an issuance of bonds in the international markets, shares issued in the local markets and MILA (Mercado Integrado Latinoamericano) of which UBS (Grupos Sura's financial adviser in the deal) took a considerable stake, and contributions of four co-investors (General Atlantic, Grupo Bolívar, IFC and Bancolombia).
Regardless of whether the applicable law of M&A agreements is Colombian or foreign, the documentation of these deals is usually drafted in English, following Anglo-Saxon parameters. Colombian legal advisers to sellers and buyers in particular are becoming more acquainted with New York law and applying it in their day to day work. Likewise, legal advisers are in some way reshaping the practice of Colombian contract law, once strictly fashioned by the Civil Law tradition dominant in Colombia, in order to align it to common law contract standards.
Although there are still some differences between M&A deals in Colombia and those in common law jurisdictions (for example, in Colombia no duties are owed by directors of the companies involved in the transaction), it could be said that these civil/common law differences are reducing every day when it comes to negotiating and documenting an M&A deal. This is reasonable in light of the increasing cross-border deals, which make it necessary for Colombian legal practice to internationalise and keep up with foreign investors' standards.
Public deals privately negotiated
Colombia's stock market is developing at a slow but steady pace, although the volume of transactions is still low compared to other markets of the region (the country's stock market totaled $3.7 billion in 2011). Additionally, Colombia has only 82 public companies, some of which are deciding to de-list; also a vast majority of this number is controlled by few beneficial owners, so only a minor stake is owned by floats. As a consequence, the acquisition of a Colombian public company is relatively simple as it is usually negotiated privately with the controlling shareholder(s) through pre-arrangements.
This was the case with the acquisition by Experian of Computec, a publicly-listed company on the Colombian stock exchange. Experian first became a minority shareholder of the company and later, by the launching of a delisting tender offer in 2011, it acquired a 56% stake in the company plus an additional 42% from the majority shareholders in a private deal, all of which gave Experian control of the company. Nonetheless, it should be noted that, as Colombia's stock market continues to deepen, partly due to the MILA stock exchange (integration of Colombia, Peru and Chile's stock exchanges, with Mexico probably joining in 2012), it is very likely that the number of public companies and floats percentage will increase, as well as the difficulty for friendly takeovers of public companies.
Enhanced merger review
An increase in M&A activity in Colombia has resulted in a more developed merger-control regime. Since the enactment of Law 1340 in 2009, Colombia's antitrust system has evolved rapidly and, nowadays, the national antitrust authority, SIC (Superintendencia de Industria y Comercio), has developed more systematic criteria in antitrust analysis for merger control. Also, it is worth mentioning that in a recent regulation issued by SIC, this entity has started to follow the North American and European tendencies in antitrust matters.
One good example of this trend is Resolution 46325 of 2010, according to which SIC reconsiders its doctrine with respect to non-compete agreements, establishing that such provisions may not be considered prima-facie anticompetitive in M&A deals. This innovative regulation in Colombian antitrust law impacted some M&A deals during 2011 and is likely to continue to develop in the years to come.
Prospects for 2012
The Colombian M&A market is evolving rapidly, thanks to good economic indicators, new investment options and a more developed and internationalised regulatory framework. In view of the this, there is a promising outlook for the country's M&A deals during 2012.
Particularly, three main trends are likely for 2012 M&A that are worth keeping in mind when deciding to undertake a transaction in the country. First, there will probably be more strategic buyer activity versus private equity buyer activity, due to the increase of the value per share of local companies. Secondly, there will be more seller efforts to negotiate certainty of closing as a consequence of the volatility in the global markets. Third, a growing presence of earn-outs should bridge the price gap in M&A deals of the extracting sector.
These projected dynamics will make local authorities start supervising the different transactions with a higher degree of attention. For instance, the SIC has recently hardened the threshold requirements that oblige a proposed M&A transaction to file a pre-evaluation for clearance of SIC: by means of Resolution 75837 of December 26 2011, SIC lowered thresholds from 150,000-times the minimum monthly wage (approximately $47.5 million) to 100,000-times ($31.6 million) for joint annual operational income or joint total assets of any of the companies involved in the transaction.
||Alejandro Linares chairs the M&A business unit and is a member of the project finance practice group of Gómez-Pinzón Zuleta Abogados. He consistently leads local and cross-border corporate transactions and reorganisations, spin-offs, acquisition of assets and tender offers, among others. He is an attorney from Universidad de los Andes in Bogotá, and earned a graduate degree in finance at Universidad de los Andes and an LLM from Harvard Law School. He also earned a graduate diploma on international tax from Harvard University. |
Linares has more than 26 years’ professional experience; he worked for several years at important positions in the Colombian public sector, including the Office of the President, the National Planning Department and the Ministry of Finance and Public Credit. He is included in the list of arbitrators of the Chamber of Commerce of Bogotá, is a member of the International Bar Association and the International Law & Practice Section of the American Bar Association. He has been a lecturer both for undergraduate and graduate students for more than 20 years in areas such as international economic law, international investment law, public finance law and business law. He is the chairman of the Legal Services Chamber of the National Association of Businessmen.
Besides being the managing partner of the firm, Linares focuses his practice on complex project financings and cross-border M&A transactions for private equity funds and corporate clients.
Gómez-Pinzón Zuleta Abogados
Calle 67 No. 7-35
Of. 1204 Edificio Caracol
Bogotá D.C. - Colombia
T: +571 319 29 00
F: +571 321 02 95
|Maria Montejo |
||María Montejo-Torres is an associate in Gómez-Pinzón Zuleta’s M&A and corporate practice groups. She advises on national and international M&A transactions, corporations and corporate governance, commercial agreements and reorganisations. |
She holds a law degree from the University of Los Andes, Bogotá, and is a candidate for postgraduate studies in International Business Law at the same University. In addition, she studied at Panthéon-Assas University (Paris II) during 2009, and worked in the intellectual property practice at the law firm of Rodríguez & Cavelier in 2008.
Gómez-Pinzón Zuleta Abogados
Calle 67 No. 7-35
Of. 1204 Edificio Caracol
Bogotá D.C. - Colombia
T: +571 319 29 00
F: +571 321 02 95