Energy and telco deals power Mexican M&A

White & Case LLP

Global M&A was laid low by market headwinds in 2023, with a cocktail of high inflation, geopolitical tensions and macroeconomic uncertainty causing activity to slow. Mexico was no exception to this trend, with dealmaking falling from strong post-pandemic performances logged in 2021 and 2022.

Overall, 110 deals targeting Mexican assets were announced in 2023. Worth a combined US$8.8 billion, the transactions represent year-on-year declines of 35 percent in volume and 46 percent in value. However, these totals remain above deal volume levels recorded in 2018 to 2020, and above the aggregate values of US$3.2 billion and US$5 billion recorded in 2018 and 2020, respectively.

M&A activity by value 2018 – 2023
Target location: Mexico Bidder location: Global Sectors: All Sectors

Explore the data

Inbound M&A saw a significant year-on-year drop in value as international dealmakers shied away from cross-border deals. International dealmakers undertook 56 deals worth just under US$1.2 billion in aggregate in Mexico in 2023. This represents the second-lowest annual value of the last 15 years, narrowly surpassing the US$1.1 billion of inbound M&A announced in 2018, while last year’s volume is the lowest since 2009.

Local players make moves in energy sector

Mexico’s energy industry overtook telecommunications, media and technology—historically the country’s dominant sector in aggregate value terms—to deliver the highest total deal value across all sectors in 2023, and by a considerable margin. A handful of big-ticket domestic energy deals pushed deal value to US$6.8 billion, or 76.6 percent of all deal activity in 2023, signaling the intention of local investors and companies to expand their influence in the sector.

Most of the aggregate value for the energy sector was delivered by one transaction, specifically the US$6 billion acquisition by state-owned fund Mexico Infrastructure Partners of a 55 percent stake in the Mexican power-generating assets of Spanish utility Iberdola.

Following the deal, the investment management company will take control of Iberdola’s 8.54 GW combined-cycle gas turbine and wind assets. The landmark deal, announced in April 2023, reflects the government’s aim to increase the proportion of state-owned energy assets in the country, with President Andrés Manuel López Obrador describing it as a “new nationalization.”

The next-biggest energy deal saw Grupo Carso, one of Latin America’s largest and most diversified conglomerates, acquire the Ichalkil and Pokoch oil fields from local energy company PetroBal in December. The US$530 million transaction follows Carso’s US$125 million deal announced in May 2023 to acquire a 50 percent stake in the offshore Zama oil field from Houston-based Talos Energy.

Telco consolidation

Consolidation within Mexico’s telecommunications infrastructure was a key feature of dealmaking in 2023, as telco players look to bolster their market share. The purchase of American Tower’s Mexican optical fiber business by El Paso-based Flo Networks underscores this trend.

Now controlling more than 20,000 miles of fiber in Mexico and the US, the US$252 million deal puts Flo Networks in a stronger position to compete with Mexican market leader América Móvil, which currently boasts an estimated 90 percent market share.

Mexico’s tower assets also hold appeal for international investors, as evidenced in the July 2023 acquisition by French PE firm Ardian of a 50 percent stake in local telecom tower company MXT from Mexico Infrastructure Partners. MXT will use the funds from the US$170 million deal to carry out an asset swap with Spanish telco giant Telefónica of an estimated 200 towers and 1,800 kilometers of fiber optics, in addition to other strategic acquisitions.

The deal marks Ardian’s first direct investment in Mexico as the global PE player looks to capitalize on the country’s growing economy and mobile phone usage.

US VCs target fintech space

Among international acquirers, US buyers were the most active in Mexico’s M&A market in deal volume terms in 2023, leading 18 bids in the country, ahead of second-place Spain’s 12 inbound deals.

Mexico’s fintech startups have attracted particular interest from US investors looking to capitalize on their growth potential. This trend continues to play out despite an acutely challenging fundraising environment, which precipitated a steep drop in global venture capital activity last year. According to Crunchbase, venture funding totaled US$285 billion in 2023, down 38 percent from the prior year.

Nonetheless, Mexico’s fintech arena still witnessed notable deals. The sector’s largest funding round in 2023 saw spending management platform Clara—which achieved unicorn status in December 2021—raise US$60 million from a group of investors led by Silicon Valley VC firm GGV Capital. The startup, which offers locally issued corporate cards and financing solutions to businesses, has 10,000 clients across Latin America.

Another significant deal saw Mexican challenger bank Albo raise US$45 million in a fundraising round featuring VC investors Morpheus Ventures and Vala Ventures. Less than half of Mexico’s adult population has a bank account, with Albo primarily marketing its services toward the country’s underbanked middle- and lower-income consumers. The fintech hopes to achieve profitability this year, claiming it would be the first Mexican neobank to do so.

Nearshoring drives dealmaking

Nearshoring continues to be an important driver of investment in Mexico, a trend that began to gather pace when the US imposed trade tariffs on China in 2018 and was supercharged by the pandemic’s impact on international supply chains. Besides its strong existing connections to North American consumer markets, Mexico’s skilled workforce and lower cost of labor, transportation and logistics are all factors in the country’s favor.

According to Market Analysis, a market intelligence group focusing on the Mexican industrial sector, 42 new businesses arrived in Mexico in 2023 due to the nearshoring trend. These hailed predominantly from China and the US, but companies from South Korea, Taiwan, Germany and Italy also made their first foray into the market for production or logistics purposes.

International industrial manufacturing firms carried out several significant deals to grow their presence in the country. Among these, two of the largest saw North Carolina-based Honeywell and Minnesota-based Donaldson buying up square footage in the states of Chihuahua and Guanajuato, respectively.

An uncertain outlook

The anticipated stabilization of interest rates in 2024 will likely boost confidence among dealmakers looking to carry out deals in the Mexican market. The country boasts some valuable assets across a range of industries—especially energy, telco, logistics and fintech—which will continue to attract interest from international players throughout the year.

Upcoming presidential elections in both Mexico and the US will add an element of volatility to dealmaking. Also weighing on investors’ minds is the possible impact of a second Trump presidency on US-Mexico relations. While qualifying goods and services with zero tariffs under the North American Free Trade Agreement remain tariff-free under the new US-Mexico-Canada Agreement, which updated NAFTA in July 2020, Trump has continually threatened to raise tariffs on allies and rival nations alike, leaving the exact fate of US-Mexico trade unclear for now.

Despite uncertainty on the horizon, though, the US is expected to continue strengthening its economic ties with Mexico. Once the dust settles post-election, dealmakers appraising Mexican assets should have reason to feel more positive.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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