Dealmaking in Latin America’s energy sector will likely remain dampened this half as the coronavirus continues to pummel the region, but over the longer-term Argentina and Colombia may help support an uptick in activity. 

Latin America saw a deceleration in overall dealmaking in January-June, with energy, mining and utilities (EMU) – usually among the most resilient – suffering a major drop.

In the EMU space, 34 deals were reported for a combined US$1.3bn, down 30.6% and 92% year-on-year, respectively, according to data from research firm Mergermarket. 

Overall dealmaking has been hampered by uncertainty, by changes in company financial strategies and by sanitary rules snarling the wheels of negotiations and due diligence processes. The plunge in crude oil prices has also taken its toll.

Carlos Martínez, senior Latin America correspondent at Mergermarket, told BNamericas that while a rebound in overall dealmaking was not expected in the near future, government officials were working to pull in oil investment, citing Colombia and Argentina.

“The administration of [Argentine] President Alberto Fernández, for example, is putting the finishing touches on a bill that seeks to stimulate upstream investment, particularly in its Vaca Muerta shale formation,” Martínez said.

Any legislative changes that promote regulatory stability in Argentina – combined with a resolution of the country’s debt crisis – would help woo back nervous investors.   

“Colombia, for its part, still plans to launch a new auction for oil drilling rights in late November and recently announced technical guidelines for the country’s first fracking projects. Four pilot projects, run by coal company Drummond, and oil companies Ecopetrol, ExxonMobil and ConocoPhillips, are expected to generate billions of dollars in investment over the next few years.”

Martínez indicated that changes in the Brazilian water supply and sanitation regulatory framework and a planned privatization program in Colombia could also help underpin dealmaking in the region.

THE REGIONAL PICTURE

Overall dealmaking in Latin America – one of the last regions to be hit by the pandemic – decelerated sharply in the first half of the year, a trend that should reverse as infection metrics improve and the risk of new restrictions fades.

“The possibility that governments could reimpose stricter lockdown measures to help curb the spread of the novel coronavirus will continue to scare away investors, with some local investment bankers not expecting robust dealmaking to resume until 2Q21,” Martínez said.

Chile and Colombia have reintroduced lockdowns in population hubs amid spikes in infections against a backdrop of a wider overall regional easing trend. Argentina recently postponed easing measures in the Buenos Aires metropolitan region as infection rates climbed. 

Mauricio Borrero, partner at Colombian law firm Dentons Cardenas & Cardenas, said in a Transactional Track Record (TTR) report that strategic buyers and funds have their radars spinning, adding that an uptick in distressed M&A transactions was likely through 2Q21.

Borrero said the overall market was starting to recover, citing “bargain prices and multiple investment opportunities.”

In terms of dealmaking data, the first half of the year was the weakest on Mergermarket record (since 2001), with 199 deals reported for a total of US$8.1bn, down 37% and 77.7%, respectively. Mergermarket cited the impact of an M&A slowdown in coronavirus hotspots Brazil and Mexico as key factors behind the regional figures.

Inbound activity, particularly from China, took a hit although Japanese investors, notably telecom and internet company Softbank, held steady.

TTR, which measures activity differently, said that over the first half 835 deals for a total of US$20.7bn were reported, down 29.8% and 59.9%, respectively.

Source: Business News Americas / BN Americas - Chile