- 1.Has the level of M&A activity picked up slowed, and what are conditions like today? In general terms, what level of activity is foreseen for 2012?
Peru’s economy has shown considerable robustness in recent years, growing approximately 9 per cent annually in both 2007 and 2008, managing to grow during the 2009 financial crisis and growing approximately 8.9 per cent in 2010. An estimated 6.8 per cent growth of our economy for this year and an expected 5.5 per cent growth for 2012 is helping Peru consolidate as one of the most sought-after investment destinations in Latin America.
In addition, Peru’s country risk index is among the lowest in the region: its foreign currency debt is rated with investment grade by Fitch Ratings, Moody Investors and Standard & Poor’s. Also, as may be evidenced in the World Bank’s Business Environment Snapshot, Peru’s position in global ranking on business environment is generally improving. For instance, in the World Bank’s Doing Business 2011 ranking, Peru is considered among the top 10 most-improved economies.
As a consequence of such a positive economic environment, M&A activity in Peru has not slowed, and has continued its upward trend. Despite being 2011 a presidential election year, M&A data for 2011 surpassed all expectations. As for the statistics published in Diario Gestión (a financial newspaper) there were more 170 M&A deals involving directly or indirectly a Peruvian target for an amount that exceeds, for deals in which the acquisition price was actually disclosed, US$30,500 million. As for 2010, during 2011, deals in the mining, energy and fishing sectors continued to comprise the core of Peruvian M&A activity.
Naturally, provided that the aforementioned conditions remain, we expect that during 2012 the level of M&A activity will continue to increase. We expect more private equity and venture capital-driven deals.
- 2.Which industries do you expect will see the most M&A activity in 2012?
We are of the opinion that the 2011 M&A industry trend will continue as deals will be mainly focused in mining, energy and fishing industry. However, we expect that M&A activity in the retail, agribusiness, financial (particularly microfinance), health and construction sectors will also play an important role in 2012. Most market players agree that most deals in the fishing, agribusiness, health and retail sectors will be driven by groups seeking consolidation, which have been a trend in 2010 and 2011.
Peru’s potential, its economic achievements and particularly its business environment are helping Peru consolidate as one of the most sought investment destinations in Latin America. Foreign investors have played and will continue to play a key role in Peruvian M&A activity and we should highlight the ever-growing presence of Peruvian local groups in the M&A market. Local players are actively seeking strategic M&A deals in order to consolidate their business, and it is becoming increasingly more common for established domestic groups to continue to grow through foreign acquisitions. Provided that the aforementioned conditions remain stable, we expect that M&A activity will continue to grow in a steady pace during the following years.
- 3.What types of deals do you expect to see?
There is no particular type of deal that we expect to see in Peru more than others. M&A activity in Peru will continue to show a wide array of deals, from joint ventures, total acquisitions, mergers, to asset purchases.
Nonetheless, taking into account industry trends we could reasonably expect
- total acquisitions or mergers in the mining, fishing, financial, health and agribusiness sectors;
- joint ventures in smaller mining companies and electricity companies in need of capital; and
- certain minority investments in connection with private equity deals where funds typically co-invest as a strategic partner.
Likewise, considering the large amount of infrastructure concession projects, we expect to continue to see joint ventures between domestic and foreign companies seeking to combine their expertise.
- 4.Discuss the level of M&A activity you have seen over 2011 and expect to see in 2012.
(i) pure domestic deals;
(ii) deals in your jurisdiction involving a domestic target and foreign acquirer from Latin America, or a foreign acquirer from outside Latin America; and
(iii) deals involving a domestic acquirer and foreign target in Latin America or a foreign target outside Latin America.The level of M&A activity has greatly increased and we expect this upward trend to continue. With more than 170 deals closed in 2011, and provided that Peru’s economy continues its steady growth, we expect an overall increase of M&A activity in Peru. Foreign investors play an important role in Peru’s M&A activity and we expect their presence to increase as Peru consolidates as one of the most sought investment destinations in Latin America. The announcement by Credicorp, one of the largest Peruvian conglomerates, and the Carlyle Group, of the creation of a private equity fund expected to manage during its first three years approximately US$700 million evidences the growing interest in Peru by important foreign investors.
Domestic deals
Examples of noteworthy 2011 domestic deals include:
- acquisition of the Inkafarma pharmacy chain (major Peruvian pharmacy chain) by IFH Perú Ltd for approximately US$350 million;
- acquisition by Peruvian Enfoca SAFI of an stake of Maestro Home Center, for approximately US$50 million;
- several consolidation driven acquisitions and asset acquisitions by local fishery companies (eg, Pesquera Exalmar SA); and
- acquisition by BBVA Foundation for Microfinance of a majority stake in Confianza by Caja Rural de Ahorro y Crédito Nuestra Gente SAA for approximately US$35 million.
We particularly expect for 2012 a continuance in the consolidation of the fishery, health and microfinance sectors.
Foreign acquirer deals
Examples of noteworthy 2011 M&A deals that include a foreign acquirer include:
- private tender by Mitsui & Co Ltd for the acquisition of a stake in Anglo American Quellaveco SA from the International Finance Corporation for approximately US$800 million;
- indirect acquisition of 100 per cent of the capital stock of Stratton Perú SA by Spanish Grupo Allus, for approximately US$200 million;
- acquisition by Sempra Energy of a stake in Peruvian energy distributor Luz del Sur, for approximately US$164 million; and
- acquisition of Corporación Infarmasa by Teva Pharmaceutical Industries for approximately US$120 million.
Foreign investors traditionally have a strong presence in mining and energy related M&A deals. We expect an increase of foreign investor presence in 2012.
Domestic acquirer cross-border deals
Examples of noteworthy 2011 M&A cross-border deals that include a domestic acquirer include:
- acquisition of 64 per cent of Chilean paint company Tricolor by Peruvian industrial group Brescia for approximately US$ 62 million;
- acquisition of 70 per cent of Ecuadorian sugar company Holding Grupo Azucarero EQ2 SA, one of the largest Ecuadorian sugar producers, by Grupo Gloria for approximately US$133 million;
- the acquisition of 17.66 per cent of Chilean cement company Cemento Polpaico SA by Volcan Compañía Minera SAA for approximately US$50 million;
- acquisition of Compañia Americana de Multiservicios (CAM), a Chilean subsidiary of Enersis Group with operations in Chile, Peru, Colombia, Brasil and Argentina, by the Peruvian industrial group Graña y Montero for approximately US$20 million, consolidating its presence in Chile; and
- acquisition of the Ecuadorian broadcasting companies Centro de Radio, Televisión Cratel SA and Teleamazonas Guayaquil SA by La República SA group for an undisclosed amount.
Following successful experiences, consolidated Peruvian groups are expected to continue to grow through foreign acquisitions, particularly in the Latin American region.
- 5.What is the level of private equity activity? Are domestic or international funds involved? What kinds of deals are they doing?
Domestic and international private equity activity has significantly increased, becoming a key element of Peruvian M&A activity. Both domestic and international funds have made relevant investments in distinct industry sectors, mainly in the mining, energy and infrastructure industries.
We expect private equity to significantly increase in 2012, as it is increasingly more common to find large international private equity funds exploring the possibility of making significant investments in Peru. For example, in March 2011, Credicorp, one of the most important Peruvian conglomerates, and Carlyle Group announced the creation of a private equity fund expected to manage during its first three years approximately US$700 million.
It is worth noting that private equity funds are emerging as a means of channelling capital held by Peruvian institutional investors, for instance, into infrastructure projects. For example, Brookfield Assets Management Inc was selected in late 2009 as lead manager of a Peruvian government-sponsored infrastructure fund in partnership with a leading Peruvian financial and advisory firm. The funds initial capital commitments included a US$300 million contribution from Peruvian private pension funds, US$100 million from Cofide, Peru’s national development bank; US$50 million each from the IDB and CAF; and US$100 million from Brookfield.
- 6.Is acquisition financing available for deals? For strategic buyers? For private equity buyers? From which domestic or international sources?
Although, it is common to find that deals are mostly self-financed by the acquirer, acquisition financing is generally available in Peru from either domestic or international sources. In general, international sources are used in the case of more significant financing. For example, in early 2011 the acquisition of Inkafarma pharmacy chain (major Peruvian pharmacy chain) by Grupo Interbank was financed through a senior secured credit facility provided by international banking institutions.
As noted in our previous response, provided that private equity funds are emerging as a means of channelling capital held by Peruvian institutional investors, Peru is becoming a great place for strategic buyers and private equity buyers to find sources for acquisition finance. For example, by means of the aforementioned infrastructure fund, Peruvian private pensions funds are able to participate in equity investments they would otherwise not be able to perform. It has become increasingly more common for foreign private equity funds to seek funding from Peruvian pension funds by registering their funds before the Superintendency of Banking, Insurance and AFP (SBS). Subject to certain conditions, registry of such funds shall generally enable private pension funds to acquire such securities by means of a private offering. For example, Aureos Capital Limited, BNP Asset Management, Celfin Capital SA SAFI, Credit Suisse Equity Fund Management Company, Deutsche Bank, Enfoca SAFI, HarbourVest Partners LLC, JP Morgan Asset Management, and Morgan Stanley, to a name a few, have registered funds before the SBS.
- 7.Do you expect more M&A activity involving financially troubled companies?
Since we have not seen any increase in M&A activity involving financially troubled companies during 2011, we do not expect to see a growth in this area in 2012.
- 8.Does your country’s bankruptcy law permit the reorganisation of the debtor as a going concern, and the acquisition of the entity out of bankruptcy?
Under Peruvian bankruptcy law a company is entitled to continue performing its activities even if it is subject to a reorganisation proceeding.
Even in the event of liquidation, creditors can decide to allow the company to continue performing activities, to the extent that the realisation value of the assets is greater under such scenario. To that extent, a company can be reorganised while it is a going concern.
As to the acquisition of the company, there are no specific provisions under Peruvian bankruptcy law. However, considering that in our bankruptcy system the powers and privileges of the general shareholders meeting and board of directors of the debtor are suspended during bankruptcy and such powers are exercised by the creditors meeting, it is common practice to proceed with the acquisition in the following ways:
- by acquiring the credits against the debtor, which will give majority in the creditors meeting that will decide the future of the debtor and approve its reorganisation plan. Such a reorganisation plan includes the reduction of the share capital to zero and the capitalisation of part of the bankruptcy credits, hence eliminating the existing shareholders and providing control to the acquirer; and
- by acquiring both the credits against the company and the shares from the shareholders. This is a less hostile strategy that allows the acquirer control over the creditors meeting during bankruptcy, as well as over the general shareholders meeting once the credits have been repaid.
A noteworthy example of this practice in Peru is the acquisition of a controlling package of creditors rights in Compañía Peruana de Radiodifusión SA by Plural TV Group, allowing them to acquire control over the company, which had US$100 million in liabilities to be restructured.
- 9.What other types of activity are resulting from the economic situation?
Since Peru was not significantly affected by the 2009 crisis, a few exceptions aside, we have not seen these types of activities in the Peruvian market with certain relevance.
- 10.More generally has there been any increase in hostile takeovers and shareholder activism? What defences and responses are target companies using?
The practice of hostile takeovers in Peru is still in its early days. Peru has only witnessed a handful, at most, of unsuccessful hostile takeovers attempts. In general, hostile takeovers are rare and highly uncommon and provided that several listed companies have a concentrated ownership structure the possibility of success is remote. Although we have analysed the implementation of anti-takeover provisions in listed companies, in our experience, few have actually implemented these.
Additionally, taking into account concentrated ownership structures in Peruvian companies, we have neither experienced major developments nor activity in connection with shareholders activism.
It is of relevance to note that Peruvian merger control rules apply only to acquisitions in the electricity market and that, in some cases, previous regulatory authorisation is required in connection with the acquisition of certain regulated businesses (eg, banking and insurance).
Also, Peruvian security regulations include mandatory takeover rules applicable to the acquisition of control of a listed company. Subject to certain conditions, such regulations generally establish the obligation to make a tender offer when a person or group of persons acquires a relevant interest in a listed company. According to Peruvian law, a person acquires a relevant interest in a listed company when such person (a) holds or has the power to exercise directly or indirectly 25 per cent, 50 per cent or 60 per cent of the voting rights in a listed company, or (b) has the power to appoint or remove the majority of the board members or to amend its by-laws.
In general, the tender offer must be launched prior to the acquisition of the relevant interest. The tender offer may be launched after the “relevant interest” is acquired if it is acquired (a) by means of an indirect transaction, (b) as a consequence of a public sale offer, or (c) in no more than four transactions within a three-year period.
- 11.Have directors changed how they conduct themselves in M&A deals? Should directors and management be more concerned today about negative publicity, shareholder criticism, regulatory pressure and liability from potential litigation? From your experience, are directors more diligent today in their review of M&A transactions and other matters?
As Peruvian economy develops, we have witnessed that level of commitment and professionalism of directors has increased. Directors are generally more concerned about negative publicity and shareholder criticism. However, in our experience, it is uncommon for directors to actually be subject to a liability suit.
It is worth noting that as to the World Bank’s Doing Business 2011, there is a stronger than average ability of shareholders to take legal action and a slightly below average director liability. In addition, the Peruvian Securities Commission set up a voluntary corporate governance code in 2002 under which more than 200 listed companies agreed to submit annual reports on corporate governance compliance. As to 2009 data, significantly all of such corporations reported on their corporate governance compliance and there was some ‘minor’ improvement in practices from 2008.
- 12.Are there major differences in how domestic and cross-border deals are being conducted? For instance, does the type of purchase agreement used in your jurisdiction differ significantly from the international style of agreement? If so, which type is being used more often?
M&A transactions in Peru generally follow the structure used by common law countries and do not substantially differ from the ‘international style of agreement’ (eg, representations and warranties, covenants, conditions precedent, termination, indemnification, etc). Furthermore, valuation procedures, as well as legal and financial due diligence generally follow such international standards. Most market players have significant experience in cross-border transactions, and regularly apply the same standards to domestic deals.
Finally, note that deals subject to Peruvian law shall take into consideration certain mandatory provisions set forth by Peruvian law (eg, limitation for any liability arising from wilful misconduct or gross negligence is void and invalid, implied latent defect rules, etc).
- 13.For international buyers and investors looking at deals in your jurisdiction, what are the three most important pieces of advice you have and what are the pitfalls that should be avoided?
A complete and thorough due diligence of the target company must be conducted as to identify and address any potential legal risk. Litigation, labour and tax issues are the most common contingencies to be aware of in Peru.
If the parties consider submitting the acquisition documents to Peruvian law, buyers and investors should be fully aware of the Peruvian law provisions generally applicable to any Peruvian law contract (see question 12).
Submitting the agreement to arbitration is key in avoiding any future uncertainty regarding Peruvian courts. International buyers and investors generally submit the agreement to international arbitration chambers, however taking into account high legal costs of an international arbitration and foreign counsel, investors may consider submitting disputes to reputable Peruvian arbitration chambers (eg, AmCham Peru and Peruvian Chambers of Commerce).
- 14.Have there been changes in the process for how M&A transactions are conducted in your jurisdiction?
No, there have been no material changes with respect to the process on how M&A transactions are conducted in Peru (see question 16).
- 15.Have there been any significant developments in the regulatory area – your country’s security exchange commission, antitrust regulators, etc?
- 16.Describe recent and forthcoming regulatory developments that affect M&A, whether involving the securities and markets regulator, competition agency or other regulatory agencies that review deals?
By means of Law 29663, in force since 16 February 2011, capital gains derived from an indirect transfer of shares or participating interests representing equity capital of a Peruvian corporation shall, in certain cases, be considered as Peruvian-source income subject to income tax. Also, in accordance with such law, Peruvian companies shall, subject to certain conditions, be severally and jointly liable with the non-resident transferor (eg, if considered related parties within the last 12 months) if the latter does not pay the corresponding tax debt.
There has been considerable debate regarding the scope and application of this law, including derogatory requests by prominent opinion leaders. The scope of such law should be shortly clarified in impending regulations.
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