- 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?
After a high level of M&A activity in Panama in the period between 2006 and 2008 (principally in the financial industry), M&A activity has again picked up considerably in the last few years across an ample spectrum of industries. In 2012, we expect the level of M&A activity in Panama to continue its recent growth, or at the least remain stable.
- 2.Which industries do you expect will see the most M&A activity in 2012?
Although difficult to project, we expect the M&A activity to continue to be evenly distributed among several industries, which will most likely include the financial services industry, the telecommunications industry, the mining industry, the energy industry, the tourism industry and the food industry (both food manufacturing and consumer sales).
- 3.What types of deals do you expect to see?
We expect to see a higher level of outright acquisitions, followed by mergers, minority investments and a few joint ventures. Outright acquisitions have historically been the leading type of deal, and we expect that trend to continue.
- 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.Traditionally, the majority of M&A transactions in recent years have been in deals involving a domestic target and a foreign acquirer from Latin America, Europe or the United States. During this time, although in lower numbers, several purely domestic deals have also taken place. Less frequent are deals involving a domestic acquirer and a foreign target in Latin America or outside Latin America. We expect this trend to continue to hold true, in that we forecast that most of the M&A transactions to take place in 2012 will continue to likely involve a domestic target and a foreign acquirer, with most foreign investors coming from Latin America, Europe and the United States.
- 5.What is the level of private equity activity? Are domestic or international funds involved? What kinds of deals are they doing?
The level of private equity activity is not particularly high in Panama. Although there have been cases of international private equity funds investing in Panama in certain specific industries (like the power distribution industry), such cases are rather few and far between.
- 6.Is acquisition financing available for deals? For strategic buyers? For private equity buyers? From which domestic or international sources?
Acquisition financing is available for deals in Panama. With an internationally recognised banking centre, Panama has become an important hub for
financial services, including acquisition financing. However, given that most M&A
activity involves foreign investors looking to acquire a domestic target, it is often the case that such foreign investors have secured their acquisition financing abroad, whether from strategic buyers or equity buyers. It is important to note that Panama’s economy is unique in the region. It is a heavily service-oriented economy, with more than 75 per cent of the gross domestic product and 50 per cent of the nation’s employment resulting from this sector.
For the past seven years Panama has had an impressive average GDP growth. Panama’s gross domestic product has increased despite the recent economic downturn. In 2010 Moody’s (Baa), Standard & Poor (BBB-) and Fitch Ratings (BBB-) awarded Panama an investment grade rating, which has been maintained in 2011. The achievement of investment grade signifies the culmination of a painstaking and lengthy process begun in the 1990s to establish a solid macroeconomic framework for the country. The positive outlooks by rating agencies, banks and financial institutions speak highly of the confidence in
Panama’s economic position and of the prospect for growth and stability in
Panama in the long term. Improvements in Panama’s fiscal accounts coupled with strong economic growth in the last decade have allowed the country to maintain manageable levels of debt, which in turn have permitted us to responsibly meet our credit obligations, both domestically and internationally. Panama has
significantly decreased its levels of debt in recent years and our sovereign bonds were already trading on par with countries like Brazil. Panama today continues to have one of the better-performing economies in Latin America. The four major sectors of our economy - logistics and transportation, financial services, tourism and construction - continue to experience solid growth. Panama continues to be a major destination for foreign direct investment, attracting more FDI as a proportion of GDP than most countries in the hemisphere. The
Panama Canal Expansion Programme of the Panama Canal Authority, which will
double the Canal’s capacity by its completion in 2014, will in time increase Canal
contributions to the National Treasury fourfold. Moreover, the current government administration has recently committed US$12 billion for a five-year investment plan to improve the competitiveness of our economy, of which US$4 billion has been set aside for national infrastructure projects. The investment grade has been a milestone for our county and an acknowledgement of the country’s sound economic standing, but more importantly, in practice it has allowed Panama to lessen the burden of its debt obligations by gaining access to cheaper financing. Also, it has significantly increased the interest of international banks and other financial institutions to finance projects and acquisitions in Panama.
- 7.Do you expect more M&A activity involving financially troubled companies?
No, there has not been a lot of M&A activity involving financially troubled companies, and we do not expect this to be a particular area of activity 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?
Panama’s bankruptcy regulation is somewhat dated. As opposed to other countries, like the United States that allow companies to reorganise as a going concern (chapter 11 provisions), Panama does not have a similar bankruptcy regulation. In some regulated activities (banking, insurance, securities), specific regulation does allow for regulatory intervention that could result in some form of reorganisation of the particular entity as a going concern, but these cases are the exception and not the rule. In practice, the probability of an acquisition of a Panamanian entity out of bankruptcy is not likely.
- 9.What other types of activity are resulting from the economic situation?
As mentioned above, Panama has had impressive economic growth in recent years despite world economic downturn. In a sense, Panama was able to weather the worst of the crisis without suffering any short-term effects. In that regard, there were no other types of activities (the restructuring or exchange of debt, the sale of non-core businesses, activist shareholders, etc) that could be directly attributed to the economic situation.
- 10.More generally has there been any increase in hostile takeovers and shareholder activism? What defences and responses are target companies using?
We have not perceived an increase in hostile takeovers or shareholder activism in Panama, or at least none due to the recent worldwide economic downturn.
- 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 noted earlier, since Panama was able to avoid the worst of the worldwide economic crisis, any change in the way that directors conduct themselves in general, and in M&A deals in particular, could not be directly attributed to the economic situation. However, it is worth mentioning that, in general terms, the board of directors of operational Panamanian companies, and especially those in regulated industries have become significantly more professional and sophisticated, and are therefore more likely to be concerned about issues like negative publicity, shareholder criticism, regulatory pressure and liability from potential litigation, whether or not in the context of an M&A transaction.
- 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?
There are still notable differences in how domestic and cross-border deals are being conducted. The type of purchase agreement used in Panama depends a great deal on the nature of the transaction. If the transaction involves a domestic acquirer and a domestic target, it is very likely that the purchase agreement will be a far simpler document than a purchase agreement used when the acquirer is a foreign investor. The differences are mostly reflected in the amount and scope of the representations and warranties, and the affirmative and negative covenants, which tend to me more comprehensive in international-style purchase agreements.
The size of the transaction will also have great bearing on the type of purchase agreement that is finally used. As a general rule, foreign investors tend to feel more comfortable using international-style purchase agreements, most often governed by New York law, and using both New York counsel and Panamanian counsel in its drafting and negotiation. Given that there are a larger number of transactions involving foreign acquirers, the international style purchase agreement is being used more often.
- 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?
As must be the case for most jurisdictions, the three key elements in our estimation to be taken into consideration by potential buyers and investors in Panama, are to:
- acquaint themselves as much as possible during the early negotiation stages of any possible acquisition, with the target company, the industry in which it operates, and the legal and any regulatory requirements within the industry in which the target company conducts its business;
- upon the progress of the negotiations, conduct a thorough due diligence exercise in respect of the target company (legal, financial, labour, licences, corporate, etc) and try for it to take place on-site as much as possible, limiting the amount of information exchanged online via virtual data rooms; and
- obtain feedback and information from local sources and make sure to get the best local professional advice possible (both legal and financial including tax).
- 14.Have there been changes in the process for how M&A transactions are conducted in your jurisdiction?
No specific changes have taken place in Panama in regard to how M&A transactions are conducted.
- 15.Have there been any significant developments in the regulatory area – your country’s security exchange commission, antitrust regulators, etc?
Law No. 67 of 1 September 2011, created the Superintendence of the Securities Market (formerly known as the National Securities Commission) and modified certain dispositions of Decree Law No. 1 of 1999 (the Securities Law). Most of the modifications related to the overall administrative structure and operations of the securities regulator, the Superintendence of the Securities Market, but some of the modifications do touch on certain substantial issues relating to the regulatory framework of the securities market.
- 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?
There have not been many recent regulatory developments in this regard, except for a recent amendment to the Panama mining code, which among other changes, was amended to allow the possibility of foreign governments to directly invest in companies that have been awarded local mining concessions. This is an important development that could certainly result in increased M&A activity, as there are important confirmed metallic mineral deposits either under concession or under current study which will certainly attract foreign investment to Panama, particularly by foreign governments looking to secure future metallic mineral sources. It is also worth mentioning that the current government administration intends to introduce certain reforms to the securities regulation mostly to restructure the National Securities Commission.
Contributing Authors
Contributing Editor
Paul Schnell
Skadden, Arps, Slate, Meagher & Flom LLP
Questions
- 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?
- 2.Which industries do you expect will see the most M&A activity in 2012?
- 3.What types of deals do you expect to see?
- 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. - 5.What is the level of private equity activity? Are domestic or international funds involved? What kinds of deals are they doing?
- 6.Is acquisition financing available for deals? For strategic buyers? For private equity buyers? From which domestic or international sources?
- 7.Do you expect more M&A activity involving financially troubled companies?
- 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?
- 9.What other types of activity are resulting from the economic situation?
- 10.More generally has there been any increase in hostile takeovers and shareholder activism? What defences and responses are target companies using?
- 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?
- 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?
- 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?
- 14.Have there been changes in the process for how M&A transactions are conducted in your jurisdiction?
- 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?
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