- 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?
The M&A market in Colombia is far from slowing down: it actually maintains the growing tendency it has showed in the last couple of years. In fact, Colombia is rapidly becoming an attractive option for investors who seek to inject capital outside unsettled markets like the US or the Eurozone. Throughout 2011 we saw big deals as well as several strategic acquisitions by regional investors, mainly Brazilian and Chilean strategic buyers.
The M&A market in Colombia will surely present important activity this year; the consequences of the global financial crisis did not hit our economy as harsh as others, and Colombia’s economic activity has not slowed but, rather, it has shown a sustained growth. The foregoing contributes to M&A activity picking-up and we foresee that this tendency will continue in 2012.
- 2.Which industries do you expect will see the most M&A activity in 2012?
Last year our forecast indicated the telecommunications and financial services industries as well as the extractive industry (eg, oil and gas, gold, coal and mining) as the ones to present more activity. We were correct: 2011 saw the financial services sector and the energy and mining industry as the most active in M&A transactions. Two examples are the repurchase of 49 per cent of the Colpatria Bank from GE Capital in June of 2011 and the subsequent sell of 51 per cent stake to ScotiaBank for US$1 billion in October, 2011; and the acquisition by the Japanese Itochu of a 20 per cent interest in the coal mining company Drummond.
This year we expect the energy and mining sector to continue presenting some important activity, since the Santos administration’s National Development Plan (NDP) has established this sector as one of the five “locomotives” of Colombian economic growth and its goals is to attract more national and international investment to this sector. We also expect the financial services sector to continue on this trend; and we anticipate the infrastructure, tourism and pharmaceutical industries to take off in 2012’s M&A market.
- 3.What types of deals do you expect to see?
The current growth of the market indicates that we will see all kinds of deals in 2012. However, the economic situation calls for strategic investments (whether minority investments, acquisitions of majority interest or total acquisitions) as well as joint ventures. Also, the volatility of the global markets has triggered some transactions of stock-for-stock.
- 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.In 2011 the most common deal was the one in which a foreign acquirer merges or acquires a domestic company. However, due to the outstanding recovery of the Colombian economy during the past couple of years, pure domestic deals have increased, being the second most common type of deal. Thirdly, we saw domestic acquirers investing in off-shore markets, mainly in Central and South America. For 2012, we expect to see all kinds of deals, although the most common one will continue to be the one involving a domestic target and a foreign acquirer. Also, we believe that domestic deals will increase as domestic acquirers are showing more and more optimism in the internal market.
For 2012 M&A activity, we recommend keeping a close eye on intraregional deals; we are confident that transactions involving a domestic target and foreign acquirer from Latin America and domestic acquirer and foreign target in Latin America will rapidly increase, as shown in several big deals of 2011, such as: the acquisition by the Chilean group CorpBanca of Banco Santander in Colombia; the acquisition by the Banco de Crédito of Peru of 51 per cent of the Colombian stockbroker dealer Correval; the purchase by the Chilean company Indumotora of the majority stake in Colombia’s PracoDidacol; the acquisition by the Colombian bank Davivienda of the operation of HSBC in Costa Rica, El Salvador and Honduras; the acquisition by Colombian Grupo Sura of ING assets in Colombia, Mexico, Chile, Peru and Uruguay for US$3.7 billion; and the acquisition by Interbolsa, a Colombian stock broker firm, of the Brazilian firm Finabank for US$12 million.
- 5.What is the level of private equity activity? Are domestic or international funds involved? What kinds of deals are they doing?
Private equity has continued to increase in Colombia in recent years, thanks to the government’s commitment to encourage private equity and to the country’s wide range of investment opportunities. The regulation on private equity that has been developing since 2007 has boosted the incorporation of local funds as well as the opening of local offices by foreign funds. Also, regional equity funds are increasingly becoming major players in the M&A market.
In fact, some of the biggest deals of 2011 involved foreign private equity funds, and two examples are the Promigas transaction, in which Ashmore Energy International (AEI) sold its 52 per cent stake in Colombia’s biggest gas-transportation company Promigas to Corficolombiana, Empresa de Energía de Bogotá and a private equity fund for USD $790 million; and the acquisition by ACON Latin America Opportunities Fund of Aseo Urbano SA, one of the leading waste management companies in Colombia.
Private equity funds, either local or foreign, are investing mainly in infrastructure, services, energy and mining sectors and natural resources. However, we believe that in 2012 private equity activity will give ground to strategic buyer activity, due to the increase of the value per share of local companies.
- 6.Is acquisition financing available for deals? For strategic buyers? For private equity buyers? From which domestic or international sources?
Yes, acquisition financing continues to be available for all types of deals and acquirers. In particular, Law No. 1328 enacted in 2009 eliminated the legal restrictions for local financing of M&A transactions by modifying the Financial System Statute and allowing banks to grant loans aimed to buy shares of any company (previously, there existed a prohibition imposed on local banks by means of which they could not grant loans for acquisition of shares).
However, despite this change in regulation, the truth is that financing for deals in Colombia is not very common yet. Leveraged buyouts are rare in deals involving domestic players. As a matter of fact, in 2011 there were only two deals involving LBOs: the repurchase of 49 per cent of the Colpatria Bank from GE Capital in June of 2011 for the subsequent sell of 51 per cent of the Bank’s stake to ScotiaBank, with a syndicated loan arranged by UBS; and Colombian Grupo Sura’s acquisition of ING assets in Latin America, 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 advisor in the deal) took a considerable stake, and contributions of four co-investors (General Atlantic, Grupo Bolívar, IFC and Bancolombia).
- 7.Do you expect more M&A activity involving financially troubled companies?
Fortunately for Colombian companies, the financial crisis was managed properly. We have seen an increase in M&A activity involving financially troubled companies, and companies that have been on the verge of bankruptcy for a decade or more are starting to be the subject of M&A. Although the recent crisis did affect many companies, some more than others, its impact was not as intense as it was in the US, so these companies are not currently being subject to M&A.
An indirect effect of the crisis in the Colombian market was the divestiture of the Colombian subsidiaries of multinational companies affected by the crisis. Companies that had been hit by the crisis turned to their Colombian subsidiaries, which were generally doing well, and sold them in order to generate cash. Some examples are the sale by Spain’s Gas Natural of its controlling interest in EPSA (an integrated utility) for US$1.1 billion, the sale by Citicorp of its controlling interest in Citi-Colfondos (a pension fund administrator) and the sale of certain Colombian assets by AIG.
For 2012 we do not expect an increase of M&A activity involving financially troubled companies because in general terms Colombian companies are not troubled companies. The market is in a very good condition and the evidence is that domestic companies are being purchased for up to 12 times their net worth.
- 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?
Colombia does permit reorganisation as a going concern, but Colombian regulation does not have the ‘bankruptcy sale’ figure the US law does (ie, section 363 of the Bankruptcy Code). As a general rule, Law No. 1116 of 2006 (the Colombian bankruptcy law) does not prohibit the sale by the shareholders of an insolvent company of their shares in said company. However, in respect of sales of assets of an insolvent company, Law No. 1116 of 2006 establishes that such sales are allowed if the sale is within the ordinary course of business of the insolvent company. Otherwise, the bankruptcy judge’s authorisation is required.
In the cases of mergers and spinoffs of the insolvent company, the onset of insolvency suspends certain statutory rights granted to creditors (ie, right to demand guarantees) and to shareholders (ie, appraisal rights).
- 9.What other types of activity are resulting from the economic situation?
Although the M&A transactions have been performed in the recent years through share acquisitions, the economic situation has forced many, if not all, companies to create counter measures to avoid bankruptcy but still make profit during the crisis. Some did have to significantly reduce their staff and other operational costs but not to the extent of having to close down.
We have not seen a lot of restructurings so far; however, some sales of non-core business have been seen, both by multinational companies with investments in Colombia as well as by local companies.
- 10.More generally has there been any increase in hostile takeovers and shareholder activism? What defences and responses are target companies using?
In Colombia hostile takeovers have been rare as Colombian regulation on the matter is not very flexible and leaves little or no space for this kind of acquisition. This situation makes measures such as poison pills or any other anti-takeover protection unnecessary.
Nonetheless, during 2011 some important acquisitions of Colombian public companies were actually “friendly takeovers”, partly due to the fact that in Colombia there are only 82 public companies, some of which are controlled by few beneficial owners, so only a minor stake is owned by floats, making it easy to negotiate privately with the controlling shareholder(s). Such was the case of the acquisition by Experian of Computec SA, a publicly listed company on the Colombian stock exchange: Experian first became a minority shareholder of the company and later, via the launching of a delisting tender offer in 2011, it acquired a 56 per cent stake in the company plus an additional 42 per cent from the majority shareholders in a private deal, all of which gave Experian the control of the company.
On the other hand, we have seen an increasing shareholder activism, especially in certain pension funds that own portions of companies such as ETB, ISAGEN and Ecopetrol, regarding matters such as access to information and payment of dividends.
- 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?
It is important to note that in Colombia no duties are owed by directors of the companies involved in M&A transactions. Yet, as the financial market deepens and M&A transactions become more common, we start to see a change in their attitude. There is certainly more awareness when it comes to negative publicity, shareholder criticism and liability from potential litigation in order to avoid certain constitutional actions (eg, collective and class actions) that have been seen in the past against M&A deals. Also, directors have started to take a more active role when it comes to reviewing these deals and providing their advise, especially in antitrust 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?
The M&A market is becoming more demanding day by day, and the need to achieve international standards has become a priority. Actually, the documentation of these deals is usually being drafted in English, following common law parameters.
Currently, there are no significant differences between domestic and international deals. It could be said that civil/common law differences have reduced when negotiating and documenting an M&A deal, to some extent thanks to modern law firms achieving an international standard to handle cross-border deals, which they apply to both domestic and international transactions.
- 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?
The first piece of advice would be to search and use modern local legal advice given that certain sectors and activities have very complex and rather specialised regulations, and so a good law firm could make the difference.
Secondly, it is very important to have a clear arbitration clause in the agreement and even more important, to be very careful with technical pre-arrangements to settle the dispute as they might affect the validity of the arbitral holding. A favorable legal framework for international arbitration exists in Colombia.
Finally, from a structuring point of view, it is important to explore tax efficient structures depending on the kind of deal. Parties to a transaction should explore the existing choices to benefit from tax incentives or to optimise taxes. For instance, sellers must seek to minimise tax impacts while buyers should take advantage of the amortisation of good will, which for the case of Colombian jurisdiction may be achieved successfully.
As for pitfalls that should be avoided, we consider that simultaneous negotiation in two languages (English/Spanish) is not advisable. The fact of having double documentation (usually requested by foreign acquirers) may actually become a double-edged sword.
- 14.Have there been changes in the process for how M&A transactions are conducted in your jurisdiction?
No; during past years the processes have started to show certain uniformity. As more clients demand for certain ‘international standards’, the only option is to keep up with these practice standards transplanted from Anglo-Saxon firms. Also, we have seen that, depending on the type of deal, its structuring and negotiation may become very sophisticated, as happens in foreign jurisdictions.
Nonetheless, there’s a probability that later in 2012 the government presents a tax reform that could impact the way in which M&A transactions are conducted at present. In fact, currently mergers and spin-offs are “tax-free” or “tax-neutral” transactions since tax regulations consider them as simple corporate reorganizations that do not involve indirect transfer of assets. However, as the corporate environment continues to sophisticate, the government could likely include these M&A deals as taxable events considering that most of them usually include indirect transfers. If this reform is to happen, the way of conducting M&A deals in Colombia may be reshaped to a certain extent.
- 15.Have there been any significant developments in the regulatory area – your country’s security exchange commission, antitrust regulators, etc?
One significant development in the regulatory framework has to do with Resolution 46325 of 2010, a recent regulation issued by the national antitrust authority (Superintendency of Industry and Commerce – SIC) per which SIC reconsiders its doctrine vis a vis non-compete agreements, establishing that such provisions may not be considered prima-facie anticompetitive in M&A deals. This innovative regulation indicates that SIC has started to follow the North American and European tendencies in antitrust matters, which will surely impact positively some M&A deals from now on.
Also, in the field of antitrust law, SIC recently hardened the threshold requirements that oblige a proposed M&A transaction to file a pre-evaluation for clearance of this authority: by means of Resolution 75837 of 26 December 2011, SIC lowered thresholds from 150,000 minimum monthly legal wages (MMLW) (approx. US$47,455,000) to 100,000 MMLW (approx. US$31,637,000) for joint annual operational income or joint total assets of any of the companies involved in the transaction.
Another development in the regulatory area is the reform introduced to foreign exchange regulations by Resolution No. 5 of 28 October 2011, issued by the Colombian Central Bank, per which it is now allowed that Colombian companies validly obtain loans from foreign entities, including intercompany loans. This new regulation will be relevant for M&A transactions in which Colombian residents leverage an acquisition with funding from their foreign affiliates.
Also, there now exists a recent regulatory doctrine issued by the Superintendency of Finance (SFC), according to which said entity is entitled to review all acquisitions of Colombian financial institutions, even if the change in the shareholding structure is indirect. Let us recall that, pursuant to article 53 and 88 of the Financial System Statute, the SFC is only entitled to review direct acquisitions of 10 per cent or more of the company’s stake. However, in the case of the resale of 51 per cent of Colpatria Bank to ScotiaBank, even though the transfer was done at the level of the indirect shareholders, the SFC considered that it was also entitled to review this type of indirect transfer of stakes in financial institutions.
- 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?
Other than what has been stated above, we have not seen recent regulatory developments involving national authorities that review M&A deals.
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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