Latin America: Bankers caught in valuation divide
With sellers and buyers in LatAm equity issuance and M&A finding it difficult to agree on valuations, banks are hard pressed to get deals away.
Latin American bankers face a seemingly intractable problem. Valuation expectations from sellers and buyers vary widely, and the gaps are getting wider. An ECM banker told Euromoney that, if both sides’ valuation expectations were barges, it would feel, as an underwriter, like having a foot in both vessels while they slowly drift farther apart. "It feels increasingly uncomfortable, and it’s increasingly unsustainable to stop from falling into the water in between the two."
The impact on deal activity in Brazil is clear: only those companies that have to come to market are coming. Mexico is seeing some deal activity, the latest – Fibra Shop – coming at the bottom of the range. Prospects are brighter in Colombia and Peru, but the pipeline is small.
M&A is suffering from the same problem. Multiples demanded by sellers are prohibitive to many buyers. A recent report from MergerMarket says that in the first six months of 2013 deal value in the region was almost cut in half from the first half of 2012 – falling to $36.6 billion from $68.7 billion. Brazil is again the biggest culprit: traditionally the largest M&A market in Latin America, the aggregate deal value of $30.7 billion in the first half of 2012 fell to $19 billion in the first half of this year. But even Mexico declined by 70%, from $23.3 billion to $7 billion.
Bankers report that buyers are reluctant to pay traditional ‘EM multiples’, especially at a point in the world economy when the differentiation in growth prospects is narrowing. Sellers don’t want to sell at what they believe – and hope – is a cyclical low.
It’s not clear what will drive the valuations from both sides into a range where deal activity can begin to grow – or how long this will take. Buyers and sellers can – in the main – wait it out, so the problem is really only acute for the banks, which have invested heavily in the region just as fee generation from these areas has slowed. The growth countries of Latin America are well banked, some say overbanked. Expect to see more innovative – some say desperate – structures in ECM and M&A transactions from the region as banks scrabble to make deals work and avoid being the banks that are forced to throw some of their team overboard.