Paraguay – South
America
1. Has the level of M&A activity increased,
slowed, or remained flat in 2012 as compared to 2011, and what are conditions
like today? In general terms, what level of activity is foreseen for 2013?
Paraguay has remained
largely unscathed by the financial and economic crisis of the last few years.
This has allowed investment in the form of direct acquisitions and joint
ventures (typically 50/50) to continue to flow. Considering the developing
nature of its economy, M&A operations have been essentially strategic in
nature, in key sectors such as agribusiness, banking/finance and
pharmaceuticals, for example.
In 2012, we have seen
the closing of major M&A transactions in the pharmaceutical, banking and agribusiness
sectors. The investors have been typically major foreign players in their
respective sectors, with local sellers.
Despite the country’s
political challenges (2013 is an election year), we estimate that key private
sector segments will continue to grow, including by acquisitions. As the
country’s macroeconomic variables continue the pace of the last 10 years
(single-digit inflation, fiscal responsibility, low level of foreign debt,
extremely strong hard currency reserves (more than twice the amount of foreign
debt), market conditions will remain positive for M&A and other forms of
investment.
2.Which industries do you expect will see the
most M&A activity in 2013?
We expect to see
M&A activity, either through share or asset deals or through joint
ventures, mainly in agribusiness and in real estate related sectors (hotels,
shopping centers and estates). Paraguay’s agribusiness is one of the most
technologically developed and fastest growing in the world, with the top
international firms having a very strong presence (ADM, Noble, Cargill, Louis
Dreyfuss, etc). There are opportunities in this sector for both real estate and
asset acquisitions, and from what we have seen in 2012 and the growth
expectations in 2013,we expect more M&A transaction in this sector.
3. What types of deals do you expect to see?
Based on recent
experience, we would expect to see whole takeovers and relevant stake
acquisitions (30 per cent to 70 per cent) in the financial sector.
In the agribusiness
sector we expect to see straight asset acquisitions or joint ventures. The
latter are implemented through joint venture agreements combined with medium –
long term financing with producers, silos, etc, on the one hand, and relevant
international players (like those mentioned above) on the other.
Recently as well we
have received a mandate for what will be the first full private equity fund in
Paraguay. The fund’s investments will be in commercial and micro finance,
infrastructure and agribusiness.
Finally,
infrastructure is expected to be very relevant as the growth of the country has
made infrastructure investment by the Government and the private sector very
necessary.
4.Discuss the level of M&A activity you
have seen over 2012 and expect to see in 2013 of: (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.
Due to the excellent
economic situation of the country, we expect to continue seeing strong levels
of investment both from local and foreign players. Regarding M&A
transactions in particular, we have seen the largest acquisitions being done
mainly from European jurisdictions (Spain and France) as well as from Latin
America (mainly Brazil, but also Uruguay and Argentina). Considering the growth
in other South American economies, we expect to see further investments from
Colombia and a presence from Peru.
Taking the precedents
into consideration, we expect continued investment from companies in these
jurisdictions (mainly from South America, but also from Spain) as acquirers.
Based on our experience, the types of deals expected are whole takeovers and
50/50 joint ventures.
Outside the financial
sector, local players have yet to tread more steadily in the acquisition of
companies. There are purchases of foreign subsidiaries and of other local
companies from time to time (share deals), but asset deals are somehow more
limited in that there is a specific law with cumbersome requirements regulating
transfer of going concerns.
5.What is the level of private equity activity?
Are domestic or international funds involved? What kinds of deals are they
doing?
As mentioned above,
recently as well we have received a mandate for what will be the first full
private equity fund in Paraguay. The fund’s investments will be in commercial
and micro finance, infrastructure and agribusiness. Considering that the local
capital markets are essentially debt based and the public equity offering
through listings is limited mainly to preferred stock, the participation of
private equity in the M&A market has so far been non-existent. Paraguay is
in this sense a net receiver of investment, although a consequence of this fund
will likely be participation by local investors in this type of vehicle.
6.Is acquisition financing available for deals?
For strategic buyers? For private equity buyers? From domestic or international
sources? What amount of debt equity leverage are you seeing in private equity
transactions?
As acquisitions in the
Paraguayan market are of a strategic nature (ie, they are very long term
investments, not made with the expectation of a listing or secondary buy-out
down the road in a few years), the acquirers, especially foreign ones,
typically fund the acquisitions themselves or obtain financing in their own
jurisdiction.
That said, again due
to the extraordinary growth of the Paraguayan economy and the excellent
performance and supervision of the banking/financial sector, credit for
business is readily available, including to finance growth through
acquisitions. In this sense, local corporations have since 2011 successfully
issued private bond offering under Rule 144 and Reg S (including the largest
ones advised by our Firm). We expect to see a lot of this type of issues going
forward, signaling a new source of financing.
7.How open is your country to investments and
acquisitions by foreign buyers? Is there a level playing field when foreign and
domestic bidders compete to buy the same domestic target company?
Paraguay has a very
transparent and open economy. In the banking and financial sector, the Central
Bank is an independent and very efficient supervisor which ensures that M&A
transactions involving financial institutions comply with the high standards
required to operate in the country; there is no difference between foreign or
local participants. In other sectors of the economy (unregulated) the
participation of local and foreign investors is subject to the same standards
and obligations. It is advisable for foreign investors to retain skilled and
knowledgeable advisors to take advantage of all the opportunities and
protection available in in the country, in order to have a successful M&A
experience.
8.Do you expect more M&A activity involving
financially troubled companies?
As Paraguay has
largely avoided the financial crisis of the past few years, there has not been
a wave of distressed M&A deals, and we expect this to continue to be the
case. However, there is a special procedure for financial entities in which we
have participated, and which sets the benchmark for this type of transaction,
done under the supervision and mandate of the Central Bank of Paraguay. In
other sectors of the economy, there is no specific regulation other than the
bankruptcy law to consider; in this respect, reorganisation or bankruptcy
rather than M&A are the typical alternatives for financially troubled
companies.
9.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?
Paraguayan bankruptcy
law certainly permits the reorganisation of the debtor as a going concern, and
the acquisition of the entity out of bankruptcy. This procedure is not
specifically foreseen in the law, yet it is certainly an alternative that may
be approved within the insolvency procedure in settlement with creditors (with
the legally required minimum approvals and other legal formalities). Under
Paraguayan law, there are two alternative solutions in a bankruptcy procedure.
The first one is reaching a settlement between creditors and debtor, the second
one is liquidation of the debtor company. This settlement would need the
approval of the bankruptcy judge to be valid. The procedure would imply the
restructuring of the company’s debt in bankruptcy, during the settlement
process. The proposed debt restructuring would then be voted by the debtor’s
creditors and approved by the bankruptcy judge.
The actual sale of the
restructured company would proceed after bankruptcy has been exited and would
be done within the scope of the Civil Code.
10.More generally has there been any increase
in hostile takeovers and shareholder activism? What defences and responses are
target companies using?
The Paraguayan capital
markets are essentially focused on debt issues. The listing of stock is
limited, with the exception of preferred shares. For this reason, our market
does not present issues of corporate law related to hostile takeovers and
shareholder activism. All transactions are private and of a voluntary nature.
No one can be “squeezed out”, although there is a right for minority
shareholders to be bought out in certain circumstances.
11.Have directors, management and controlling
shareholders changed how they conduct themselves in M&A deals? What kind of
fiduciary duties do directors, management and controlling shareholders have
under the laws of your jurisdiction? From your experience, are directors,
management and controlling shareholders more diligent today in their review of
M&A transactions and other matters?
As foreign investment
has increased in the past few years in the form of acquisitions, we have
noticed a progressive sophistication in directors of mid to large sized
companies in our market. This includes directors of both local and foreign
entities. Directors increasingly rely on precise advice from their counsel in
all steps of the acquisition process in order to ensure that they comply with
their duties to their company and shareholders. This is also seen in
representatives of foreign acquirers, where there is a heavy reliance on their
local counsel to help them bridge the cultural gap in undertaking the transaction
in our jurisdiction.
Concern today for
directors lies mainly with dealing correctly with regulatory supervision in
those deals where there is such a presence. As it happens, several of the main
deals in the past few years have been in the banking and financial sector, a
sector in which Paraguay is regulated. The Central Bank of Paraguay is a very
efficient, independent, transparent and sophisticated regulator, so deals in
this sector are very well scrutinised. This process implies a very active participation
by directors and their advisers in explaining the transaction, its causes,
justification and potential effects in the market. It is of great concern
therefore for directors to avoid running foul of both law and regulation, and
take great care in receiving complete explanations on what is expected of them
and how they must act. Fiduciary duties obligate directors to be well informed
of the transaction to be undertaken, to avoid related party transactions or
disclose them, and to amply document their decisions in order to be fully
covered in the event of future judicial scrutiny.
12. Should directors, management and
controlling shareholders be more concerned today about negative publicity,
shareholder criticism, regulatory pressure and liability from potential
litigation?
Directors and
shareholders are subject to public scrutiny in those areas of investment which
have a socially sensitive aspect, like the sale of an industry which is the
mainstay of a community, or the investment or transaction involving
environmental issues (like the envisages USD 4 billion investment by Rio Tinto
Alcan). This however is not a general rule, it only happens as mentioned in
socially or environment sensitive transactions.
13. 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?
As in other
jurisdictions in the world, Paraguay has also adapted to the Anglo-Saxon
transactional model, with the adaptation to the size and sophistication of
transactions done locally. Share purchase agreements, asset purchase agreements
and joint venture agreements largely follow the schemes of their Anglo-Saxon
counterparts. M&A transactions with a foreign element (typically a foreign
purchaser) in all events follow this international pattern of agreements. For
local deals, it largely depends on the size of the transaction; transactions of
a certain amount (for example US$5 million upwards) will normally involve more
experienced counsel and therefore agreements which follow the international
style.
That said, in our
experience we have been realistic in “pruning” or adapting the international
agreements to correctly address the business reality of our economy and market
(“tropicalization”). There is no virtue in necessarily maintaining language and
stipulations which are not of application or relevance locally.
14. 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 and main
piece of advice that we would give to a foreign investor in Paraguay would be
to retain trustworthy and reliable local counsel which meets the following two
requirements: strong international track record; and very strong local base and
presence. A local firm should provide the foreign investor with the comfort and
ease to bridge the cultural gap, provide sophisticated advice and navigate the
local scene successfully. The flip side of this coin is omitting the necessary
research to select adequate counsel. The wrong type of counsel can in the best
case fail to grasp the expectations of the foreign investor and in the worst
case cause material and reputational damage to the investor.
The second piece of
advice would be to negotiate and obtain arbitration as a means of dispute
resolution. Paraguay is party to several treaties which recognise arbitration
as a valid and binding dispute resolution method, duly approved and
incorporated into our legal system, including intra-Mercosur treaties).
Additionally, the arbitration forum need not necessarily be international;
local arbitration is quite satisfactory. This is in order to avoid, if it comes
to litigation, the local courts, dealing with which can be a very unpredictable
and time consuming exercise.
The last piece of
advice concerns the country itself. Paraguay is a country with excellent
opportunities for investments through M&A and other forms. We recommend
foreign investors to approach with an understanding of the extraordinary growth
opportunities in a market where the private sector matches the level of
preparation and effort of developed markets and where the public sector is
making serious efforts in making the economy and local markets attractive to
the world. We believe that there is a great business environment in a market
where there is reasonably inexpensive, young and prepared labour force, a very
low tax pressure (10 per cent on average as a maximum) and a very strong and
well regulated financial/banking system which provides credit, combined with
access to local and foreign capital debt markets. Finally, it should also be
noted that Paraguay is party to several investment protection treaties, both by
itself and as a member of Mercosur (including with Germany, Belgium,Spain,
Great Britain,France, Netherlands, Corea, the US, Portugal, Netherlands, among
others, and of course with most Latin American jurisdictions).
15. Have there been changes in the process for
how M&A transactions are conducted in your jurisdiction?
Yes, there have been
changes in the way transactions are conducted. International-style agreements
have been incorporated for M&A deals of relevance. The expectation and
demands from foreign investors, along with the foreign training in universities
and international firms of local lawyers (and their subsequent return to our
jurisdiction) have caused a shift in the way deals are conducted. In the end,
grasping the nature of a deal, of the business involved, negotiating, drafting
and closing documents, will depend a lot on the skills of the lawyers involved;
however, there is a new crop of lawyers who understand the demands and
expectations of foreign investors and international counsel. This has resulted
in M&A transactions (as well as financing and capital markets transactions)
having a reasonable and predictable element to the foreign eye.
16. Have there been any significant
developments in the regulatory area – your country’s security exchange
commission, antitrust regulators, etc?
An antitrust bill is
currently under study in Congress. Although all political and economic actors
in general support the bill, there may be debate and eventual delays in its
approval this year. This bill is expected to be approved either this year or
the next.
17. 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?
Paraguay does not have
a central body which regulates fairness in the markets at present. An antitrust
regulation continues to be under study in Congress and would be expected to
pass in the near future, although the vicissitudes of political life preclude
us from providing an estimate of the enactment of this statute.
Currently, deals fall
under regulatory review depending on the business sector where the deal takes
place. Areas such as banking, telecommunications, infrastructure and capital
markets have an essential regulatory component and deals in each of these areas
are subject to review by the corresponding regulatory authority. The banking
and securities regulators are in particular highly competent and sophisticated,
operating with high levels of independence and transparency. They are
constantly innovating and normally remain ahead of the curve in their areas.