It is worth pointing out that in the last decade, Argentina was one of the countries with the highest growth rates in Latin America (LATAM), with an average GDP growth rate of approximately 5.4% (figure 1). However, during the past two years, emerging market economic growth has slipped to a slower pace.
In light of the current economic environment, the October 2015 Presidential Election is generating strong expectations of change, and investors are already analysing entering the market through investments in private companies and anticipating an upcoming new macroeconomic scenario. This potential investment flow generates interesting opportunities in Argentina’s M&A market.
M&A activity in Argentina – SME focus
Historically, due to the size of their economies, Argentina along with Brazil, Mexico and Chile, have been traditional M&A destinations in LATAM. In recent years however, Argentina has been gradually losing its leadership position, as structural and political issues have negatively influenced the M&A activity in the country (figure 2).
Consequently, buyers of Argentine companies have mainly been local players with a more comprehensive understanding of the current political and economic environment. With respect to foreign investors, Asia (leaded by China) and Europe have been the main players in the M&A market. In the case of Chinese companies, investments taken place since 2010 represent a small amount of deals, although of an important size value.
With regard to deal size, 80% of transactions in the last eight years have been under USD 100 million.
The industries which have driven the most activity in M&A in Argentina have been energy, financial services and mining; energy accounting for more than half of the operated volume. The largest deals have been in the energy and financial services industries.
Opportunity in the shale oil & gas industry
Argentina’s oil & gas industry has been booming in the last two years, mainly driven by the potential of the shale oil & gas sector and the accelerating activity of the national oil & gas company YPF. According to data from the U.S. Energy Information Administration, Argentina’s shale oil & gas reserves are the fourth and second largest in the world respectively.
Since 2012 the rig count has increased more than 50% as international players such as Chevron, Exxon Mobil, China National Offshore Oil Corporation (CNOOC) have started to position themselves in the industry. Experts indicate that the industry is expected to increase more than tenfold in size during the next decade, becoming the main growth driver of Argentina’s economy.
A sub-sector that is expected to follow the growth of the shale oil & gas industry is oil field services, where local companies have been showing strong growth and there is a lot of opportunity for expansion and investments.
The recent fall in crude oil prices threatens to slow investments in this industry. However, it is important to point out that the shale industry is a medium to long-term project which is still in an initial phase of development, and one in which companies will look to maintain the level of investments.
Other industries with potential
Other sectors considered to have great potential in the upcoming years are:
- Agribusiness: Argentina is the third soya bean exporter in the world, and one of the lowest-cost agricultural commodity-producing regions, with a well-developed supply chain and service providers.
- Financial services: Extended banking service levels remain low compared to leading economies and as a result there is a lot of room for growth in the banking segment. Additionally, as investment flows increase in the short and medium term, there will be opportunities to develop the investment banking sector.
- Mining: Mining has recently developed in Argentina, experimenting remarkable growth during the last decade. Argentina ranks in sixth place in relation to countries with the most mining resources in the world with a suitable legal framework. There are attractive projects in the gold, silver, copper and lithium segments.
- Infrastructure: Investments in this sector have been growing and have become a state policy in areas such as railway transport, airports, highways, communications, real estate and renewable energy.
The value of Argentine companies – An opportunity for private equity firms
Another aspect to consider is that Argentine companies are valued up to 50% lower than those in other countries in LATAM. This opens great opportunities for M&A operations for companies and investors looking to enter strategic industries.
Additionally, many companies need capital to grow, which is ideal for financial investors. Partnering with a private equity firm can boost growth and generate extraordinary value for local companies, who also face professional challenges.
Capital Markets with Growth Potential
At a regional and international level, Argentina is still a small market based on capitalisation and negotiated volume, showing great potential for development. Analysing the market capitalisation indicator (also known as the “Buffet Indicator” – long term valuation metric), the United States is at a level above 150% (which is historically high), and Argentina is below 15%, with a lot of undervalued companies and assets. There is an opportunity for companies and investors to capture the upside that awaits the Argentinean capital markets. Additionally, private equity firms could benefit from the capital market development, allowing a strong exit strategy to their investments through the local market.
- The Presidential Elections of October 2015 have generated strong expectations of change, and some investors have started developing market entry strategies.
- Argentine companies and assets are currently undervalued, which creates opportunities for strategic investors looking to enter the market.
- The development of shale oil & gas is a mid / long-term project which is still in an early stage. Despite the international context, players in this sector will continue investing, given that it has an enormous growth potential.
- The energy and agribusiness sectors will be the key drivers of the next growth stage of the country.
In conclusion, those investors who are able to anticipate the mentioned change in expectations, will achieve a significant competitive advantage, in what could be an inflection point towards Argentina’s next growth phase.
FIRST Corporate Finance Advisors is a team of 70 professionals with more than 30 years of experience in the corporate finance market, where it has achieved comprehensive networking and deep commercial bonds. Among our accomplishments we can highlight:
- Participation in more than 60 M&A transactions.
- We have taken more than 95 companies to the capital market.
- More than 500 valuations undertaken in the region during the last 10 years.
- We have structured over 1,200 series of trust securities worth more than US$ 15,000 million.
- We acted as financial advisors in the first transaction rated as Investment Grade International in Latin America (S&P BBB-).