Claudio Rodríguez-Galán
Head of Energy Practice

Mergers and Acquisitions on the Horizon

Wed, 02/24/2016 - 15:35

Established in 1997, Ramírez, Gutiérrez-Azpe, RodríguezRivero y Hurtado (RGRH) recently adopted a new corporate name as a result of several changes, but clients can rest assured that the expertise remains the same. RGRH has a strong M&A practice that works alongside the firm’s core business areas, which include energy, competition, and taxes. Claudio Rodríguez-Galán joined the firm as Head of the Energy Practice three years ago, and his experience allows him to shed some light on the way partnerships and M&As might play out in Mexico’s energy industry.

For Rodríguez-Galán the fact that CFE might enter agreements under civil and commercial law is an outstanding feature because it means that, in addition to entering new types of agreements, CFE can grant many guarantees that it was not allowed to give before. In his view, this trait will definitely have an impact on PPPs with international players. According to Rodríguez-Galán, the way CFE interacts with the private sector will depend on the company’s corporate strategy. One main difference he stresses is that now CFE has a board of directors that can decide on the path the company will take. An example of this trend is the creation of CFE International. In his opinion, CFE has a duty to optimize its services in order to function well under the new legislation. “CFE can do many things to attract potential partners or to fill the gaps it still has in order to compete in the new market. The energy company is currently focusing on gas distribution, an area where it has no experience, thus creating plenty of opportunities. I also see a lot of opportunities for PPPs in geothermal because CFE has the most experience in operating geothermal fields in Mexico.”

In Rodríguez-Galán’s view, the new legislation will present Mexico in an extremely attractive light, and will bring the benefit of international players with the experience in energy trading that is currently lacking. Another phenomenon that he predicts is that companies will transform from firms dedicated to gas or wind exclusively into full energy companies, as is already occurring with CFE. “Electricidade de Portugal expanded its activities and is now known as Energias de Portugal. The fact that companies are changing their names demonstrates they are committing to diversifying their operations,” he illustrates.

According to Rodríguez-Galán, companies will be likely to adopt one of two strategies to successfully thrive in Mexico. Firstly, they can transform into vertically integrated companies in order to fit into the market. The other option is to enter alliances, M&As, and partnerships to gain the experience or financing capabilities they would otherwise lack. This is the reason why firms like RGRH are foreseeing mergers and alliances in the energy market to be a strong trend. “The mergers and PPP schemes will be interesting in this market because previously, there were few major players, such as Iberdrola and EDF, but now there will be a flood of investment from companies who are already interested in this market. I believe the opportunities are such that even SMEs from around the world will make attempts at entering the Mexican market through partnerships and M&As,” Rodríguez-Galán shares.

The drivers for M&As, according to Rodríguez-Galán, can be financial, experienced-based, or even the national content requirements. “Perhaps an EPC company, a pipeline developer, and a company with experience in transmission might be interested in forming a new enterprise to create a gas-fired efficient project and sell that power in the market. In order to do so and build the necessary infrastructure, a considerable financial capability is needed, but companies will need to make many guarantees. With these elements in mind, I see a growing importance in alliances with experienced Mexican companies.”

The M&A activity Rodríguez-Galán expects to see the most in the renewables sector is in the solar segment. However, these will depend on the new rules for renewables and on the industry’s ability to overcome existing obstacles, such as the ones the solar energy community has experienced so far. “Since the rulings make solar developments more attractive, I expect more M&A transactions to happen within this segment. The wind sector is already seeing a wave of mergers and projects, like the case of Zuma Energía acquiring PE Ingenio,” he points out. In RodríguezGalán’s view, there are many serious solar energy companies in Mexico, but they are spread out across the whole national territory. “Four years ago, everyone was developing projects in Sonora, yet there are still no active projects in the state. If the solar market manages to finally succeed, Sonora might have a second chance of becoming the solar Oaxaca.”