Vicente Corta
Partner
White & Case
/
View from the Top

PPP Framework Theoretical, Ambitious, Costly

Tue, 11/01/2016 - 16:16

Q: How do global M&A trends impact Mexico and its local infrastructure market?

A: The global M&A market has changed in the wake of the 2008 economic recession. The first impact relates to the financial condition of companies and access to financing and the other to the availability of bargains in the market. For the latter, there was an increase in cash-rich companies that had the ability to buy other enterprises. The only significant factor in such cases was whether the targets were willing to sell at the prevailing market prices. With the market having partially recovered, we see more companies able to leverage themselves, access more favorable financing and be more proactive in terms of strategy.

White & Case has observed a wave of investors asking for advice on how, when and at which scale to invest in Mexico. While new investors to the market remain at times hesitant, seasoned players with a lengthy track record are more than willing to invest. Another variable to factor into this equation is private equity, as an increasing number of funds are looking to invest in medium to large-sized companies in Mexico. As a result, antitrust has gained momentum, with the approval of a new antitrust law and the forming of the Coordinator of Foreign Trade Promotion (COFOCE), which promotes fair market participation by ensuring that companies do not engage in hostile practices. When new companies want to enter the market, or existing ones want to grow, they now have to face the challenges of antitrust.

Q: What is affecting the local M&A market and what can be done to create an environment that is conducive to more PPPs?

A: One factor is the impact the drop in oil prices has had on the federal government’s budget. The ensuing effect is that companies dependent on public resources, such as suppliers of the government or of PEMEX and CFE, will likely face difficulties. These suppliers might fall prey to competitors looking for increased consolidation. Sectors like energy and power are highly attractive. In addition, new financial instruments such as Fibra E are being heavily promoted by the government, so hedge funds and sponsors, will be going to the market with this kind of structure. The PPP framework that has been put into place is extremely theoretical and ambitious. It contains an unnecessary amount of red tape, as well as countless studies and analyses. Consequently, planning a project under the PPP model is costly, in particular when there is no clear mandate or agreed project. The experience of some companies has been discouraging due to the unfortunate bureaucracy that can be observed at both federal and state levels.

Q: How do you benchmark Mexico’s capital markets for equity and debt?

A: The pending assignment in Mexico concerns equity because despite a number of improvements over the past few years, the area remains underdeveloped. White & Case has a strong capital market division both in terms of equity and debt. We discuss with our clients, who have the size and characteristics for an IPO, whether such a move would be convenient for them at a certain point in time or not. For instance, White & Case was involved in the IPO for Aeroméxico. In the infrastructure sector, we participated with BlackRock and First Reserve, and we facilitated the Los Ramones deal with PEMEX.

Q: What areas offer the best potential for development?

A: We have been doing some work for state and municipal governments, ranging from adjusting their laws on PPPs to actually developing projects, such as toll roads, hospitals, educational facilities and prisons. The latter is an area of significant potential. All levels of the government have an interest in developing more projects, because most prisons are overcrowded. From an investor perspective, these are projects that provide a high degree of certainty because of how they are structured. Hence they attract a lot of investors and very competitive bids. White & Case has been successful at forecasting so today we have a strong energy practice. We have been able to meet the needs of states and municipalities and we have a strong capital market practice. We firmly believe that it is ineffective to open divisions for too many areas, so we outsource certain work