The market is long Mexico. During the first three months of this year, the country has led the Latin American pack for share sales and M&A activity. The reasons are to be found in Mexico’s renewed growth prospects. The IMF expects the country to grow by 3.5% this year and next as Mexico’s export-led economy benefits from an increasingly active US economy. According to Dealogic, in 1Q 2013 Mexico has concentrated 35% of all the M&A deals that took place in the Latin American region – leaving behind Brazil with 25% of deal volume.
Source: Dealogic & Financial Times.
When I learned about the Dealogic data, I started looking for US-listed Mexican companies that could be M&A targets going forward. The companies I found as possible targets were: Grupo Televisa SAB (ADR) (NYSE:TV) Grupo Aeroportuario del Sureste (ADR) (NYSE:ASR), Grupo Televisa SAB (ADR) (NYSE:TV) and WAL-MART DE MEXICO V (FRA:4GN). In the following paragraphs I will try to see if these companies could really represent good targets going forward.
Grupo Aeroportuario del Sureste (ADR) (NYSE:ASR) is a Mexican airport operator with concessions to operate, maintain and develop most airports in the southeast of Mexico. The company is growing its top line relatively (to its industry) fast. In 2013, revenues are expected to grow by 8% year over year, and the company is always increasing its profitability levels. I am sure there are many private equity (PE) groups that would be willing to take Grupo Aeroportuario del Sureste (ADR) (NYSE:ASR) private. Airport operators produce steady revenues and stable earnings streams. They are perfect candidates to be leveraged up (Grupo Aeroportuario del Sureste (ADR) (NYSE:ASR) should end 2013 with $2 billion negative net debt). That said, the current valuation seems already overly rich at 2013 16x EV/EBITDA and 29x P/E. Great candidate for a levered transaction, but I don’t think there is much room for further equity appreciation.
In the case of WAL-MART DE MEXICO V (FRA:4GN), which is the leader in Food Retailing in Mexico with a 50% market share, I would not expect some PE fund to buy the company out. I would expect Wal-Mart Stores (owner of 68.5% of the company’s shares) to take it private. Mexico has a fast growing middle class, which is the key for Wal-Mart’s success. The company is growing its top line at a 10% YoY peace with a return on invested capital (ROIC) well above 20% (a ROIC of 22.5% is expected for 2013). Selling for 2013 x14 EV/EBITDA and 25x P/E, the company is an attractive target for its main shareholder.
The valuation argument for Latin American equities is getting less and less attractive. Companies are doing great but valuations are doing still better. Multiples are about 25% higher YoY, and a higher entry point always means higher risk. I am sure Mexico will continue leading the M&A landscape in Latin America this year, but I am also sure premiums are poised to shrink. Out of the three great companies mentioned above I would go for Grupo Televisa SAB (ADR) (NYSE:TV) purely for valuation reasons. After all and as I usually say, “Price is What you Give and Value is What you Get”.
The article Mexican M&A Candidates originally appeared on Fool.com is written by Federico Zaldua.
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