• Mar 23, 2017
  • by Jorge Inchauste | José Bernal

 

1. Overview of the market and the country

In the last couple of years, the Bolivian mergers and acquisitions market, which for a considerable amount of time was limited to very few deals principally structured abroad with effects in the country, has seen some significant developments that have revived the market and made the M&A practice relevant again.

Authorities and legislation

The legislation governing mergers is dispersed.  In general terms, mergers of Bolivian corporations are mainly regulated by the Bolivian Commercial Code, which requires that Bolivian companies involved in a merger give notice to their creditors and shareholders, and allows them to object to the merger process.

In the case of Bolivian companies that have outstanding instruments issued in public securities markets, they must inform the markets and the Supervisory Authority of the Financial System (ASFI) of any relevant change regarding the company, including mergers, acquisitions and spin-offs.

There are also a number of specific regulations applicable to different regulated industries, as merger control is imposed on certain sectors and industries in Bolivia.  As a result, regulations that pertain to mergers can be found in the Electricity Law, the Telecommunications Law, the Hydrocarbons Law, the Banks and Financial Institutions Law, the Securities Law and the Insurance Law.  These specific regulations are administered and enforced by the supervisory and control authorities for each sector.  Therefore, any merger within the electricity industry in Bolivia, for example, will have to be notified and sometimes approved by the Supervisory and Control Authority for Electricity prior to the merger taking place; to the extent the operator, subject to the merger, has instruments issued and traded in public markets, then it must also inform the Supervisory Authority of the Financial System (ASFI).

Foreign exchange rules and controls in Bolivia are minimal.  Currently there are taxes on, but no restrictions to, the entry or exit of capital, or the remittal of dividends, interests and royalties for the transfer of technology or other commercial concepts.  Foreign investments and loans into Bolivia, as well as payments to foreign investors, must be reported to the Bolivian Central Bank, but there are no prior approvals or restrictions to foreign investment. 

In addition, there is freedom to hold and deal in foreign currencies, there are close-to-market exchange rates that can be easily and safely accessed through regulated exchange, and the law allows the remittal abroad of foreign currency with few restrictions.  However, there is a growing public policy towards the “Bolivianization” of transactions in Bolivia.  As a result, there is a Financial Transaction Tax on any operation with foreign currency involving Bolivian financial institutions.  This tax has recently been raised to 0.20% from 0.15%, and it is expected to be increased again in the next years.  In addition, there is a tax on the exchange of foreign currency, and there is an obligation to inform of the origin and destination of currency or account movements that exceed US$ 10,000.

Principal mechanics of acquisition

As to the principal mechanics of an acquisition at present, it is important to bear in mind that the number of publicly traded firms in Bolivia is minimal.  Most companies are either limited liability partnerships or stock corporations, and are closely held.  Furthermore, the structure of most corporations in Bolivia generally involves a principal who owns a majority of the corporation’s stock (unlike other countries in the world where dispersed ownership is common).  For the purposes of this analysis, we are going to refer to the Bolivian corporation structure as a ‘concentrated ownership’ structure.  In this structure, the dominant shareholder usually owns a sufficient amount of shares to allow him or her to appoint all directors of the board, or at least a majority of them.  As a result, the possibility of hostile acquisitions of companies is minimal (or, at least, different in its essence) because acquisitions must generally be consented to and recommended by the majority shareholder of the target, and the concentrated structure leaves little room for hostile takeover attempts through proxy fights or tender offers.

The transfer of stock or share participations in corporations is generally unrestricted and straightforward, requiring only registration in the company books with no prior filing.  Transfer of participation in limited liability partnerships is more cumbersome, as it requires that documentation evidencing the existence and legal representation of the acquirer be legalised in Bolivia and thereafter filed before the Registry of Commerce.

Mergers and acquisitions between large international companies that hold assets in Bolivia generally do not trigger regulatory scrutiny, unless they take place in a regulated sector.  As a result – and unless the acquisition involves the merger of two Bolivian companies – most acquisitions can proceed without regulatory filings and approvals.  In many cases, an acquisition is completed by acquiring interests in holding companies that may be several levels above the target with assets in Bolivia.  This form of acquisition may be rapid and outside the scrutiny of certain regulators.

Further, joint ventures that do not result in a merger or change of ownership of the relevant regulated company typically do not fall under the scrutiny of merger control.  However, joint ventures that involve regulated companies are subject to some review and could be opposed by the relevant regulator to the extent that they could be considered contrary to antitrust or competition policies.

Asset purchase deals, as opposite to stock purchase deals, are also common.  This method avoids certain tax and labour liabilities in the underlying target.  However, this ‘cherry picking’ – which requires adequate identification of the productive assets that are of interest – may take more time than a stock purchase and may involve a tax impact on the value of the assets being acquired.

Overview of market and key sectors

As mentioned before, the Bolivian M&A market has revived in the last few years.  Bolivia is still a small market in comparison to most of its neighbours in Latin America, but the growth perspectives are encouraging.

So, why has the level of activity resurged during the last years?  It is hard to ascribe the increased level of activity to a single factor.  In all likelihood, it is the result of a series of developments and events in the economic, legal and political arenas.  Among these several factors, one should include the continuous and sustained growth of Bolivian GDP during the last years, the enactment of a new investment promotion law, and the fast-paced development of the city of Santa Cruz.  All these points are further developed below in this report.

It is also hard to point out specific key sectors of development.  M&A transactions have ranged from mining companies to hospitality to telecoms and media.  Nevertheless, it may be possible to single out the banking industry as a key sector for recent M&A activity, as this activity has surged from a specific event, the economic distress of certain smaller financial institutions called “mutuales” in Bolivia.  This is also covered below.

Most M&A activity in Bolivia takes place in private transactions; public M&A transactions (i.e. through the Bolivian Stock Market) are rare, but there are some notable exceptions.  In December of 2014, CIMSA (part of the Doria Medina family group) sold its controlling shares in the largest Bolivian cement company, Sociedad Boliviana de Cemento (SOBOCE), for US$ 300m, and listed the sale on the Bolivian Stock Exchange.  The stock was acquired by the Peruvian company “Consorcio Cementero del Sur”, and this transaction is recorded as the largest in the history of the Bolivian Stock Exchange. 

2. Significant deals and highlights

One of the most significant deals took place in the cement industry.  Sociedad Boliviana de Cemento (SOBOCE) is the leading cement company in Bolivia, and one of the largest companies of the country.  Samuel Doria Medina and his family were the controlling shareholders in this company.  At the end of 2014 and beginning of 2015, Doria Medina sold his shares in the company to the Peruvian company “Consorcio Cementero del Sur”, which amounted to around 50% of the market capital of the company.  The remaining shares were the subject of arbitration between Doria Medina, Consorcio Cementero del Sur, and the Mexican company Grupo Cementos de Chihuahua.

This transaction was made through the Bolivian Stock Exchange, and is recorded as the largest in the history of the Bolivian Stock Exchange.

Other important deals took place in the banking sector.  The financial institution “Mutual La Paz” was undergoing economic distress during 2016 and, in May, the Bolivian comptroller of banking institutions (ASFI) intervened the bank, fearing that it would go into bankruptcy.  There was also a general panic of a bank rush, as other financial entities of similar characteristics (mutuales) could also be under risk.  As a result of this, the bank “Mercantil Santa Cruz” bought the client and deposits portfolio of the distressed Mutual La Paz.

In October of 2016, Mercantil Santa Cruz started a merger process with another financial entity, bank “Los Andes ProCredit”.  The combined entities will have close to 20% of market share over the financial industry of Bolivia.  This transaction was approved by the comptroller of financial institutions (ASFI) in December of 2016.

There were also many cases where the M&A activities of foreign giants have had effects on the companies and assets of those companies in Bolivia.  In these cases, the acquisition is completed by acquiring interests in holding companies that may be several levels above the target with assets in Bolivia.  For example, the mergers of American Airlines and US Airways, or the merger of AB InBev and SABMiller, had regulatory repercussions in Bolivia.

3. Key developments

Some important developments in Bolivian legislation have impacted, and will continue to propel changes, in the mergers and acquisitions market during the next couple of years.  At least one of these legislative developments is still at the proposal stage, but it is expected to be enacted during 2017.

Investment promotion law and related norms

The first relevant development in the Bolivian legislation is the approval of a new investment promotion law on April 5, 2014 in order to establish a general legal framework for the promotion of investments in Bolivia.  Up to that point, the framework for investment in Bolivia had been on hold, because the previous investment law of Bolivia, which was enacted in 1990, had been largely made inapplicable by the Bolivian constitution of 2009 and the political reforms of the government of Evo Morales.  So, until 2014, the legal framework applicable to investments in Bolivia was uncertain.

The new law regulates not only foreign investments, but also domestic and public investments.  The law follows the same political and economic principles set out in the Constitution and, as a result, it gives greater importance to Bolivian State participation – particularly with regard to the exploitation of natural resources.  The law focuses on investments that: 1) promote economic and social growth; 2) generate employment; and 3) contribute to the eradication of poverty, and reduce inequality.

There are several sections of the new investment law that are unclear and are far from ideal for increasing the flow of investment to the country (for example, the regulation of international arbitration as a means of solving investment disputes is largely rejected by the law).  Nevertheless, the issuance of the new investment law has provided a certain degree of certainty to the market, which was lacking since the previous law seemed to lose validity in 2009.

The most relevant aspect of the investment promotion law on this subject is that any acquisition or merger that involves a change in control or a foreign direct investment or loan to a Bolivian Company must now be registered before the Bolivian Central Bank.  The Registration before the Bolivian Central Bank involves the periodic filing of certain forms and should be performed after the acquisition or merger has been completed.

Project of a new antitrust law

As of now, there are no regulations in Bolivia applicable to non-regulated industries.  This means that, at this moment, an M&A transaction that does not involve a regulated industry would not have to comply with any particular requirements in order to be completed, in regard to merger control.  However, there is a proposal for a “general” antitrust law, which will develop merger control regulations.  This new law would apply to all non-regulated industries and is currently under consideration by the Bolivian senate.  It is likely that this law will be enacted at some point during this year.

The content of the draft law is, unfortunately, very broad and unspecific.  Most of the relevant sections of the law are reserved to a regulatory supreme decree to be issued later by the executive branch, and which will contain the rules of application of the law.  Therefore, it is not possible at this point to analyse at large the impact that the law may have on mergers.  In any case, it seems obvious that the implementation of the new merger control law will significantly impact the M&A practice, probably impose further requirements for the completion of a merger or acquisition, and even impose restrictions thereon.

Increased level of activity of the regulator

The third novelty is the increased level of activity of the enterprise supervision and regulation entity, Autoridad de Supervisión de Empresas (“AEMP”).  This entity is in charge of regulating Bolivian companies in regard to corporate governance, restructuring, and antitrust.  It is expected that AEMP will become a more active participant and enforcer of corporate governance and merger control regulations in the future (in the same way that it has gradually become a more active participant in the field of antitrust law during the past five years).  Because of its scope of regulatory authority, this entity may play an important role in the Bolivian M&A market in the future.

It is hard to know, however, what is going to be the impact of the increasing level of activity of the regulator in the M&A market.  It is logical to think that the increased level of regulation (by both the new law and the involvement of AEMP) will impose more obligations on the companies, and this could adversely affect the market.  It is also obvious that the increased involvement of the regulator is due to the increased activity of the market, as a reaction to it.  The effects of the involvement of the regulator will be seen in the long-run.

4. The years ahead

There are mixed signals regarding the M&A market for the following years.  M&A thrives in stable and predictable environments.  Although Bolivia has continued to be politically and economically stable and predictable over the past decade, its “socialist” economic orientation has, however, created somewhat of a hostile investment environment for certain industries.  Such is the case with Hydrocarbons (where the State has taken a much larger role) and Mining (where transfers of ownership have been restricted), and which are traditionally the largest productive sectors of the Bolivian Economy.  Notwithstanding the above, certain events and legislative alterations may change this scenario and positively impact the investment market, even in complicated and regulated sectors as those mentioned above.

In general terms, we consider that it is likely that the M&A market will continue to grow and expand in coming years.  It is important to remark that the next presidential elections will take place in 2019, but the political panorama of Bolivia is certainly unclear, as president Evo Morales (currently serving his third term as president) has been denied the possibility of running again for office for a third term.  Yet his political party has publicly announced that it is looking at ways to circumvent the constitutionally imposed restriction and present Mr. Morales for a re-re-election.  So, a certain political friction is to be expected as the 2019 election comes closer.

On the other hand, a change in the government might be beneficial for M&A markets.  The legal and economic panorama of the country under the left-leaning government of Evo Morales is not very favourable to investment and business development.  Over the last decade, Bolivia has undergone a shift in economic orientation that has resulted in the “nationalisation” of over 15 companies since 2006.  The great majority of these “nationalisations” affected former state-owned companies that were privatised during the 1990s as a form of recuperating the companies and assets that originally belonged to the Bolivian State.  In this sense, the new investment promotion law is intended to bring clarity and certainty to the investors and the market, signalling that the nationalisations are over and that the new laws of the country are solid.  It is still unclear whether the markets are going to agree with the signals sent by the Bolivian government, and will increase the flow of capital to the country. 

The economic perspectives of the country also seem uncertain.  The annual growth rate of Bolivian GDP was, for several years, higher than 5%, and it relied heavily on gas and minerals.  The low prices of these commodities have hit the Bolivian economy, and the growth rate of GDP has started to slow down its pace.  Notwithstanding, it continues to be one of the highest in Latin America, at around 4.4% according to official government reports.

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