The nearshoring effect starts to show an M&A impact in Mexico; challenges remain ahead

News Analysis 21 September

The nearshoring effect starts to show an M&A impact in Mexico; challenges remain ahead

  • US escalated tariffs on Chinese goods benefit Mexican companies 
  • Startups to streamline financing and freight forwarding operations 
  • Unfavorable exchange rate and power/water shortage may prevent investments 

The ‘nearshoring effect’ is starting to prove its strength in helping drive M&A deals in Mexico, a trend that will continue increasing in the following months, a few industry sources and M&A advisors told Mergermarket.

Since president Trump’s administration separately set and escalated tariffs on goods imported from China in 2018, advisors were expecting to see many US-based companies undertaking a massive relocation of their factories to Mexico. According to a Morgan Stanley’s report published last June, nearshoring has the potential to boost the growth of Mexican manufacturing exports to the US from the current USD 455bn to an estimated USD 609bn in the next five years.

M&A activity related to nearshoring has just started to show up as this type of transactions take time, Beamonte Investments’ Senior Managing Director Luis Trevino said, adding that he is aware of two transactions of this sort involving private equity firms, which is unusual in the industrial sector.

According to Alejandro Ibarra, investing banking partner at Deloitte, there is not a clear date for an uptick in deals, but the firm estimates they will keep rising, particularly in the middle-market, with average tickets between USD 30m and USD 100m.

While main bidders are still US-based, there is an increasing interest from Chinese companies, as well as from other latitudes like Germany, he said. Sergio Garcia del Bosque, managing director at investment firm Seale & Associates, agreed noting that nearshoring is attracting new investors, and not only the “usual suspects.”

Relevant transactions reported by Mergermarket include the acquisition of Toluca-based leading packaging, display, and commercial printing company Foli de Mexico by its Chinese peer GPA Global last August, and the buy of Hermosillo-based nearshore outsourcing firm Kuadra Support from Tucson-based accounting firm BeachFleischman.

Earlier, in May 2022, Calhoun, Georgia-based global flooring manufacturer Mohawk Industries [NYSE:MHK] acquired Mexican peer Vitromex for USD 293m from Grupo Industrial Saltillo. The same month, COSMOCEL, a Mexico-based company focusing on specialty biostimulants was acquired by Portugal-based bio-solutions company Rovensa.

M&A uptick could also be triggered by the fact that there is a lack of industrial properties in the country, Trevino noted.

According to a past report by this news service in September 2022, FIBRA Mty [BMV:FMTY14], a Mexican real estate investment trust, or Fibra, was planning to launch another follow-on offering in 2H23, to acquire office and industrial properties in northern Mexican cities like Tijuana, Ciudad Juarez, Reynosa, Mexicali, Saltillo and Matamoros, as industrial real estate market was experiencing record growth due to nearshoring.

Mergermarket reported in March that Fibra Storage [BMV:STORAGE] was also planning to launch a follow-on offering in 2Q23 or 3Q23, to grow its property portfolio. Mexico’s self-storage market is another industry that is growing due to nearshoring, or bringing production closer to the point of use, Fibra Storage´s CEO Diego Ysita said at the time.

As a single-family office, Beamonte Investments, prefers long-term projects and plans to close two deals this year through its industrial platform Axman Holdings, as reported. One of the investments is related to the automotive sector, which accounted for 35% of all nearshoring demand in 1H23, according to a report by CBRE Research.

The main sectors driving nearshoring in the country are the automotive sector -including TIER 2 and TIER 3 suppliers- in the Northeast of the country and in the Bajio region, and the Electronics and Appliances industry in the West and Northwest region of the country, the CBRE report stated. General manufacturing, chemicals and packaging are also behind the rise of this phenomenon, the sources agree. 

Startups to streamline operations on the rise

The relocation of companies to manufacture products closer to the market where they sell them is also driving export companies to look for technologies that can streamline financing and freight forwarding, which are services that can be provided by startups, Garcia del Bosque said.

Nearshoring is increasing the volume of capital funds flow from country to country, creating opportunities for the fintech sector, Eric Rosenthal, Chief Strategy Officer at Rapyd, a UK-based financial transactions software firm with “unicorn” status, said. The company could consider further acquisitions in Latin America following the takeover of PayU Global Payment Organisation, as reported. 

According to Rosenthal, companies like New York-based Mundi are getting ready to meet the increased demand for payment, export, import, and workflow management products. Mundi, a financial services company for exporters with offices in Mexico City, raised USD 16m in a Series A round by Union Square Ventures in March 2022.

Aligned with this trend, Solvento, a Mexico City-based non-banking online lender catering to logistics companies, raised USD 5m in a round led by Ironspring Venture in October 2022. Earlier, in February, CEO Jaime Tabachnik told this news service that the company had provided loans to 50 logistics companies like Cuautitlan Izcalli-based Onest Logistics and planned to offer loans to more than 1,000 firms by the end of the year.

Investments in Mexican freight forwarding startups driven by nearshoring have also been notable since 2022, according to Mergermarket data. Nowports, a Monterrey, Mexico-based online freight forwarding company, raised USD 150m in a Series C round at a valuation of USD 1.1bn in May last year.

Will Mexico seize this opportunity? 

While movement in M&A activity as a result of nearshoring is already being seen, many transactions are expected to materialize between 2024-2026, taking into account that acquisitions take place between 18 to 24 months after decisions are made, Ariel Fischman, founder and director at investment banking and advisory firm 414 Capital said.

However, the ability to make the most of the potential offered by the so-called Mexican Moment remains to be seen, the expert added, noting that one way in which this opportunity could be wasted is by losing efficiency and competitiveness, a scenario that could be triggered by an unfavorable exchange rate.

Last July, after the peso hit its highest level against the dollar since early December 2015, strengthening by more than 1.3% in morning trading to 16.63 per dollar, some analysts warned that a prolonged peso run could eventually be more harmful than beneficial to Mexico's economy because it makes Mexican exports and M&A activity more expensive. 

“There has to be a connection between monetary policy and the economic policies to attract capital,” Fischman noted.

On the other hand, Garcia del Bosque expects the peso to be revalued to previous levels, limiting the impact on long-term investments. He is, however, more concerned about how Mexico will work to solve electricity and water supply issues, as well as whether it will be able to increase investments in infrastructure at the expected pace.

“Increasing the production and distribution of electricity to meet the demands of industrial plants must be a priority, it is an issue that is being addressed, although perhaps not with the expected speed,” del Bosque pointed.

by Adriana Curiel and Jessica Bigio in Mexico City

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