LatAm M&A: Matching expectations amid macro challenges
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LatAm M&A: Matching expectations amid macro challenges

Horizon landmark ecological energy renewable solar panel plant Company Building.

Renewable M&A activity in Latin America has slowed down in the last year, a phenomenon not endemic to the region with lower anticipated returns, high interest rates, and other factors including low energy prices hindering the space across jurisdictions.

Amid these headwinds the market remains optimistic that renewable opportunities in 2024 are plentiful with hopes that investor appetite will pick up again as the macro environment stabilizes.

“Equity return thresholds are starting to creep up. That is creating more of a gap between what the sellers are looking for and what the buyers are looking for,” explained Tobey Collins, managing director and head of Americas at Astris Finance.

“In some cases, the sellers are still thinking of the old numbers, and the buyers have new numbers, there's a bit of a disconnect there. There's still a lot of appetite however but I think the deals are just taking longer because finding a meeting point takes a little bit more time.”

With an energy matrix made up of more than 80% clean energy and one of the fastest growing renewable markets, dealmakers in Brazil experienced that valuation disconnect last year.

Fewer transactions were made in 2023 compared to 2022, according to IJGlobal data, although the second half of 2023 saw an uptick in M&A activity with a couple large portfolios changing hands towards the end of year.

In October, Engie agreed to buy a 550MW portfolio of solar assets from Atlas Renewable Energy for a total of R$3.24 billion ($643 million), while Patria Investimentos bought a 600MW portfolio of wind farms from London-based electricity generation company ContourGlobal in December.

Impacting M&A was the large decrease in Brazil energy prices caused by heavy rains that left the country with ample hydro resources to rely on until the end of 2024. Over the last 2 years, the country experienced a significant drop in average energy spot prices, reaching the regulatory bottom of R$55.7/MWh in 2022 and R$69/MWh in 2023. According to S&P, oversupply and hydrological conditions will keep energy prices low at about R$110/MWh to R$130/MWh in the medium to long term.

“Low energy prices and high interest rates have provided a more challenging couple of years but with those dynamics changing, I think 2024 will be the start of a renewed momentum in the Brazilian renewable sector,” said Sarah Lane, managing director at Denham Sustainable Infrastructure.

Low energy prices and high interest rates have provided a more challenging couple of years but with those dynamics changing, I think 2024 will be the start of a renewed momentum
Sarah Lane, managing director, Denham Capital

UK-based investment firm Denham Capital sold its previous platform Rio Energy in July 2023 to Equinor, a deal that comprised 800MW of projects either in operation or pre-construction and an additional 1.2GW development pipeline.

“The regulatory framework, the talent pool in terms of management teams and the lending environment are probably the 3 key drivers to invest in Brazil. And of course the resources. Brazil has excellent wind and solar resources that are going to enable it to become a leader in emerging technologies like green hydrogen,” said Lane.

Despite the sale, Denham remained in the Brazilian market with a new renewable venture, Pontal Energy, that the firm announced later that year. Pontal Energy retained 1GW of the assets in operation or under construction from the Rio Energy sale and is looking to grow further through M&A and greenfield development.

“We do expect higher returns this year but there was a huge mismatch between expectations from sellers and buyers before,” said Gustavo Ribeiro, chief executive of Brazilian renewable developer Pontal. “We are active in this space [M&A] right now in Brazil and we are involved in a couple transactions. The market is starting to pick up. There are still some gaps between expectations, but much smaller than what we saw in the past. I see a very positive trend continuing in 2024.”

Sectors like distributed generation - which grew to a total 7.4GW in Brazil by the end of 2023 - saw major players coming into the space thanks to an advantageous regulatory framework that seemed to woo investors (PFR, 1/17). Brookfield, Neoenergia, Serena (formerly Omega Energia), I Squared all ventured into the space in 2023 or earlier this year, making significant commitments to develop DG solar in Brazil.

Doubling down in Mexico

While regulatory and political support for parts of Brazil’s renewables landscape was a positive, it remains an uncertainty in other parts of the region and continues to affect investor confidence. The tide might finally be turning in one of the more unreliable markets, however, as Mexico makes moves.

The nation’s renewable targets are ambitious – considering its current renewable capacity and the government’s stance – but the market expects the sector to see a recovery.

The country will see a new government come into power on 2 June 2024 bringing hope in the market that renewable generation development will not face as combative an administration as before. Mexico’s economy has also been growing steadily over the past few years and the demand for energy, particularly from renewable sources, along with it.

“We're seeing a lot of projects change hands, many of them have been on hold for some time. Some of them have even been built but haven't been interconnected, and some of them haven't been built because they don't have interconnection. There are a lot of buyers and sellers. People are realizing, if they’re ready to get out of Mexico, this is a good moment because many are starting to be more optimistic. The people who want to be in Mexico are doubling down. That's the word we hear everybody using,” said Astris Finance’s Collins.

Some sizable transactions just closed or are already underway. UK-based Cubico Sustainable Investments acquired Renantis Mexico in January (2024) which saw the company add 1.6GW to its Mexican renewables development pipeline. The portfolio comprises 12 solar and hybrid projects in various stages of development with several located in the Yucatan region where clean energy demand is growing due to nearshoring.

Close up of wind turbine blades in New Mexico desert.

Nearshoring is another buzzword that has driven optimism in the sector. Several factors have pointed interest towards Mexico, including US tariffs on China, supply chain disruptions and increasing logistics costs. According to Deloitte, Mexico’s GDP could grow an additional 3% in the next 5 years if the country is able to capitalise on the opportunity that nearshoring presents.

“A lot of US-based corporations are looking at the idea of nearshoring and deploying manufacturing operations in Mexico. These are oftentimes the same companies who have made significant commitments between now and 2030 to decarbonize their supply chain. So not having renewable energy is not an option for them, and we see a huge opportunity there,” chief executive of CSP developer Heliogen Christie Obiaya told PFR in February as the company made its debut on the Mexican market with a CSP project in the region of Sonora.

Despite the optimism, the country is still heavily reliant on fossil fuel and perceptions of uncertainty rightfully persist in the minds of many. Mexico’s strategy to get to energy sovereignty has seen the government abruptly get involved and take steps towards the nationalisation of assets.

Earlier this year, the government ordered state-owned Pemex to take over a hydrogen plant at the oil and gas company’s Tula refinery, currently operated by France’s Air Liquide, who should be compensated according to an appraisal from Mexico’s Institute of Administration and Appraisal of National Assets.

Many factors that have created the current skittish M&A environment will remain while other headwinds soften. Both buyers and sellers are adapting to these changes and starting to navigate these macro market dynamics more regularly.

Projects are sure to change hands more regularly in 2024 as both buyers and sellers navigate their new normal and valuations become aligned.

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