Investing in Newly Opened Markets: A Case Study for International Pioneers

Growing a business in a new territory is challenging enough, but breaking into a market that was until recently closed to foreign investment can present both larger obstacles as well as unmatched growth opportunities for those brave enough to venture into such unchartered waters. We recently helped our client, a fast-growing “Multilatina”, become one of the first foreign companies to obtain a telecommunications license in Mexico. The journey, which we highlight in this post, involved carefully navigating through significant shifts in local laws, regulatory bodies, and market players and thus stands out as a test case for expansion-minded companies.

Pioneering Vision Meets Reality

In July 2013, we received a call to help manage the legal and due diligence aspects of our client’s entry into the Mexican telecommunications market through a foreign direct investment ("FDI") transaction. Simple enough, we thought. But, as we learned more about the transaction, we realized that this was anything but a typical deal because, if consummated, the investment would result in our client becoming one of the first foreign companies to ever own a Mexican telecommunications license following a soon-to-be announced constitutional reform lifting the bar against such investments. Far from a typical investor, our client’s ambition – in line with other growth-minded Latin American "Multilatinas" who are adept at identifying and pursuing expansion opportunities in nearby markets (see this post for more background) -- was to be an early mover in a large diversifying market that stood to offer significant growth as it became open to new foreign-owned competitors.

As we got our arms around the task ahead, it became evident that, unlike more typical FDI deals in already "open" markets that turn primarily on buyers and sellers coming to acceptable financial terms of a purchase, the proposed transaction also depended on several external events that required careful tracking and management.

A Constitutional Reform

The first issue that stood out was the status of the constitutional amendment that proposed to lift the ban on foreign ownership of telecommunication license and without which our client's planned FDI would be impossible. If passed, the constitutional reform (discussed in this earlier post) would represent a fundamental shift in Mexican competition rules in the telecommunications industry. (see here for more background on the legislation itself).

While constitutional reforms often involve major political events and sometimes protracted legislative procedures, two factors favored the quick passage of this particular amendment in Mexico. First, the Mexican Constitution -- like that of many other countries -- is relatively easy to change, at least compared to its US counterpart. By point of comparison, the Mexican Constitution is less than 100 years old and has been amended over 500 times whereas the US Constitution is well over 200 years old and has only been amended 27 times. Indeed, the last amendment to the US Constitution -- the 27th -- took 202 years to pass! see here). Second, by the summer of 2013, the proposed reform had gained significant momentum in Mexico as could be seen by the passage of related laws aimed at breaking up Carlos Slim's dominant hold of the telecommunications industry. In the end, both these factors came together quickly and the Constitutional reform was passed in a matter of just a few months.

Creation of a New Agency

But getting the Mexican Constitution amended was only the first structural legal change that needed to occur for the FDI to go through. The amendment also called for the creation of a new federal agency -- the Instituto Federal de Telecomunicaciones, or, “IFT” -- which for the first time combined under one roof the authority over the technical aspects of telecommunications licensing and the competitive effects of corporate mergers in the Mexican market.

The establishment of a new federal agency, of course, raised many obvious questions including who would be its directors, what regulations it would issue (and when), and how long it might be before it would be ready to review proposed deals. As these questions were raised, we had a choice: wait until these issues were resolved and clarified before presenting the deal to the authorities or start the process while the transition to the new agency was taking place. After some analysis, the team decided to go forward with the request for regulatory approval and was successful in tracking the process carefully so that the filing did not fall through the cracks or get lost in bureaucratic confusion.

Related Deals and Consolidation

Finally, as is the case in any newly-opened market, my clients were not the only ones brave enough to want to get in on the new market opportunity. In fact, in the middle of negotiations, the Mexican company that owned the target company’s shares itself became an acquisition target by another multinational heavyweight. Fortunately, the negotiations had advanced significantly before the sellers had themselves been bought, allowing our deal to go forward as planned. Notwithstanding, it quickly became clear that our client was indeed right in its vision that the legal and regulatory shifts would result in significant business opportunities for expansion-minded foreign investors.

Lessons for Pioneers

As should be evident, our client’s investment in Mexico might best be summarized as a process of managing multiple moving pieces, all at once. While recognizing that any of those factors could have presented major potential hurdles, we were nonetheless successful in managing the process efficiently so that our client could gain regulatory approval and close on the purchase in approximately nine months.)

These are some of the reasons we think we were successful:

1. Be willing to be first

No doubt, one of the main drivers of the deal was our client's measured, but unwavering desire to be an early entrant into Mexico's newly-opened telco market. As detailed above, several "unknowns" presented themselves throughout the process that may have caused a less committed firm to take a pause and see how things developed for would-be entrants. Their prize for managing through the uncertainty will be access to many more customers, sooner, than will be available for hold-outs and later entrants.

2. Build an effective advisory team

Nextant is proud to have been asked to build and manage the regulatory, legal, and financial advisory team that would push the deal through. We selected a boutique commercial law firm with regulatory experience and a financial advisory firm that had experience assisting foreign firms in other purchases of Mexican assets. We tasked the advisory team to adopt our client's can-do attitude by responsibly focusing on how to get the deal done rather than focusing on the multiple reasons why it might be interrupted. We also sought to convey this services attitude in each of our interactions -- whether with the sellers’ counterparts or regulatory agents -- and believe it helped all involved get the deal done.

3. Get to "yes" efficiently

In retrospect, although the financial terms were only one aspect of the transaction, it was critical to reach agreement with the sellers quickly and efficiently so that we could also start the regulatory process without extended delays. A protracted negotiation process may have set the deal back a few months, likely resulting in falling further to the bottom of the growing pile of applications of foreign investors at the IFT.

4. Stay on top of the process

It is hard to over-emphasize the importance of maintaining contact with regulators in a changing legal and regulatory environment. Although you do not want to overload them with unnecessary or unhelpful questions, a regular rhythm of updates and information flow can help maintain the deal as top of mind and even help regulators do their jobs. In the end, the IFT, like our clients, should be understandably pleased to have completed the process of an FDI like ours and to begin to count it as a success case.

5. Be patient

Having set out all the reasons to push for efficiency and speedy resolution of an investment in a newly-opened market, there are times when a company just needs to be patient and comfortable with the knowledge that they will emerge as an early entrant. Although there were times during their review that the regulators' silence could have caused angst, the team remained patient, allowed the IFT to do their work, and was eventually rewarded with approval of the deal.

For a downloadable pdf version of this article, please see here

____________________________________________________________________________________

Andres Snaider is a founding partner of Nextant, a consulting firm specializing in assisting companies expand their businesses in international markets, with a strong focus on Latin America. With a degree in law and experience working as an international attorney and businessman, Andres has advised clients on a range of commercial matters and investments across the Americas. He is a graduate of the Harvard Law School and currently lives and works in Boulder, Colorado.

Email Andres at : asnaider@nextant.com

____________________________________________________________________________________

To receive automatic updates of Expansion Insights, please subscribe by clicking here Subscribe Here or the button to the right on the main blog page.

Nextant has extensive experience in assisting leading clients through its Market Expansion and Business Optimization services. For more information on how Nextant can assist your company in socializing a market entry and initiating sales, please visit our website at http://www.nextant.com

#latinamerica #foreigndirectinvestment #fdi #constitutionalreform #carlosslim #telecommunications #newmarkets #telco #mexico #redulation