Mexican Baked Goods Firm Has a Sweet Tooth for Outbound M&A

Grupo Bimbo, one of Mexico’s largest baked goods manufacturers, announced on April 20 that they were actively looking to expand their presence in China and that their first step in doing so would be through acquisitions of local companies in the area. One week later, they also officially entered the African market via Morocco by purchasing local baked goods producer Adghal Group. Purchases of foreign companies, however, seem to clash with all the hoopla that has been made of investment and hefty economic growth in Mexico, a commonly held narrative. So, what is driving this apparent surge in outbound M&A by Grupo Bimbo, and can it be seen as a bellwether for the rest of the country?

Decreased Risk Appetites

It’s no secret that emerging markets have fallen somewhat out of vogue in the past two years or so. Rising protectionist rhetoric in the West – whether it comes from the US promising to renegotiate NAFTA, French elections where a leading candidate has similarly vowed to revive domestic manufacturing, or paralleled sentiments in the UK culminating in Brexit – has raised doubts about what the future of global trade will look like. Similarly, geopolitical tensions abroad, like political missteps by South African President Zuma or flaring tensions in the Korean peninsula, have chipped away at risk appetites since the start of the year, making Emerging Markets less palatable. For firms in these countries, including Mexico, the resulting reduction of inbound investment will make them more inclined to look for growth elsewhere, expanding into new markets.

Mexican Climate Change

In spite of some claims that Mexico has been experiencing stellar growth at the expense of American jobs and economic advancement, the data doesn’t particularly bear this out.

Mexico GDP
Figure 1 – Mexican GDP, Quarterly, Annual Rate (Source: St Louis. Fed FRED Database) 

In fact, over the past 7 years, Mexican GDP growth has been steady, but calling it stellar would be a stretch. In countries where the pace of domestic market growth is unable to provide a large enough rate of return, firms must look elsewhere to hit their growth targets. In turn, this should encourage global expansion in the form of outbound M&A by Mexican companies.

Extra Baskets

As the old adage goes, it’s unwise to put all your eggs in one basket. From Mexico’s point of view, the USA is a recipient of 80% of its exports, representing a very large basket of eggs. While this has been a boon for Mexico over the past 2-3 decades, with a NAFTA renegotiation supposedly coming up in the fall, this concentration represents an enormous risk to Mexican companies. Even a business whose focus is primarily domestic is in danger of being caught up in the debacle, as their customers almost certainly have some proportion of their income tied to trade with the US.

Moving into other countries can help to offset this risk, and it’s almost always easier to gain a foothold in a new country by snapping up existing players in a market when compared to bootstrapping. It reduces the risk of cultural clashes and allows the new entrant to leverage existing expertise in local laws and customs. Furthermore, Mexico has Free Trade Agreements with over 40 other countries, making it easier for them to enter a multitude of markets via acquisitions as there is already a political and economic framework in place for them to be accepted.

Timing is Everything

In 2016, as the world watched Donald Trump’s campaign gain steam, one could also watch the value of the Mexican Peso tumble in tandem. However, in 2017, it has undergone a staunch reversal and is now one of the top-performing currencies in the year against the US Dollar.

2017 Q1 Currency Performance vs USD
Figure 2 – 2017 Q1 Currency Performance vs USD (Source: St Louis. Fed FRED Database)

With all the unknowns surrounding trade renegotiations, it is not surprising to see companies like Grupo Bimbo taking advantage of this significant bounce in the peso’s value to expand overseas. Payments and financing can be structured in a way that neutralizes the effects of foreign exchange rates in the future, locking in this stronger position for the longer term and hedging the risks of the peso depreciating, while still being able to benefit from diversification. The significant outperformance of the Mexican Peso this year is no small factor in the calculus being done by companies looking to expand overseas.

Wrapping Up

With all these factors in mind, it’s no wonder we’re seeing Mexico begin to look for outbound M&A opportunities. After years of inbound purchases by foreign companies, Grupo Bimbo is leading the way in expanding Mexico’s presence outside its borders this year. Given the current global business environment, it’s a trend that seems likely to continue, and one that presents an exciting opportunity to help shape global trade patterns for the future.

Kevan Hartford

Kevan Hartford is a Toronto-based finance professional working in asset management.