Capital Confidence Barometer

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1 May 2016 ey.com/ccb 14th edition highlights Capital Confidence Barometer Mexican companies maintain healthy pipelines and increase their focus on alliances to spur growth

2 Key findings M M 36% expect to pursue acquisitions in the next 12 months 50% M Mhave five 15% or more deals in the pipeline 20% 4+96+M M 4% say their largest deal in the next 12 months will be greater than US$5b 12% M M 39% say they are planning to pursue alliances 40% 2 Capital Confidence Barometer

3 Confidence remains high in as companies balance dealmaking with operational efficiencies to move the needle on growth In this edition of the Capital Confidence Barometer, Mexican executives continue to express tempered optimism in the local economy and a stable confidence in dealmaking as pipelines remain robust. Although 31% perceive a modest decline in the local economy, a the majority (65%), however, feel comfortable that the economy remains stable or is modestly improving. s ambitious reform agenda, oil prices and the depreciation of the Mexican peso against the US dollar are all contributing factors to the shift in mood. Pipelines remain robust as Mexican executives look to pursue deals Yet, when it comes to dealmaking in, pipelines remain robust, with a positive outlook in the near term. While expectations are more subdued than the near-record high reached six months ago, more than a third of Mexican executives are looking to pursue deals over the course of the next year. With two or more deals in the pipeline and deal sizes of US$1b or less, Mexican companies are looking to adapt to changing consumer behavior and the need to boost digital capabilities to compete in today s market. A minority of companies (4%) are taking bolder steps and looking at megadeals of US$5b or more to achieve transformational change. However, they may have stiff competition as Mexican executives expect private equity players to increase their profile in the M&A market over the next 12 months. In addition to dealmaking, Mexican executives are pursuing strategic alliances as a cost-effective means to accelerate growth, with nearly half focusing their efforts on monetizing tangible assets such as production facilities, land and buildings. Organic growth centers on core products and existing markets Although growth is the primary goal for Mexican companies, in today s low-growth climate, executives are seeking improvements in infrastructure, organization and processes, and make better use of digital technology and analytics. Organic growth efforts for 31% of respondents center on core products and existing markets. Rigorous cost discipline remains atop the boardroom agenda. However, cost-cutting efforts will not include losing talent, as almost 80% of executives indicate that they plan either to create jobs or keep their workforce at its current size. With strong deal fundamentals and a majority of executives expecting asset prices to remain at current levels over the next 12 months, we expect Mexican companies to continue their trajectory of making the most of buying opportunities and pursuing alliances or inorganic growth avenues to boost revenues and earnings in the current low-growth environment. Olivier Hache Managing Partner Transaction Advisory Services Mancera, S.C. 3 Capital Confidence Barometer Capital Confidence Barometer 3

4 Macroeconomic environment Mexican executives remain optimistic about the economy Nearly three quarters of Mexican executives express confidence in the global economy, as they perceive it to be stable to modestly improving. Almost two-thirds see the local economy as stable or modestly improving. Continuing volatility in commodity and currency markets especially affects Mexican companies ability to plan in the near term, while the timing and pace of US interest-rate increases are of heightened concern. Geopolitical concerns continue to pose corporate challenges to Mexican companies as well M M 65% see the state of the local economy as stable or modestly improving 84% M M 33% view increased volatility in commodities and currencies as the greatest economic risk over the next 6 12 months 26% M M 30% view increased global and regional political instability as an economic risk over the next 6-12 months 29% 4 Capital Confidence Barometer

5 Corporate strategy Mexican companies focus on improving operations in a low-growth environment Although the effort six months ago was focused on developing new sales channels, in the low-growth economy, Mexican executives have shifted their focus to improving operations and making better use of digital technology and analytics to accelerate company growth. They are also moving decisively to more rigorously focus on core assets to protect current revenues and earnings. At the same time, low growth has reinforced reducing costs and improving margins as top priorities on the boardroom agenda M M 63% are focusing on improving operations such as infrastructure, organization and processes to drive growth in the next 12 months 47% M M 31% are placing more emphasis on core products and existing markets 27% M M 51% have elevated reducing costs and improving margins on their boardroom agenda in the past six months 44% Capital Confidence Barometer 5

6 M&A outlook Although deal intentions may be tempered, pipelines remain robust Expectations have eased somewhat from six months ago. However, Mexican executives continue to express confidence in both global and local M&A markets. Although M&A appetite has become more subdued from its 2015 high, a solid 36% of Mexican executives plan to actively pursue deals in the next 12 months, compared with 50% of global respondents. Q: Do you expect your company to actively pursue acquisitions in the next 12 months? Expectations to pursue an acquisition 57% 41% 50% 38% 67% 40% 31% 27% 29% 25% 29% 24% 39% 35% 46% 31% 40% 33% 56% 59% 50% 55% 57% 36% respondents respondents 41% CCB average Apr 10 Oct 10 Apr 11 Oct 11 Apr 12 Oct 12 Apr 13 Oct 13 Apr 14 Oct 14 Apr 15 Oct 15 Apr 16 Deal fundamentals remain supportive of a healthy M&A market Q: What is your level of confidence in the following at the local level? At the same time, deal fundamentals remain supportive of dealmaking, with 80% or more expressing stable to positive confidence in the number and quality of acquisitions, as well as the likelihood of closing at the local level. 18% 47% 35% 16% 36% 48% 20% 66% 14% 19% 44% 37% 18% 36% 46% 21% 59% 21% 19% 41% 40% 26% 33% 41% 14% 72% 14% Negative Stable Positive Apr 15 Oct 15 Apr 16 Number of acquisition opportunities Apr 15 Oct 15 Apr 16 Quality of acquisition opportunities Apr 15 Oct 15 Apr 16 Likelihood of closing acquisitions 6 Capital Confidence Barometer

7 M&A outlook A healthy deal pipeline supports this confidence, with 40% indicating two deals in their pipeline, while an ambitious 15% report having five or more deals on the go. Although deal sizes remain focused on transactions below $1b, there s been a slight uptick in megadeals of $5b or more M M 40% have two deals in the pipeline 30% M M 59% expect no change in current pipeline over the next 12 months 64% 96+4+M M 96% are focused on deal sizes of US$1b or less 88% Mexican executives turn to alliances to accelerate growth Like their global counterparts, Mexican executives are increasingly attracted to strategic alliances, with 39% indicating that they are planning to enter alliances as a cost-effective means to boost revenue and earnings. Alliance efforts will concentrate on monetizing tangible assets, such as production facilities and real estate. Q: Are you planning to enter alliances with other companies or competitors to help create value from underutilized assets? 61% 39% Yes No To monetize both intangible and tangible assets To monetize tangible assets (including production facilities, land and buildings) To monetize intangible assets (including data, brands, intellectual property) Q: If you answered yes, what was the primary reason? 23% 30% 47% Capital Confidence Barometer 7

8 M&A outlook Shifts in customer behaviors are driving cross-sector and cross-border dealmaking Changes in consumer behaviors and the way companies interact with customers are driving the need for transformative deals. Two in five Mexican executives more than the global average cite changes in customer behavior as the strongest driver for cross-sector deals, while two-thirds say they are most likely to pursue a cross-border acquisition in the coming year M 41% see changes in customer behavior as the main strategic driver for pursuing an acquisition outside of their sector M 28% M 67% expect to pursue cross-border deals M 74% Not surprisingly, the consumer products and retail sector is seeing the most action, with more than 70% of executives surveyed planning acquisitions in the coming year M M 71% intend to pursue acquisitions in the consumer products and retail sector 59% Mexican companies expect more competition from private equity players A slim majority of Mexican executives see the current M&A valuation gap as relatively small. However, more than half expect this gap to grow over the next 12 months. Executives are also keeping a close eye on private equity players, with whom they expect to compete more fiercely in the deal market over the next 12 months M M 55% think the gap between buyers and sellers is zero to less than 10% 52% 8 Capital Confidence Barometer

9 M&A outlook M 55% M M 35% M expect the valuation gap to grow in the next 12 months expect greater competition from private equity acquirers to become more prominent in dealmaking over the next 12 months 52% 25% Top investment destinations US 3. Germany 4. Brazil 5. India Despite cross-border intentions, Mexican companies still prefer to look for deals at home first. Stronger growth in the US and the attractiveness of high-quality assets in Germany have motivated to rank these countries number two and three respectively in their top five destinations. Capital Confidence Barometer 9

10 contacts For a conversation about your capital strategy, please contact us: Olivier Hache Managing Partner Transaction Advisory Services Mancera, S.C. olivier.hache@mx.ey.com Capital Confidence Barometer

11 About The Capital Confidence Barometer April 2016 ey.com/ccb 14th edition Capital Confidence Barometer Buying and bonding: Alliances join M&A as engines of growth The Capital Confidence Barometer gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their Capital Agendas EY s framework for strategically managing capital. It is a regular survey of senior executives from large companies around the world, conducted by the Economist Intelligence Unit (EIU). Our panel comprises select global EY clients and contacts and regular EIU contributors. In February and March, we surveyed a panel of more than 1,700 executives in 53 countries; nearly 50% were CEOs, CFOs and other C-level executives. Respondents represented 19 sectors, including financial services, consumer products and retail, technology, life sciences, automotive and transportation, oil and gas, power and utilities, mining and metals, diversified industrial products, and construction and real estate. Surveyed companies annual global revenues were as follows: less than US$500m (16%); US$500m US$999.9m (25%); US$1b US$2.9b (21%); US$3b US$4.9b (12%); and greater than US$5b (26%). company ownership was as follows: publicly listed (65%), privately owned (31%), family-owned (2%) and government- or state-owned (2%). For emerging markets, we surveyed 768 executives in 21 countries across 17 sectors. Buying and bonding: Alliances join M&A as engines of growth Our latest Capital Confidence Barometer continues to find a strong acquisition appetite together with a growing inclination to forge new alliances. Prolonged economic challenges are driving investment decisions and leading companies to ally and cooperate for growth as well as compete for and acquire for market share. Connect with us at ey.com/ccb. Capital Confidence Barometer 11

12 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Limited, each of which is a separate legal entity. Ernst & Young Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. About EY s Transaction Advisory Services How you manage your Capital Agenda today will define your competitive position tomorrow. We work with clients to create social and economic value by helping them make better, more informed decisions about strategically managing capital and transactions in fast-changing markets. Whether you are preserving, optimizing, raising or investing capital, EY s Transaction Advisory Services combine a unique set of skills, insight and experience to deliver focused advice. We help you drive competitive advantage and increased returns through improved decisions across all aspects of your Capital Agenda EYGM Limited. All Rights Reserved. EYG no Gbl ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com/ccb 12 Capital Confidence Barometer