09 - Mergers and Acquisitions Update

11

2

M&A UPDATELatin AmericaActivity during 2011

U$S 90,000 millionTotal

U$S 36,000 millionSecond Semester

U$S 54,000 millionFirst Semester

Amount of transactionsSemester

Source: Deloitte, Corporate Finance

23

M&A UPDATELatin America

Activity during First Semester 2011Origin of Purchaser

22%Others

3%Per

4%France

5%United Kingdom

6%Argentina

7%Colombia

8%Chile

11%United States

34%Brazil

% ParticipationCountry

Source: Mergermarket

4

M&A UPDATELatin America

Activity during Second Semester 2011Origin of Purchaser

9.5%Others

3.5%Argentina

4.5%Per

5%Mexico

5%Colombia

7.5%Chile

14%United States

23%Europe

28%Brazil

% ParticipationCountry

35

M&A UPDATELatin America 2011

Country of Target Brazil:

68% of targets with purchase price of U$S 500 million or more, and

56% of targets with a purchase price of less than U$S 500 million

60% of all transactions during the first semester. Argentina and Chile:

Each country 10% of all transactions during the first semester.

Source: Deloitte, Corporate Finance

6


Activity per Industry

M e d ia ; 1 , 1 0 %

In te rn e t; 1 , 1 0 %

R e a l E s ta te ; 2 , 8 0 %T e le c o m m u n ic a tio n s ; 0 , 9 0 % O th e rs ; 5 , 2 0 %

E n te r ta in m e n t; 1 , 1 0 %

M in in g ; 3 , 1 0 %

A g r ic u ltu re ; 4 , 4 0 %

T ra n s p o r ta tio n ; 3 , 9 0 %

H e a l th ; 4 , 1 0 %

T e c h n o lo g y ; 5 , 0 0 %

R e ta il; 6 , 3 0 %

C o n s tru c tio n ; 2 , 6 0 %

C h e m ic a l; 3 , 1 0 %

F in a n c ia l S e rv ic e s ; 8 , 1 0 %

S e rv ic e s ; 8 , 9 0 %

M a n u fa c tu r in g ; 1 3 , 9 0 %

E n e rg y ; 1 1 , 1 0 %

C o n s u m e r ; 1 3 , 3 0 %

47


Main transactions

USD 1,524 MJapanItochu Corp.ColombiaMiningDrummond Co.Inc.

06/15/11

USD 1,950 MJapanNippon Steel Corp. and others

BrazilMiningCBMM03/04/11

USD 2,400 MDenmarkA.P.,MollerBrazilEnergySK do Brasil07/04/11

USD 2,553 M JapanKirin HoldingsBrazilFood and Beverage

Primo Schnicariol

08/03/11

USD 2,925 MSpainIberdrola S.A.BrazilEnergyElektroElectricidade e Servicios S.A.

01/19/11

USD 4,963PortugalPortugal Telecom S.A.

ChileInternetTelemarParticipacoes

01/25/11

USD 5,390 MJapanMitsubishi Corp.ChileMiningAnglo American Sur

01/11/11

USD 6,277 MBrazilTelecommunicacoesSao Paulo S.A.

BrazilTelecomVivo Participacoes

01/25/11

USD 6,507 MMxicoAmerica Movil SABMxicoTelecomTelfonos de Mxico

01/11/11

USD 7,189 MChile/BrazilLanChile/BrazilTransportLAN/TAM01/19/11

AmountCountry of Purchaser

PurchaserCountryIndustryTargetDate

8

M&A UPDATEArgentina

Activity during the last years

U$S 255 million2012 (January / April)U$S 10,566 million2011U$S 13,380 million2010U$S 2,387 million2009

Amount of transactionsYear

Source: OJF & Asociados

59

M&A UPDATEArgentina

Activity during the last years

Arg: 60%, Brazilian: 10%,Others 30%

202012 (January / April)

Arg: 59%, Brazilian. 9%Others: 32%

1112011

Arg: 53%, Brazilian: 6%Others: 41%

1102010

Arg: 65%, Brazilian: 7%Others: 28%

1062009

Origin of purchaserNumber of transactionsYear

Source: PWC/OJF & Asociados

10

M&A UPDATEArgentina

Argentina and Brazil

Argentina: 111 / Brazil: 7512011



Number of TransactionsYear

Source: PWC

611

M&A UPDATEArgentina

Activity per industry

Others; 9,79%

Retail; 5,11%

Financial Services; 6,60%

Mining; 25,50%

Oil & Gas; 53%

20092010

Others 26,55%

Mining 26,53%

Oil & Gas23,87%

Food and Beverages 5,52%

Utilities 4,23% Financial Services 3,30%

12

Repatriation of direct investments: requires evidence that the investment was brought into Argentina through the official exchange market. The regulation applies to investments made since October 28, 2011.

Applies to acquisitions of shares and capital contributions.

Case 1) Non resident Buyer acquires assets from a Resident Seller: the regulation applies to Non Resident Buyer.

Case 2) Non Resident Buyer acquires assets from a Non Resident Seller: the regulation applies except if the Non Resident Seller can prove that he brought his investment through the official exchange market.

Case 3) Capital contributions: the regulation applies in all cases.

M&A UPDATEArgentina

Rules affecting M&AsCentral Bank Communication A 5237

713

M&A UPDATEArgentina

Rules affecting M&AsPresumption affecting low tax jurisdictions

Section 18.1 of Law 11,683 presumes that funds coming from a low tax jurisdiction are taxable income of the recipient.

The presumption admits evidence to the contrary, but the Tax Authorities are restrictive regarding this evidence.

It affects all capital contributions made by companies located in low tax jurisdictions.

It also applies to payment of purchase price if buyer is located in one of those jurisdictions and seller is an Argentine resident.

14

M&A UPDATEArgentina

Rules affecting M&AsTax treatment of leveraged buy-outs

The Tax Authorities took the position that interest on loans obtained to buy equity interests in Argentine companies is not deductible.

The position is grounded in the tax treatment of dividends: not subject to additional tax in the hands of the shareholders.

Taxpayers on the other hand believe that interest is deductible under the principle of universality of liabilities, which require each year proration between taxable and non taxable income.

815

M&A UPDATEArgentina

Rules affecting M&AsProposed tax bill

Income from the sale or disposition of shares by foreign residents will be subject to tax. On the other hand, resident individuals will be exempt if the profits derive from the sale of shares listed in a stock exchange.

Amounts paid to individuals or entities located, created or domiciled in low tax jurisdictions will not be deductible to arrive at net taxable income.

Amounts paid to individuals or entities located, created or domiciled in low tax jurisdictions will be presumed to be net taxable income of the beneficiary of the payment, subject to a 35% withholding tax at source.

16

M&A UPDATEBrazil

Over the last years, Brazil has consolidated its position as a mature country, financially, economically and politically.

This situation has established a favorable scenario for M&A transactions economic growth perspective and heated financial and capital markets.

M&As transactions over the last 2 years: 2011:

Continuous growth over 740 transactions Around 30%of the deals disclosed their values US$ 49,9 billions 50% of the transactions involved foreign investors Predominance of transactions in medium and small markets

2012 (1st quarter) positive numbers Over 200 transactions 50% represent acquisitions by foreign investors

917

M&A UPDATEBrazil

Main segments involved in M&A transactions in Brazil:

IT leader in the number of transactions since 2008Food/BeveragesChemicals / PetrochemicalsFinancial InstitutionsReal EstateMedia/Telecommunication Shopping centers Infrastructure (airport/seaport)Energy

18

M&A UPDATEBrazil

Oportunities and Investment Structuring

IT leader in M&A transactions Oil and Gas Pr-Sal Infrastructure FIFA 2014 World Cup and 2016

Olympic Games General alternatives for investment structures in the

next slides:Direct Investment: Equity or Debt; Investment via Local Holding; Investment via Private Equity Fund FIP; and Investment via Infrastructure Bonds.

10

19

M&A UPDATEBrazil

Direct Investment in a Brazilian Company Equity Funding Inflow of funds registered with the

Central Bank of Brazil (RDE-IED) FX transaction - IOF/Exchange at a

0.38% rate Repatriation of profits

Dividends Not taxable Interest on Net Equity (JCP) 15%

WHT

Return of the investment: Capital reduction or disposal of the

investment Potential capital gain

Abroad

Brazil

Brazilian

Company

$$$$Capital Inflow for Subscription of

Shares

$$$Dividends

JCP

Foreign

Investor

20

Inflow of funds registered with the Central Bank of Brazil (RDE-ROF)

FX transaction -IOF/Exchange at a 0% rate - loans with term grater than 1,800 days. If under 1,800 days, IOF/Exchange at 6% rate.

Thin capitalization rules (2:1 or 0.30:1 if the lender is located in Low Tax Jurisdictions)

Repatriation of profits Interest payments subject to 15%

WHT. Tax Treaties analysis Japan (12,5%)

Transfer pricing rules

M&A UPDATEBrazil

Direct Investment in a Brazilian Company Debt Funding

Abroad

Brazil

Brazilian

Company

$$$$Capital Inflow for

Subscription of Shares

$$$Dividends

JCP

Foreign

Investor

11

21

M&A UPDATEBrazil

Investment Via a Local Holding

Abroad

Brazil

Brazilian

Holding

$$$$Capital Inflow for the Subscription of

Shares

$$$Dividends

andJCP

ForeignInvestor

$$$$Acquisition of Shares of Brazilian

Company

BrazilianCompany

$$$Dividends

andJCP

Funding: equity or debt, as described in the previous slides

No tax imposition on transfer of funds to Brazilian Company

Possible tax inefficiency on JCP payments

Taxation on gains derived from the sale of either Brazilian Holding or Brazilian Company

Potential reduction of gains obtained by Brazilian Holding

Group taxation is not permitted in Brazil each entity is taxed separately

Potential tax benefit - goodwill amortization

22

M&A UPDATEBrazil

Investment via Private Equity Fund - FIP Access to Brazilian financial and capital markets only

through the regime of Resolution 2,689 (2,689 Investor)

FX transaction - IOF/Exchange at a 0% rate

Outflow of investment, dividends and JCP - 0% IOF/Exchange rate

Need of Brazilian Company to be incorporated as a corporation

FIPs must take part in the decision-making process of the invested company

No taxation at FIPs level Not considered a legal entity

Gains and earnings recognized by quota holders of the FIP would be taxable only on the sale or amortization of the corresponding quotas: 15% WHT for Brazilian investors and 0% WHT rate to foreign quota holders, upon fulfillment of certain requirements.

Feeder

Brazilian

Company

FIP

$$$$Capital

Contribution

Feeder Feeder

Abroad

Brazil

12

23

Brazilian

Entity

Brazilian

Entity

Brazilian Investor

(legal entity)

2,689Investor

Abroad

Brazil

Brazilian Investor

(individual)

2,689CustodianBank

Brazilian Entities

WHT on the interest derived from the bonds - 15%

Brazilian Entities


Brazilian Individuals


Brazilian Individuals


Non-residents

WHT on the interest derived from the bonds - 0%IOF/Exchange - 0%

Non-residents

WHT on the interest derived from the bonds - 0%IOF/Exchange - 0%

M&A UPDATEBrazil

Investment via Infrastructure Bonds

Fund

24

Brazilian

Entity

Brazilian

Entity

Brazilian Investor

(legal entity)

2,689Investor

Abroad

Brazil

Brazilian Investor

(individual)

2,689CustodianBank

M&A UPDATEBrazil

Investment via Infrastructure Bonds

Fund

Tax benefits granted by Law N. 12.431/2011 Investment in infrastructure, research and development bonds issued by Special Purpose Entities.

Non-residents:


IOF/Exchange - 0%

Brazilian Entities:


Brazilian Individuals:


13

25

Modification in tax legislation possible change in goodwill amortization tax benefit: Repeatedly announced over the last years, yet to be implemented. Possible restriction to the commonly used goodwill structure in Brazil.

Interpretation on Tax Laws by the Administrative Courts Necessity of economic substance to support the acquisition / divestment structure.

New accounting rules Conversion to IFRS rules. Regulation of tax impacts has not been issued by the Tax Authorities. Currently, there is a transitory regime in force.

New Antitrust rules Law N. 12,529/11, the New Antitrust Law has come into force on May 29, 2012 and brought significant changes to the Brazilian merger control system. On May 30, 2012, the Administrative Council for Economic Defense (CADE) issued four new regulations. In summary, under the New Antitrust Law, a filing with CADE will be mandatorily required when (i) the transaction has effects in Brazil; (ii) the transaction constitutes an economic concentration; and (iii) one of the economic groups involved in the transaction had Brazilian gross revenues of at least R$ 400,000,000.00 and one of the other economic groups involved in the transaction had gross revenues of at least R$ 30,000,000.00 in the last fiscal year.

M&A UPDATEBrazil

Potential Tax Changes and the Brazilian M&A Scenario

2626

M&A UPDATEChile

Background

On April 30, 2012 the Chilean government submitted a bill of law to the House of Representatives to amend provisions of the Chilean Tax Code, the Income Tax Law and other relevant provisions (the Bill).

Up to this date this bill of law is under review by the House of Representatives Finance Committee.

Parliamentary discussion has not yet started.

14

2727

M&A UPDATEChile

Amendments that may affect M&As

Capital gains derived from the transfer of rights in personal partnerships.

Good Will.

Tax reorganization rules.

Transfer Pricing Rules

2828

M&A UPDATEChile

Taxation of capital gains derived from the transfer of equity rights

The Bill intends to amend the tax regime of capital gains obtain in the transfer of rights in personal partnerships.

Currently the capital gain obtained in the sale of rights in personal partnerships is taxed with both corporate tax and final taxes (personal progressive tax -40%- or withholding tax if remitted abroad -35%), being the first a credit against the latter.

The tax cost (foreign investors) of rights in personal partnerships in general terms is the tax book value, duly adjusted by Chilean inflation.

15

2929

M&A UPDATEChile

Taxation of capital gains derived from the transfer of rights inpersonal partnerships

The Bill intends to homologate the taxation of capital gains from transfer of rights in personal partnerships to the taxation of capital gains from the sale of shares.

Hence, if this Bill is passed: The gain on the sale of rights in a personal partnership will have 2 tax

treatments, depending on the circumstances of the transaction. The general rule will be that the gain on the sale of equity rights made

by a non-resident entity or individual will be subject to the 20% income tax and to a 35% withholding tax, being the income tax a credit against the withholding tax.

Nevertheless, if the equity rights are sold after one year as from their purchase, the seller can qualify as a non-customary trader of rights and if the sale is made to an unrelated entity, the gain will be subject to a sole 20% income tax.

3030

M&A UPDATEChile

Taxation of capital gains derived from the transfer of rights in a personal partnership

Tax Basis: The tax basis to be considered will be the original purchase price

of the rights adjusted according to cost of living increase between acquisition and sale.

Also the Bill includes a new adjustment applicable to both shares and equity rights: to calculate the gain the original purchase price, adjusted by inflation, must be increased or decreased according to capital increases or reductions executed by the seller after the original purchase.

This amendment, if approved, will come into force on 01/01/2013.

16

3131

M&A UPDATEChile

Good will Currently, the tax treatment of the good will/bad will

generated in mergers it is only regulated by IRS rulings. The Bill includes a special provision on this matter, which

basically reproduces current IRS criterion (i.e. the good will generated when the parent absorbs the subsidiary can be distributed among all non-monetary assets transferred to the parent as a consequence of the merger).

According to the Bill the remainder of the good will/bad on the portion exceeding market value of the non-monetary assets can be deducted as an expense or recognized as income in the next 10 commercial years.

This amendment, if approved, will come into force on 01/01/2013.

3232

M&A UPDATEChile

Tax reorganization rulesINTERNATIONAL REORGANIZATIONS The Bill includes provisions which extend the benefits of tax reorganization

rules to international reorganizations, when the effects of the same are allocated only in Chile.

Up to this date, this acknowledgment it has been made only by IRS rulings and on a case by case basis.

Consequently, if the Bill is passed: The IRS will not be able to challenge international reorganizations if (i) tax

values are used, (ii) there is legitimate business reason and (iii) the effects of the reorganization are allocated only in Chile.

Notwithstanding the fulfillment of the abovementioned requirements, according to the new transfer pricing rules introduced by the Bill, the IRS could still challenge an international reorganization if said authority considers that the reorganization involves the transfer to a tax haven of goods or activities which might generate taxable income in Chile and the relevant values were not determined on an arms length basis.

17

3333

M&A UPDATEChile

Tax reorganization rules

INTERNATIONAL REORGANIZATIONS (cont.) Up to this date the widely accepted criteria in Chile is that the

allocation of assets from a parent company to its permanent establishment (PE) does not constitute a sale or transfer, since parent and PE are considered as one entity.

The Bill changes that criteria and provides that said allocationwill be deemed as sale or transfer or goods and, therefore, mustfulfill the requirements of international reorganizations, otherwise the IRS could assess the values in this type of transactions.

3434

M&A UPDATEChile

Tax reorganization rules

CONTRIBUTION VALUE The Bill indicates that to benefit from these

rules, the contribution value, whether in domestic or international reorganizations, must be equal to the tax value (today the Law states that the contribution value to be used could be either the financial or the tax values).

18

3535

M&A UPDATEChile

Transfer pricing rules

The Bill includes a new provision to the Income Tax Law which thoroughly regulates transfer pricing.

This new provision is based on the OECDs Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

3636

M&A UPDATEMexicoM&A

2012 Presidential election No major changes in tax law Commercial law has been steady

Relevant industries and sectors Sensitive issue in the Presidential campaigns

Foreign investment in Mexico International treaties

Tax treaties (>50)

19

3737

M&A UPDATEMexico

M&A - Relevant Tax Issues

Integrated corporate income tax Dividends are taxed at the distributing entity level No additional tax should arise for the shareholder

NOLs Cannot be transferred in a merger Limitations for merging companys NOLs Spin-off: NOLs follow the assets

3838

M&A UPDATEMexico


Capital gains Taxable income

Some exceptions apply for publicly traded transactions Non-residents: Source taxation

Domestic statutory rate: 25% on gross income Optional regime: 30% on net income Special requirements apply

Tax treaties (>50)

20

3939

M&A UPDATEMexico


Tax-free mergers Notices should be duly filed before tax authority The merging company shall continue (for at least 1

year) carrying on the same activities carried out by it and the merged companies

Some exceptions apply The merging company shall file its own tax returns

as well as the merged companies returns

4040

M&A UPDATEMexico


Tax-free mergers Any subsequent merger or spin-off taking place

within 5 years will be subject to authorization by tax authority

Simplified reporting scheme available Only applicable for resident entities

Tax-free spin-offs Requires permanence of control group

21

4141

M&A UPDATEMexico


Tax-free corporate reorganizations Particular authorization required (ex ante) Tax treaties

Transfer pricing OECD Transfer Pricing Guidelines Reorganizations

4242

M&A UPDATEU.S.A.

Increasingly, Latam acquirors are purchasing U.S. targets.

The following slides summarize the issues for an

Acquisition for cash. Acquisition for shares.

22

4343

M&A UPDATEU.S.A.

ACQUISITIONS FOR CASH (general) Taxable to target shareholders but not usually

to target. Stepped up basis in shares of target but not

usually target assets. Dividends subject to 30% withholding tax

unless reduced by treaty.

4444

M&A UPDATEU.S.A.

ACQUISITIONS FOR CASH (debt) Intercompany debt may be introduced in the acquisition Payments of arms-length interest is deductible if

Debt is respected as such under U.S. common law tax principles

Statutory thin cap restriction (163(j)) is respected Payments of interest are subject to 30% withholding tax unless

reduced by treaty Possibility of double-dip?

23

4545

M&A UPDATEU.S.A.

ACQUISITIONS FOR CASH (non-U.S. subs of target)

It is typically inefficient for Latam acquiror to hold non-U.S. subs under U.S. target.

Lack of basis step-up in assets means that there is inherent U.S. gain

To ameliorate, new value can be contributed into non-U.S. subs directly by Latam acquiror to de-CFC the subs.

4646

M&A UPDATEU.S.A.

ACQUISITIONS FOR SHARES (general) Not always tax-free to target shareholders

Some non-share consideration can spoil whole transaction Gain recognition is FIFO Latam acquiror must be larger by equity/value

Will U.S. shareholders dump acquiror shares?

24

4747

M&A UPDATEU.S.A.

ACQUISITIONS FOR SHARES (debt)

More unnatural to introduce intercompany debt in the acquisition Risk could be dividend withholding Risk could also be full taxability

Killer B rules.

4848

M&A UPDATEU.S.A.

ACQUISITIONS FOR SHARES (inversion) A taxable share acquisition may still be desirable from targets

perspective, in that a non-U.S. parent increases tax-planning opportunities.

If former target shareholders own 80% or more of acquiror by reason of the acquisition, acquiror is treated as a U.S. company

If former target shareholders own 60% or more (but less than 80%) of acquiror by reason of the acquisition, acquiror is respected as a non-U.S. company but special taxes may apply.

Documents

09 - Mergers and Acquisitions Update