The completion this week of a deal by a New Jersey communications company and a Mexican cable firm suggests the peso's devaluation may not be the deal killer some international financiers had feared.
Acting as an adviser, Chase Manhattan Corp. used a currency hedge to rescue the plan by C-Tec, Princeton, N.J., to buy a 40% stake in Megacable, Mexico's second-largest cable company.
Megacable saw the price of the deal drop, in a month, to $84 million from $120 million, at which point Chase suggested a price formula that accounted for currency fluctuations but did not tie the price of the deal to the steadily declining peso.
J.P. Morgan & Co. advised C-Tec in the transaction.
Although Chase would not divulge the specific formula used in the hedging agreement, market sources said it established $84 million as the price floor and $120 million as the ceiling, regardless of the peso's value.
"In the middle of negotiations, we saw the devaluation as another obstacle," said Victor Josebachvili, director of Chase's Latin American mergers and acquisition team. A currency hedge "was the only way to make this deal go through."
Mr. Josebachvili said he thinks completion of this deal might encourage others. "This deal sends a signal that there are people who still believe it makes sense to bring money to Mexico."
Stockholder discomfort with Mexican mergers could mandate further creative merger agreements - generating additional advisory work for banks.
"Public companies will think twice before they agree to a price," said Mr. Josebachvili. "They probably would want to have the independent opinion of an adviser."
Heightened concern about economic risk in Mexico will continue to retard consolidations in consumer products, infrastucture, and power, even as they present new challenges and opportunities for advisers.
Many Latin American countries have tied their economic success to raising money from the capital markets.
Capital markets, in fact, helped turn mergers and acquisitions in Mexico from a "garbage disposal for multinationals" into a viable market, according to Mr. Josebachvili. Securing capital market funding in 1989 was a seminal event in bringing Mexico out of the lesser-developed-country debt crisis that had hampered Latin America from 1982 through 1989.
Throughout the current peso crisis, however, capital markets have reacted unfavorably to Mexico, contributing to continued instability. "The drying out of capital markets puts into question the economic programs of many of these countries," said Mr. Josebachvili.
It will take time for the peso to rebound from its 40% devaluation, said Caroline Lane, a director at John Govett and Co. "If you are a medium- to long-term investor, there is an argument saying this is a good buying opportunity," she said, "but you may have to be prepared for a more difficult time in the short term."
"There are discussions going on now to see how we might save other deals that the crisis put in jeopardy," said Mr. Josebachvili.
