INTERNATIONAL INTEREST IN SA STILL STRONG
Are international acquirers still investing in South Africa? I am asked this question regularly by clients and local acquirers alike. In my own experience, the number of M&A transactions that took place in 2017 and early 2018, as compared that number to recent years, showed a definite slowdown in international interest. According to PitchBook, the ratio of international acquisitions as a percentage of total transactions has, in fact, increased – despite the number of total transactions decreasing (2018: 35%; 2017: 33%; 2016:31% – Source PitchBook.com).
These statistics are almost counter-intuitive to what we would expect from international markets. There is still definite interest in limited industries, but these are not converting into transactions, as they did in 2015 to 2016. But it isn’t all bad news.
Signs of recovery are now appearing. However, the risks to investors still seem to be outweighing the benefits, in the eyes of the international investor market.
Last year was pedestrian, with 2017 seeing about US$2.7 trillion in mergers and acquisition (M&A) globally, according to Bloomberg. All eyes are on a recovery in the remainder of 2018. However, the foreign investment perception of South Africa is key to whether this recovery will be felt in the country.
According to Baker McKenzie, “Investor reluctance is not just about government corruption. The Steinhoff narrative has put South Africa in the spotlight and raised concerns about governance in the private sector as well.”
“Furthermore,” McKenzie added, “Economic concerns, the threat of another credit rating downgrade, issues around service delivery, as well as the fact that South Africa is close to its next election, means that investors are also holding back, adopting a ‘wait and see’ approach. There are also two major political issues causing uncertainty and affecting investment confidence and appetite – land reform and national health insurance.”
Against that backdrop, Reuters reports that in the first half of 2018, 135 M&A deals were signed, with a combined value of US$3.2 billion. The industrial sector was the front runner with 22% of the deal done by volume and a dominant 91% of deals by value.
Data from Bureau van Dijk differs markedly from the Reuters data. Van Dijk recorded 189 M&A deals related to South African-based companies in the first half of 2018, with a total value of US$12 billion. These statistics do not necessarily reflect complete or total acquisitions because Van Dijk includes all company transactions, such as JP Morgan increasing its stake in the Mr Price Group from 4% to 6%.
The flow of private-equity deals saw 50 deals carried out, according to the Southern African Venture Capital Association (SAVCA). It is likely that these numbers were higher, as smaller deals are less likely to be reported than larger, high-profile deals, SAVCA noted.
Of the disclosed deals, 56% were below the R100 million level, 22% were between R100 million and R500 million and the remaining 22% were between R500 million and R1 billion. Analysing the level of shareholding acquired in these deals often offers interesting insights but, unfortunately, in more than half of the publicly disclosed deals, no details on the shareholding acquired were disclosed. Where the acquisition shareholding was disclosed, approximately 39% of deals were for minority stakes, 28% for a significant minority stake (between 25% and 50%), with the remaining 33% for shareholdings of 51% or higher.
The most popular sectors for private-equity investments in South Africa during 2017 were telecommunications and technology, retail and financial services, SAVCA reported. Baker McKenzie’s Global Transaction Forecast (in association with Oxford Economics) expects M&A activity in the technology and telecommunication sectors in Africa and the Middle East to increase almost fivefold in 2018 versus 2017. It expects US$5.9 billion of deal value in 2018 in the region, versus US$1.2 billion in 2017, with an additional US$5.9 billion expected in 2019.
Over the past 12 months, transactions in the industrial sector represented the highest number of cross-border inbound deals in South Africa in terms of both number (22%) and value (91%). According to Baker McKenzie, there were eight inbound transactions in the industrial sector in the first half of 2018, worth an estimated US$362 million. The South African industrials sector is attractive to international investment as it is well established and has managed to stay the course despite a challenging environment.
Inbound investments are still proving to be a good entry point into African economies, as this sector is a focus area for many developing economies across the continent.