By Andrew Bahlmann
While South Africa has seen a general decline in M&A (mergers and acquisitions) activity from 2021 levels, it remains more buoyant than the world at large. In contrast strong growth has been seen in South Africa’s backyard, the rest of Africa.
What underpins these varying levels of performance is the degree of corporate confidence in each region. This characteristic is typically a prerequisite to support dealmaking – and South African and African corporates are still announcing good profits, even if the ordinary people are choking under high inflation.
The fundamentals which drove deal activity in 2021 remain largely intact: local companies continue to produce solid financial performances; valuations remain generally attractive offering upside for potential good future earnings; interest rates have remained within expected ranges despite recent hikes; and a long-term perspective is that the Africa Continental Free Trade Area (AfCFTA) agreement is likely to bolster regional investment. Unfortunately, much of the potential of AfCFTA is so far on paper only as no practical changes are visible on the ground.
In addition, many global investors are sitting on significant cash reserves following relative inactivity during and after the pandemic and don’t require debt. All these factors point to the potential for African levels of M&A activity to avoid the same catastrophic declines as seen in developed regions so far in 2022.
In the case of South African and African companies, it is less financial than strategic considerations which propel decision making in M&A, as business leaders look for optimisation and growth by unlocking previously untapped synergies which would otherwise not be available for local businesses.
Facing a depressed local economy, some South African companies with significant deployable capital are looking north of the border at accessible developing markets as a means for boosting growth, as well as to more mature markets where capital investment is anticipated to consolidate their position.
We at Deal Leaders International expect to see increasing M&A activity in the short to medium term in a number of sectors: financial services; retail and logistics and supply chain sectors; technology, media, and telecommunications; energy; data centres due to South Africa’s time-zone geography, relatively advanced IT, fibre infrastructure and, more recently, significantly enhanced potential for renewable energy generation.
In contrast to plummeting global M&A, there has been an almost three-fold increase in Africa (excluding South Africa) for the first quarter of 2022.
The Dealmakers Africa report listed the total value of deals at $9.7 billion (R168bn). North and West Africa were the two regions with the greatest deal activity. Africa’s M&A activity should continue to perform well, provided the global issues don’t send its economies into recession.
None of this is to say that M&A conditions could not be better than they are, but certainly it is relatively glowing compared to the global scene where confidence has plummeted as a potentially long-lasting recession sets in and interest rates rise precipitously. This will have an impact on valuations, the underlying economy and may continue to depress global M&A.
Globally, M&A has shrunk for a third consecutive quarter as rising interest rates force lenders to pull back from financing large deals which not even a soaring dollar could counter.
A steep fall in large private-equity buyouts contributed to the slowdown in global dealmaking, with third-quarter activity dropping 54% to $716.62bn from $1.56 trillion in the same period last year, according to Dealogic data.
In the third quarter, M&A volumes in the key US market plunged by nearly 63% in the third quarter, European M&A activity fell 42% while Asia-Pacific was down 52%, as the rising cost of debt forced companies to postpone their pursuit of transformative buyouts.
In particular, according to a Rystad Energy report, M&A deals across Africa’s oil and gas upstream sector in 2022 established a new record with $21bn worth of deals having being announced in the past nine months, also a threefold increase over the previous year and four times over those reported in 2020. These deals have involved Nigeria, Angola, Algeria and Libyan assets. Buyers are targeting producing assets in a bid to capitalise on the current increases in international oil and gas prices as a result of the effects of Russian-Ukraine war and energy transition-related matters.
Some of the main investing countries in Nigeria are the US, China, the UK and the Netherlands, primarily by direct investment where the investor incorporates an entity in Nigeria. Private equity investment is important in assisting companies to stay liquid and easily access capital without the challenges of high-interest rates or increased debt profile. The Nigerian Investment Promotion Act allows 100% foreign ownership, except in certain strategic sectors such as aviation, security, and oil and gas where a 100% foreign ownership may cause the company to lose certain competitive advantages.
Mergers in Angola are on the increase, both in the private sector, and the public sector following the approval of the Privatisation Programme 2019-2022 which provides for the sale of more than 70 public companies or assets and to improve the ease of doing business. This enabled more M&A transactions to be facilitated through the opening of doors for foreign investors.
In Namibia there has been an increase in M&A transactions across all sectors, particularly mining and energy and primarily driven by foreign investors, through foreign direct investment. Namibia is an investor-friendly destination for M&A transactions.
Andrew Bahlmann is the CEO of Corporate and Advisory, Deal Leaders International