After a difficult 2018 for M&A in South Africa, deal values are set to rebound this year, as part of a wider economic recovery.
There are positive signs for South Africa’s economy in 2019, with the mergers and acquisitions (M&A) market expected to rebound after a tough 2018, according to a report by international law firm Baker McKenzie and Oxford Economics.
The Global Transactions Forecast reported USD 4.3 billion in M&A activity in South Africa during 2018, down from USD 7.5 billion during 2017.
The figure is expected to rebound to a projected USD 6.2 billion in 2019, due in part to some deals which were announced during the previous year, but will be completed this year. However, it is then expected to drop again to USD 5 billion in 2020 and USD 4 billion in 2021.
This is in line with predictions for the overall global economy, which is expected to see lower activity and value until 2021, at which point, United States interest rates, global equity markets and the cross-border trade situation should have stabilised, creating a positive deal climate, though the report noted the risk that current trade tensions grow further.
The report is based on statistical measurements of the relationship between M&A and initial public offerings (IPO), as well as factors including GDP growth, equity prices, trade flows, money supply, legal structure, property rights and trade freedom.
The number of deals completed in South Africa followed a similar trajectory, with 136 deals in 2018, down from 182 in 2017, but projected to reach 199 this year. The deal volume is then expected to drop to 178 and 159 over the next two years.
South Africa had one of the world’s worst-performing stock markets in 2018, dropping 14% during the year and losing 26% of its value in dollar terms, according to figures from Bloomberg.
Last year’s report made a more optimistic prediction for 2018, but the ongoing economic uncertainty seems to have postponed that progress, at least for now.
The country entered recession during the course of the year, although it came out of it before the end of the year and is on an upward trend, while a knock-on effect of last year’s crisis is that stocks are now cheap and should encourage investors back into the market.
Much hangs on May’s general election however, with President Cyril Ramaphosa’s honeymoon period over and severe economic difficulties on hand, any weakening of his position might undermine his ability to bring in economic reforms and make real change, although some of those reforms – particularly to land and labour – have made investors cautious.
The president is due to speak at next month’s Mining Indaba in Cape Town, at which he is expected to push his reform and investment agenda.
However, this year’s expected revival is related to Ramaphosa’s economic policies and anti-corruption stand, according to Baker McKenzie’s head of corporate and M&A in Johannesburg, Morne van der Merwe.
“With the world economy cooling from 2019, the forecast predicts global M&A values will decrease in 2020. South Africa’s slight drop in M&A activity in 2020 and 2021 is partly because it is following this global cycle,” said van der Merwe in a statement. “The good news is that the forecast also predicts a new global upcycle could begin in 2021, and South Africa could see the benefit of that in future years.”
The most popular sector for investment was industry, with 15 deals, while consumer products and financial services had 10 apiece.
Van der Merwe described the industrial sector as “a good entry point for investors looking to expand into Africa” as it is well-developed and “a focal point for developing economies” and outbound deals were again focused on the industrial sector, with 15 deals, while there were 11 in materials and 10 in each of consumer products and services, financial services and high technology.
Similarly, IPOs dropped to USD 674 million in 2018, from USD 1.3 billion in 2017, but is expected to grow slightly to USD 966 million this year. However, the projection for 2020 is only USD 349.5 million and USD 541.4 million in 2021.
South Africa has a limited market for cross-border IPOs, with only USD 381 million in 2018, an increase from USD 22.4 million in 2017, but with no such deals forecast at all in 2019 or the two years following.
“I don’t see any more massive capital raising transactions happening until there is more political and economic stability in South Africa,” said Wildu du Plessis, head of capital markets at Baker McKenzie in Johannesburg. “Political stability will hopefully begin to return after the country’s election in 2019, but there is still a lot of work to do to stabilise the economy. The World Bank recently downgraded South Africa’s growth rates and I think there is another year of hard work before the economy starts to recuperate.”
Du Plessis said the political instability was also to blame for the lack of cross-border IPOs originating in South Africa, explaining that “companies wanting to raise capital in other jurisdictions in Africa are thinking twice and waiting for political and economic certainty to return before going ahead”.
AMERICA’S CHANGING APPROACH
The report revealed that US investors had the largest number of deals in South Africa last year, with 14, while Mauritian investors had 10 and the United Kingdom nine.
Van der Merwe, who is managing partner in Johannesburg, commented: “The US has been a significant investor in South Africa, and the African continent as a whole, for some time.”
The US unveiled its new Africa strategy in December last year, stating its intention to move away from what it called “indiscriminate aid” and towards a sustainable trade and investment approach.
National Security Advisor John Bolton said the policy was a counter to what it called a “predatory”, debt-based approach to Africa by China and Russia.
Van der Merwe said: “It will be interesting to see if this new policy impacts on US investment in South Africa in future years.”
South African outbound investment was primarily focused on the UK, which received 18 deals, while Australia had 11 and the US had eight, while Nigeria was the most popular destination within Africa, receiving six deals.
“The ease of doing business with the UK and Australia, brought about by various factors, including, language, historical ties and familiarity, has meant that investment between these countries has always been good. For the UK, Brexit has impacted positively on investment between the UK and South Africa in that it has caused UK trade outreach initiatives to various of its historic trade partners, including South Africa,” van der Merwe explained.
Elsewhere on the continent, the report identified a rise in M&A activity in Nigeria, supported by rising oil output and prices, while it forecast economic improvement in Ethiopia, Ghana, Ivory Coast, Kenya and Rwanda. Van der Merwe said: “In Africa as a whole, signs of financial and economic stability should help build confidence and boost deal-making from 2019 onwards.”
He added: “Further political and economic stabilisation would provide exciting opportunities for future investment.”Source: ALB