Deal activity off to a slow start in 2018
• Numbers for first three months suggest that investors still have a ‘wait and see’ attitude towards investing in this country, writes Marylou Greig
The change in guard on the South African political front has created a better environment, of this there is no doubt; but if expectations were for an immediate improvement in fortunes then disappointment abounds. Foreign governments have pledged support for the new dispensation which should, in time, translate into an increase in foreign direct investment (FDI).
The value of merger and acquisition activity involving companies listed on SA’s various exchanges during the first three months of 2018 was R130.6bn, up from the R80bn recorded in Q1 2017. But interestingly, just over half of this value (R68bn) came from deals involving foreign assets executed by companies with primary listings outside SA. The numbers suggest that investors still have a “wait and see” attitude towards investing in SA.
Of the top five deals by value for the quarter, Richemont Securities’ acquisition of the outstanding shares in YOOX Net-A-Porter for €2.7bn (R40bn) and Glencore’s acquisition of an 82% stake in HailCreek coal mine and 71.2% stake in Valeria coal resource from Rio Tinto for $1.7bn (R20.4bn) topped the list. The acquisition by Hospitality Property Fund of seven casino precinct properties from Tsogo Sun valued at R15bn, Sanlam and Santam joint venture Sanlam Emerging Markets’ acquisition of the remaining 53.57% shareholding in Saham Finances (R12.49bn) and ATON’s offer to minority shareholders for the remaining 70% stake in Murray & Roberts (R4.67bn) completes the list.
The largest black economic empowerment (BEE) deal for the quarter by value — of which there were five — was the sale by PPC of a 25.4% stake in PPC SA to a consortium comprising the PPC South Africa Employee Trust, a community development trust and eligible black entrepreneurs for R2.15bn.
Gasant Orrie, the Cape managing partner at Cliffe Dekker Hofmeyr and director in its corporate and commercial practice, believes helping move SA in the right direction is government’s renewed commitment to certain policy and regulatory matters.
For example, he says this is evident in the renewable energy space with the recent signing of the R56bn Renewable Energy Independent Power Procurement Programme projects — government has followed through on policy decisions and this will see an inflow of investment into the country’s economy.
While he concedes that these are done deals, they provide a strong enough catalyst for future deals incentivising people to invest on the back of these projects. Investors will see the next round as an opportunity to do similar deals.
Initial projects could see merger and acquisition activity in the form of BEE deals, restructuring and early exits. Almost three years since the introduction of the updated BBBEE Codes of Good Practice, there is a marked rise in the number of BBBEE merger and acquisition deals in SA. This increase is a positive sign that the policy is having its intended impact.
Against a background of a gradual increase in FDI Orrie sees South African companies focusing on local and regional deals rather than the push offshore as witnessed in 2017. For many companies the opportunity now exists to restructure, implement BEE partnerships, refinance and generally clean up before going offshore. Companies would do well to explore opportunities presented by regional and African deals first where the terrain is more familiar and the cultural perspective similar.
While it is difficult, he says, to predict when these positive indicators and trends will result in increased level of deal activity in SA, there has been renewed interest by investors in the following sectors: mining — should see increased activity on 2017 levels, reflecting more confidence in government to find a solution to the Mining Charter impasse; energy and renewable energy — boosted by the recent signing of agreements; financial services — driven by BEE considerations in the local market; retail — with particular focus to opportunities in East and West Africa; education — locally and in the rest of Africa; and healthcare — investment into other African markets.
Rainbow Field, director in the M&A team at Bowmans Kenya, concurs with the increased interest in social infrastructure sectors such as education and healthcare in East Africa, particularly from private equity firms. Deals in Kenya are noticeably down, a lagged effect, she says, following on from the political elections of 2017 and generally slower growth in the region. Deals are taking longer, investors are wanting additional reassurances and, as is the case in SA, are taking a wait and see attitude with the economy.
Field says the sectors most affected are manufacturing, retail, real estate and financial services — in part affected by the interest cap rate applied by government in 2016 in an attempt to regulate interest rates and so provide access to affordable credit for the masses and, in turn, stimulating economic growth. The outcome, however, has been negative and the legislation is under review.
Both Orrie and Field expect deal flow to increase in the second half of 2018.