Businesses wait on positive sentiment
• Current circumstances are the effects of the Zuma era; 2018 will be tough but there is optimism out there, writes Marylou Greig
The stuttering economy — which saw the contraction of GDP by 2.2% in the first quarter of 2018 representing the largest since 2009 — has been dealt another blow by the news that the ruling party will move to amend the Constitution to allow for expropriation of land without compensation.
While this call may be premature, as Parliament is still in its review process, it will do little to build much-needed investor confidence.
If hindsight teaches us anything it is that M&A activity tends to weather the storm — it is by its very nature opportunistic. There is a noticeable rise in the type of work being undertaken, with restructurings in the form of disposals of noncore and failing assets as well as consolidations.
So in spite of the pervasive economic and political noise, the value of M&A activity involving companies listed on SA’s various exchanges during H1 of 2018 was up at R286.8bn on the R189.2bn recorded in H1 2017. On a quarterly basis, deal value totalled R134.8bn at the end of June up by 30 deals on the 119 deals valued at R108.7bn announced in Q2 2017.
Lydia Shadrach-Razzino, Director at ENSafrica in the corporate commercial department, says the pure M&A market is soft; the sexy deals of five to six years ago are simply not there. The current circumstances, she believes, are the effects of the Zuma era; 2018 will be tough but there is optimism out there, investors are not putting plans on hold but rather adopting a cautious approach, working through the crunch time until the market turns.
Arie Maree, Ansarada MD — Middle East & Africa, confirms this trend. Activity in the Virtual Data Rooms (VDRs), which are controlled-access websites of software platforms that bidders and advisers can use to peruse confidential corporate information before proceeding with a purchase or disposal, IPO or capital raise, have for the months April through to June been substantial, reflecting the market’s resilience to negative macroeconomic sentiment.
Between 30 and 40 transactions closed out with double that in number of opportunities. What is interesting he says is that of the deal flow, 90% is South African and concentrated in the areas of energy, mining, technology, telecommunications and industrial and, unlike in recent years, deals being executed have a strong South African flavour with less outbound transactions taking place.
Maree says analysis recently carried out by Ansarada of the activity in the VDRs shows that the close out on deals has become shorter and sharper; disruptive technology, which continues to evolve, is ensuring that the preparation and presentation of information is carried out efficiently and effectively.
There is, he says, a scrutiny on price across the board which is in keeping with the slow economic growth environment.
PSG Capital MD Johan Holtzhausen says uncertainty in the system is not conducive to new listings or capital raising which makes conditions particularly difficult for small market cap companies needing to raise funds, unless there is a good story to tell.
The softer trend in cross border M&A he attributes to the fact that investors are conscious of the need to be prudent. While there are numerous opportunities to be had, these, he says, must be assessed in terms of one’s market cap, whether the price to be paid is palatable particularly if debt is introduced into the larger transactions — given the economy’s weakness such a scenario could create potential for disaster.
Factors such as existing cross-border footprint, the sector type and the exchange rate all play important roles; one size fits all does not apply.
TOP DEALS
The top deals by value by primary listed companies announced for the period April to June included Naspers’ disposal of its 11.18% stake in Flipkart valued at $2.2bn (R27.76bn) and the sale by Vodacom of a 6.23% stake in the company to its BEE investors valued at R16.41bn.
Secondary listed South32 acquired the remaining stake in Arizona Mining for $1.3bn; Anglo American disposed of a further stake in Anglo American Quellaveco ($600m); and BHP Billiton sold off its Cerro Colorado mine in Chile to EMR Capital Advisors for $320m.
Old Mutual’s Managed Separation dominated the general corporate finance tables in the three months to end-June. The listing of Old Mutual Ltd with a market capitalisation of R145bn topped the transaction table by value, followed by the secondary listing of Quilter at R50.98bn.
Holtzhausen, ShadrachRazzino and Maree agree that while investors are cautious there is an underlying confidence that sentiment will improve. While there is always room for smaller deals regardless of the situation, positive sentiment must flow through to the economy before there is a strong uptick in M&A activity once again.