Currency constraints

When it came to cross-border mergers and acquisitions (M&A) into SA, the US$11.4bn that was chalked up in the last quarter of 2015 was always going to be more than a little tough to beat. That number was boosted by the reverse takeover of Steinhoff to facilitate its Frankfurt Stock Exchange listing.

Global law firm Baker & McKenzie reports that the value of inbound M&As is down by over 90% to $745m.

It would have been even lower if not for one deal: Dubaibased payments provider Network International’s acquisition of Emerging Markets Payments Group for $300m from private equity firm Actis.

SA faces other headwinds in the inbound M&A space. They include rand volatility, China’s economic slowdown, the threat of SA’s sovereign rating downgrade to junk status and political turmoil. “[These] have shaken investor confidence in SA,” says Morné van der Merwe, a partner at Baker & McKenzie.

However, it’s not all bad news. Compared with the first quarter of 2015 the value of inbound M&As was up a respectable 10.5% in the first quarter.

The rising trend is sustainable, says Van der Merwe.

“SA is still the first destination of choice for foreign companies wanting to venture into Africa, especially Southern Africa,” he says.

Another factor is stimulating inbound M&A activity: distressed assets, especially in the mining sector. Foreign companies with strong balance sheets in hard-currency countries see good assets to be acquired at knock-down prices, says Van der Merwe.

On the outbound M&A front, SA companies’ enthusiasm faded notably in the first quarter of 2016. “Deal value was $50m lower than in the first quarter of 2015,” says Van der Merwe. “We believe this is due mainly to rand weakness against the dollar slowing M&A activity into developed countries.”

Outbound M&A deals in the first quarter of 2016 were small. Typical was The Foschini Group’s acquisition of UK fashion retailer Whistles in March for £4.6m.

However, Van der Merwe believes the weakening rand will not affect outbound M&A activity from SA into the rest of Africa markedly.

“In fact, we believe crossborder M&A activity from SA into the rest of Africa is on the rise,” he says.

As an example, he says Reunert is to acquire wire and cable producer Metal Fabricators of Zambia in a deal worth $12m. Other sectors in Africa are attracting SA companies. “Most notable in the short term are the Internet and e-commerce fields,” says Van der Merwe. “In the long term it will be the pharmaceutical and infrastructure fields.”