Deal flow slows
But still some large acquisitions
MERGER AND ACQUISITION (M&A) activity in South Africa has dropped off sharply from last year. It’s not surprising and due to the high level of M&As last year and unsettled markets and lower business confidence this year. But Mergermarket, which compiles the M&A report, also lays some blame with SA’s banks.
Mergermarket has offices in New York, London and Hong Kong. It tracks and provides intelligence on M&A deals worldwide. In its round-up of inbound and outbound M&A deals in SA for the first three quarters of 2008, Mergermarket notes: “While South African banks have been largely shielded from the global credit crisis there’s little doubt the increased cost of debt, liquidity issues and high interest rates have had an effect on M&A in the country.”
But if SA’s banks are more reluctant to finance M&A deals, they’re still coining it as financial advisers. Standard Bank tops the value table, having advised on seven deals worth US$2,6bn (for consistency US$ amounts haven’t been converted to rand, due to sharp swings in the US$/R exchange rate). Investec has so far been the most active financial adviser, with 14 deals valued at $1,3bn.
Total M&As in SA for the first three quarters stand at 104 deals valued at $8,3bn, an 8% decrease in the number of deals for the comparable period in 2007 and a significant 53% lower in value.
Mergermarket says foreign companies buying into SA have been increasing steadily this year quarter on quarter but it’s well below the peaks achieved in 2007. Half the SA companies being acquired are active in the mining and industrial sectors, worth 75% of the value of deals. British acquirers are most active, accounting for 56% of deals by value and 23% by volume. Britain is also the most popular destination for SA companies making acquisitions.
Looking to the year ahead, Mergermarket says the drivers of corporate activity should continue to be factors, such as cross-border M&A deals and black economic empowerment. “However, the spectre of market instability means companies are likely to adopt a more cautious approach when evaluating M&A opportunities.” It also warns market turmoil may be felt in some empowerment deals where equity’s been used as security for loan financing.
That’s currently being seen, with the value of some new empowerment shareholders’ equities dropping below the level of loans provided for the shares. “Nonetheless, market instability will also undoubtedly create opportunities for increased consolidation in a number of industries.”
Mergermarket mentions mining as an example, where difficulties faced by platinum juniors in raising finance mean some small companies could fall prey to larger miners with access to capital. It refers to recent developments, with Impala Platinum saying it will make a bid for Northam Platinum and Mvelaphanda Resources and Aquarius Platinum, signalling plans to take part in industry consolidation. Xstrata also had plans to buy Lonmin but called that off due to unsettled markets.
M&A in the property sector is also likely to continue as sector funds “seek to increase both liquidity and size”. Mergermarket also expects consolidation to continue in the IT and telecoms industries due to increased competition and technology convergence.
Looking at the top 10 deals by value (see table), M&A activity was dominated by Standard Bank and Liberty Holdings (Libhold). That followed years of growing pressure from minority activists to get Standard Bank to collapse the artificial pyramid control through Liberty Life of Liberty Group and unlock value trapped by the control structure.
Standard Bank finally succumbed, making an offer to Libhold minorities but not removing the structure. Instead, Libhold is buying out Liberty Group, with the plan to delist it and leave Libhold as the only entry to Liberty Group.
One deal listed on the table didn’t happen: Bidvest wanted to buy 25% of sluggish packaging giant Nampak. After some confusing signals, Nampak’s board indicated it wasn’t keen on the offer. Bidvest said it might reconstitute the offer, but in the end walked away.