Deal flow slows

But still some large ac­qui­si­tions

Finweek English Edition - - Companies & Markets - SHAUN HAR­RIS shaunh@fin­

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.

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