Closing deals proves challenging in Q3

Deal flow tapers off as skittish investors are holding out for the general elections next year for a clearer picture, writes Marylou Greig

erger and acquisition activity, as monitored by DealMakers, softened in the nine months to end September when compared with the same period in 2017.

The number of deals (excluding foreign deals of which there were 62 deals by foreign domiciled companies with secondary listings on one of the local exchanges) fell to 316 deals against 336 deals in 2017.

Willem Jacobs, director corporate and commercial at Cliffe Dekker Hofmeyr, says while H1 saw good deal flow he has seen a tapering off since July. Initially, he says, clients were waiting for the ANC’s December Conference; now investors are skittish, holding out for the general elections next year for a clearer picture. Investec corporate finance head Eldad Friedman concurs with the view that the fall in M&A activity was most pronounced over the months July to endSeptember. This, he says, was felt especially in the equity capital market where introspection by institutions saw a decrease in appetite.

Friedman says there is no problem in seeing the deals but the decision by rating agencies looms large, the lack of investor confidence and the decline in corporate earnings all add to the noise which, he says, makes closing deals exceptionally challenging. Lower earnings by corporates make traditional evaluations of earnings potential difficult.

MDIFFERENT TYPES

Deal flow, he says, has been buoyed by pockets of activity. For example, property funds have seen healthy deal flow as they divest of noncore assets. A further example is the sell off by international companies of local assets. The types of deals are very different from those found during a bull market.

Corporate finance activity, especially in the past three months, gives some insight to the challenges being faced. The total value of corporate finance activity in the months July to end-September (Q3) 2018 was R39bn compared with R250bn in the 2017 period. If the R95bn NEPI Rockcastle listing is excluded, the value of R155bn in 2017 still shows a significant decline. In addition the type of activity by exchange-listed companies is telling, reflecting a focus on restructuring of businesses and debt, the unbundling of assets and repurchasing of stock on the open market.

The value of share issues declined from R43bn to R9bn, the number of transactions involving share repurchases increased more than two-fold valued at R24bn, while the number of unbundlings more than doubled to 22 when compared with the same period in 2017.

What is interesting is the dearth of listings in Q3 this year of which there were just four compared with 13 over the same period in 2017. This feeds into Friedman’s point that institutions lack appetite for equity capital markets.

UNCERTAINTY

Jacobs adds that the uncertainty, created by failed listings such as Consol, has resulted in listings being postponed until such time as there is more certainty in the ability to raise funds.

He says that unlike M&A, activity in the private equity space is still healthy. As for the reason, he points to the different time lines of the private equity funds sitting on cash that has to be invested. The JSE downturn has broadened the pickings for these funds from private transactions to the possible inclusion of small-cap exchange-listed firms. A recent example of this is the announcement this week by private equity funds Metier Capital Growth Fund II and MCGF Investment of the acquisition and delisting from the JSE of Master Plastics.

PRESSURE

Nhlanganiso Mkwanazi, cofounder and director at Medu Capital, says there has definitely been an increase in the level of activity but long-term issues with the macro economy remain, putting pressure on industries exposed to commodities, capital expenditure projects and, more recently, the consumer environment. This, he says, has made valuations tricky with pressure on earnings and growth outlook.

As valuations start moderating, becoming more aligned and in sync with the trading environment so activity will increase.

There are, he says, pockets of activity in the private equity space at the moment; one such sector is telecoms which is seeing a major shift in the landscape particularly with regard to investment in infrastructure layers such as towers, fibre rollout, spectrum and data centres.

Mkwanazi says political changes and the focus on corporate governance has been positive for confidence levels as has the move by business leaders to step up and play a role. While this different narrative is positive it will take time to effect change. The levels of strong private equity activity last seen 2006-07 are, he says, still some years away.

THERE ARE POCKETS OF ACTIVITY IN THE PRIVATE EQUITY SPACE AT THE MOMENT; ONE SUCH SECTOR IS TELECOMS

WHAT IS INTERESTING IS THE DEARTH OF LISTINGS IN Q3, OF WHICH THERE WERE FOUR COMPARED WITH 13 OVER THE SAME PERIOD IN 2017