Caution rules right now, but the future is looking rosier
As the Covid shock settles, fundamentals of successful dealmaking will return
Not surprisingly, mergers & acquisitions (M&A) activity has slowed down since the Covid pandemic started. Many deals that were in the pipeline during the first half of 2020 were put on hold to allow management teams to focus on cash preservation and ensuring their businesses could survive through the extended lockdown.
Sellers have been hesitant to come to market in this economic environment, assuming that buyers would be scarce, according to Mike Donaldson, CEO at private equity company RMB Corvest.
“Business performance has been knocked by Covid, so sellers have wanted to wait for earnings to improve, resulting in a low volume of quality opportunities in the market.”
Not only have earnings been affected by Covid, says Donaldson, but because the economy is still recovering, it’s hard to forecast future earnings, making valuations and sustainable earnings tricky for investors.
He says deals are taking much longer to execute and conclude due to the lack of interaction and access. “Good dealmaking is an art, not a science, and the face-to-face interaction between a private equity team and management team is absolutely vital.”
According to Refinitiv data, in 2020 the industrial sector was the primary target for inbound deals, with 14 transactions, up 133% year on year. These deals were all small in value, yielding a total of $37bn.
Though the UK was one of the primary investors in SA companies last year with 25 deals, up 25% year on year, the biggest deals were brought in by US investors, with total deal value amounting to $871m, driven largely by the acquisition of Aspen Pharmacare’s Thrombosis by Mylan for $759m.
This year, Mr Price has agreed to buy 100% of Yuppiechef in a deal valued at R470m, and the Competition Tribunal has approved a merger between Mr Price and Power Fashion. Another recent deal is the acquisition of House of Monatic from Brimstone Investment Corp.
A lack of available capital and acquisition finance — as well as the challenges of pricing deals in an uncertain market — are resulting in investors taking a cautious, waitand-see approach, says Wildu du Plessis, partner and head of Africa at law firm Baker McKenzie.
Du Plessis says dealmakers are thinking carefully about which businesses and sectors will be winners and which will be losers, and where the pandemic has created opportunities to acquire quality assets at a discount.
Much of the deal activity for the foreseeable future, says Du Plessis, will be generated by restructurings, disposals and corporates looking for investment opportunities in offshore markets.
“Our forecast remains that SA’s M&A market will remain weak in the near term, with a modest recovery in dealmaking activity in future,” he says.
M&A activity could come from distressed M&A transactions, where buyers with strong market positions or balance sheets and an appetite for risk seek to capitalise on bargains available in the most challenged sectors, such as retail, transport, energy, construction,
What it means
The earnings knock from Covid has slowed down dealmaking, but it's also provided opportunity through disposals and restructuring hospitality and leisure, he says.
Or it could come from sectors that have performed well during the pandemic, such as technology, health care and fintech.
“The bottom line is that there will be very few sectors that have not been badly affected by the pandemic, and this could produce opportunities for buyers who have done their homework and have an appetite for risk.”
In the mining sector, the upswing in commodity prices — from battery minerals to gold and iron ore — has improved levels of cash generated by many minerals producers, which provides some scope to drive new projects or expansions, says Andrew van Zyl, director and principal consultant at SRK Consulting.
“However, M&A remains a quicker path to growth, albeit one that carries myriad risks of its own, not least being the valuation of assets in a volatile price climate, synergy value not being realised, or failure to mitigate the risks associated with M&A related to early-stage projects.
“With the increased revenues flowing into many mining companies, and the expected progress behind the scenes of the lengthy due diligence processes to assess M&A targets, we are likely to start seeing decisions made in the mining sector,” says Van Zyl.
Higher commodity prices, he says, provide a good foundation for a busier M&A market, particularly as, outside a few commodities, there are limited opportunities for rapid organic expansion within existing operations.