Mergers & acquisitions
“New developments are time-consuming, and even mines on care and maintenance can take a long time to prepare and recommission. Mining is heavily regulated, so generating new capacity also usually involves lengthy permitting and consultation periods.”
Van Zyl says that while there is scope for consolidation within SA’s mining sector, most M&A activity is likely to be outward-looking to countries elsewhere in Africa or abroad.
According to Du Plessis, there’s no question that poor business confidence in SA has affected the M&A market. “Both international investors and local corporates are discouraged by SA’s business and socioeconomic environment.”
Future prospects
The African Continental Free Trade Area is expected to boost investment both in Africa and SA. After Brexit, says Du Plessis, big African investors in the UK and EU will continue to target African sectors, hoping to capitalise on new economic partnership agreements and the launch of free trade in Africa.
In the US, a Biden administration is expected to further encourage investment and trade with African countries, including SA.
“While the country will be weathering the devastating effects of Covid for some time, the future M&A forecast looks brighter, with good investment opportunities becoming clearer across the continent once the pandemic eases,” says Du Plessis.
However, as stronger companies buy weaker ones, competition law is becoming a key consideration for many M&A deals.
“Companies will be relying on failing firm arguments to justify the consolidation of markets associated with M&A activity before the competition authorities.”
Du Plessis says the Competition Commission
has already increased its scrutiny of M&A transactions, taking the view that the benefits of foreign direct investment can’t be at the expense of the economy and the public interest that the Competition Act seeks to protect.
Though local markets have experienced a shock in terms of earnings and dealmaking, Donaldson believes that in SA, the fundamentals for sustainable dealmaking will return.
“The majority of the deals that we come across arise as a result of founders looking to retire, diversify a percentage of their wealth offshore, or bring in a reliable BEE partner. We are also seeing parent companies looking to diversify their complex group structures and unbundle noncore assets,” says Donaldson.
“We don’t see any of these attributes changing in the foreseeable future and, if anything, they could increase given the recent shocks in the market.”
As the overall measure of long-term success of M&A transactions shifts to incorporate more than only financial metrics, Donaldson says that environmental, social and governance (ESG) issues are starting to play a growing role across the globe in private equity, particularly for third party internationally raised funds in SA.
“We expect this trend to continue gaining momentum,” he says.
Du Plessis agrees, pointing out that ESG has become one of the hottest topics for businesses, their boards, customers and employees.
“The dial has shifted; an ESG strategy isn’t just about doing the right thing anymore, but is now a prerequisite to business success. We expect it will become an essential element of investment in Africa.”