Global dealmaking falls 16%
ACCORDING to the full year 2016 Mergers & Acquisitions (M&A) Review by financial advisers Thomson Reuters, global M&A activity totaled US$3.7
Trillion last year, a 16 per cent decrease from full year 2015 levels. It was however the third highest amount for worldwide deal making since records began in 1980.
Approximately 100 deals with a value greater than $5 billion were announced during 2016, for a combined value 30 per cent down on the prior year. Overall, 46,055 worldwide deals were announced during 2016, a one per cent increase compared to the previous year. However, in a positive indicator global deal making increased 50 per cent in the final quarter of 2016 to US$1.2 trillion, compared to the third quarter. Seven of the top 10 deals announced during 2016 were announced during the fourth quarter.
Director and National Head of CDH’s Corporate and Commercial practice, Willem Jacobs says that “we’re still seeing some activity in South Africa, while the rest of Africa remains relatively buoyant”.
“South African businesses realise there are challenges as the prospect of a ratings down grade still exists. But they are innovating and applying strategies that can move the economy forward.
“The outlook for intra-Africa trade, in fact, looks quite promising and businesses are likely to see opportunities for mergers and acquisitions in the rest of Africa, Europe, Asia and the Middle East,” says Jacobs.
“The local economy remained under significant pressure during 2016, following an equally tough 2015. However, as dealmakers we have to ensure businesses were able to maximise the prospects on offer,” he adds.
South African M&A for 2016 has yet to be tabulated, but major regions such as the US and Asia Pacific are both down 17 per cent and 22 per cent respectively according to Thomson Reuters. Asia Pacific targets accounted for 25 per cent of worldwide M&A, compared to 21 per cent for Europe.
Deal making in the Energy & Power sector totaled US$608 billion during 2016, an increase of 15 per cent compared to 2015 levels, while Technology M&A decreased 15 per cent by value, but fell just one per cent by number of deals. Materials deal making increased 14 per cent compared to a year ago. Six of 12 major industry sectors each accounted for at least 10 per cent of M&A - the most balanced annual sector breakdown since records began in 1980, noted Thomson Reuters.
Powered by record levels of outbound M&A from Chinese acquirors and inbound M&A for US assets, cross-border M&A activity totaled US$1.4 trillion during full year 2016, accounting for 38 per cent of overall M&A volume and the highest annual percentage since 2008.
According to estimates from Thomson Reuters/Freeman Consulting, M&A advisory fees from completed transactions totaled US$30 billion during 2016, a three per cent decrease from 2015.
In South Africa, M&A activity in the mining sector is expected to continue unabated this year, as the continued consolidation of commodity prices positively impacts on the sector and strengthens investor confidence.
In a recent report, global advisory firm EY noted that the supply of assets into M&A will continue to be the result of portfolio realignment owing to changes in strategy, as well as continuing financial restructuring. However, EY expects this to be less intense than in 2016.
One of the biggest mining deals of recent times is the acquisition by the South African gold mining major, Sibanye Gold, of Rustenburg Platinum Mines has come into effect.
Sibanye Rustenburg Platinum Mines (SRPM) has taken ownership of the Bathopele, Siphumelele and Thembelani mining operations, and other assets on a going concern basis, including normalised levels of working capital. Sibanye paid the purchase price of R1.5 billion in cash from its existing cash resources and debt facilities.
Sibanye now holds 74 per cent of SRPM and the remaining 26 per cent of the company is held by Newshelf 1335 Proprietary Limited (BBBEECo SPV).
Speaking at SRK’s 3600 Mining Perspectives seminar in Johannesburg late last year SRK Consulting corporate consultant Roger Dixon said that a change in attitudes – from boardroom to pit – will be the only way for mines to escape low productivity levels and find a path back to long-term sustainability.
“With productivity levels today 25-30 per cent lower than they were a decade ago, it is not enough for mines to focus on isolated areas of operation for a magic bullet. Neither will the gradual process of continuous improvement break us out of the current untenable situation,” said Dixon.
He said much of South Africa’s mining sector was now bound by a shaft infrastructure that had long exceeded its planned life and was no longer efficient.
“Much of the gold industry, for instance, is still running on plus 60 year old infrastructure that was only designed for a 40 year life of mine,” he said. “There also has not been enough forward ore reserve development, due to capital constraints – and this links directly to productivity.”
Dixon also blamed the poor performance on the use of ‘1950s technology’ like compressed air driven rock-drills; compressed air is one of the most inefficient power sources.
“Perhaps more importantly, however, it is our dated management model that holds back real productivity gains,” he said. “The industry has been through many drastic changes in recent decades – from trade union recognition to violent strikes – but we have not formally reviewed management competencies to perform optimally in this new and challenging environment.”
He highlighted the need for mining operations to engage constructively with a wider range of stakeholders, including employees and communities, to find ways of ensuring a wider spread of benefits for more people.
“The problem is that declining productivity has been proceeding alongside persistent inequality among South Africans, as well as a growing population,” said Dixon. “This is a toxic mix that threatens not only the mining industry, but the legitimacy of capitalism as a whole.”
An important way forward was through creating value by applying fast-developing technology across all elements of mining operations. Digital innovations allow mines to monitor and control various activities much more efficiently – and also more safely; remote control functions mean that fewer people are required to work in high-energy zones at the working face.
“Progress in mining will shift from how well the operation moves material to how well it collects, analyses and acts on information to move material more productively,” he said.