M&A activity results for H1 2017
M&A activity results for H1 2017
Published Date: 2017-08-04 | Source: DealMakers | Author: Marylou Greig
Political and economic disruptions constrain M&A activity
The value of merger and acquisition activity by JSE-listed companies for H1 2017 was R185,5 billion off 220 deals (excluding failed deals) with the largest individual contributor to the figure, the acquisition by Vodacom of a 34,94% indirect stake in Safaricom for R34,6bn. This compares with R259,67 billion off the same number of deals in H1 2016.
Analysis by DealMakers shows that BEE activity undertaken by JSE listed companies almost doubled during the period when compared with H1 2016, partially a result of the anticipated release of the amended Mining Charter Three - unleased in June on an already battered local mining industry with devastating set of new legal requirements. In a double whammy the Department of Trade and Industry lowered the B-BBEE ownership transaction threshold to R25 million from R100 million - deals with this low value must now be registered with the BBEE Commission.
In the unlisted space (companies not listed on the JSE) M&A activity was valued at R18,99 billion from 123 deals. Of these, 19 were private equity transactions, 10 were BEE transactions and two were failed deals. The largest unlisted deal announced during the period under review was the $900 million (R11,7 billion) acquisition by Sinopec of a 75% stake in Chevron SA assets and 100% of the Botswana assets.
Regulatory uncertainty is a sure fire way of deterring investors and this is evident in both the economic and legislative space. In the past few months a great deal has happened; there has been the appointment of a new Minister of Finance, the country has been subjected to downgrades by international ratings agencies, the mining industry has been shaken by the release of the amended Mining Charter and the economic and political will has been rocked by the release of the state capture report and more recently the surfacing of the GuptaLeaks.
Many deals, particularly in the mining and renewables space, have been put on hold due to delayed implementation of legislation and increased regulatory challenges leaving investors questioning the viability of making long term investments in these industries. Shabbir Norath, head of corporate finance at Nedbank CIB believes other factors such as the up and coming vote of no confidence, the elections in December and the disarray in which many of the state-owned enterprises find themselves adds to the uncertainty.
Yet despite this, he says, there is a supply of transactions in the pipeline and this activity is seen across a broad number of sectors. Gasant Orrie, the Cape managing partner at Cliffe Dekker Hofmeyr concurs that things are indeed busy. The move to invest offshore by local companies, such as those in the healthcare, retail and listed property sector, in search of better returns for shareholders, has been driven by a saturated local market. These companies, he believes, are not deterred by the noise around state-owned enterprises and Guptagate.
Additional legal requirements now need to be met by M&A players when closing a transaction and the source of work has shifted from purely domestic to include clients in other parts of Africa and offshore. Orrie believes the increase in the demand for advice from local advisory firms is testimony to the depth of expertise which encompasses cross border and international experience. He attributes this to three factors: the cost of advice in Rand terms makes it competitive compared with US and European counterparts, the South Africa time zone makes for efficient communication on transactions and local advisers are seen as pragmatic, entrepreneurial and results-driven, traits valued by many clients. He says companies with roots in South Africa and that have gone offshore and listed in other jurisdictions may use foreign advisory firms but will tend also to use local advisers to drive the transaction.
So while deal activity may not be at levels seen in 2007, the industry is by no means in free fall, rather it has maintained a pretty even keel over the past several years. What has changed is the absence of the mega deals, the motive behind disposals and acquisitions and the way in which deals are now structured. While many investors are prepared to sit on the side-lines for the time being, there are those with an appetite for risk. Pricing, Norath says remains a challenge, with investors not only more selective but also price sensitive and prepared to walk away and not overpay for assets. This attitude is reinforced by the increase in the cost of funding due to investment status downgrades.
The current environment has seen companies restructure and dispose of non-core assets. This provides good opportunities for acquisitions by other parties and offers scope for mergers and joint ventures. Norath notes that there is an increase in the number of companies seeking to refinance existing debt. This is substantiated by data collected by DealMakers for the second quarter of the year which shows that no less than 62 JSE-listed companies issued profit warnings during three month period.
Morné van der Merwe, managing partner at Baker McKenzie's Johannesburg office, says foreign investment appetite for Africa is down; the continent is not top of mind in investment decisions in Europe or US at present. Events in South Africa have also affected this appetite, he believes, with perceptions that if it is a struggle to do business in South Africa then so too will it be in other countries in Africa.
Those investors with an appetite for risk however, continue to find good quality assets. He says private equity deals continue to underpin activity in information technology, banking, agriculture, education and mineral resources. Van der Merwe notes that Australian investors are back on the investment radar in Africa and believes that their understanding of Africa stems from the fact that Australia is also a regional economy enabling Australians to identify good opportunities. The Chinese continue to be a force in inbound investment on the continent with focus on food supply and agricultural projects while Germany's presence is around investing in automotive and technology businesses.
Van der Merwe says an interesting development has been the emergence of Dubai as a hub for specific multinationals seeking investments into Africa. He sees privatisation which has been off the radar for some time, becoming more prominent and could provide a boost for mergers and acquisitions in the future. Education is another area to watch, he believes, as the creation of a growing middle class will increase demand for private education and could see local companies moving cross border into this deal making space.
Knowledge is key to investment decisions and the difficulty faced by investors is the perception that Africa is a country. The challenge facing African leaders is to create certainty which in turn will establish a favourable environment in which to do business. Each country has its own regulatory environment and associated problems. Currency fluctuations add to the uncertainty which makes it difficult to price deals. Van der Merwe believes that the establishment of a regional hub would overcome the difficulties faced with fragmented legislation and would help investors navigate the deal-making terrain. The knock on effect would be to make Africa more competitive with other jurisdictions such as South America. Bureaucracy, he says, delays closing deals and time kills deals.
Analysis and rankings by DealMakers of M&A activity of each South African advisory firm (in relation to JSE-listed companies) is reflected below. The results are in respect of the first six months of 2017.
General Corporate Finance activities of the JSE-listed companies continue to provide a solid underpin for the advisory firms. In H1 Barclays' sale of its 33.7% stake in Barclays Africa for R37.7 billion stands out as the biggest ECM transaction so far this year. Capital raised by companies via the issue of shares totalled R90,5 billion, double that raise over the corresponding period in 2016. What is interesting is the number of companies to list in the past six months. Of the 16 listings, this compares with just 5 over the same period in 2016, four were exchange traded funds and three listed on the new exchange ZARX. The total value of listings at R17,7 billion are dominated by Kaap Agri (R4,75 billion), Sea Harvest (R3,25 billion) and Long4Life (R2,73 billion).