Activity in the mergers and acquisitions (M&A) space is a direct indicator of the health of any economy. It thus comes as no surprise that M&As dropped off in SA in the second half of 2022 as the consequences of the country’s energy crisis started to bite. Yet while the implications and future are not very clear at this point, deal makers are much more upbeat about African prospects north of SA.

‘We called our global M&A outlook for 2023 Headwinds, Tailwinds and Fog. That title is a pretty good description of where things currently stand, both globally and in South Africa,’ says Rudolph du Plessis, a Johannesburg-based M&A specialist and partner at law firm Herbert Smith Freehills. He points out that M&A activity ‘tapered off considerably in 2022, especially in the second half of the year, after a record 2021’.

Roxanna Valayathum, director of corporate and commercial practice at Cliffe Dekker Hofmeyr (CDH) makes a similar point. ‘Listed deals were down in the third-quarter of 2022. There were only 206 listed deals in South Africa compared to 295 in 2021,’ she says. Valayathum notes that this figure was even lower than the number of deals in the pandemic-struck year of 2020 (238).

Marylou Greig, of corporate finance monitoring company DealMakers Africa, is even more blunt about the current situation. ‘Facts are facts,’ she says. ‘The numbers show that deal making in South Africa is in steady decline.’ Greig argues that there had been a ‘slight correction’ in 2021 as deals delayed by the pandemic lockdowns went through. ‘However, the effect of the political and energy-related woes faced by South Africa Inc on investor confidence is seen in the 7% decline on numbers recorded since 2020,’ she says.

The fact is, the listed space in SA has shrunk and this is ‘of concern’, says Du Plessis. According to investment analyst Vikash Shiba, the number of firms listed on the JSE dropped by close to 30% between 2012 and 2022. However, this is a global trend, driven – among other factors – by the greater availability of private capital and more accessible debt markets. Frankfurt’s listings have contracted by 35% in approximately the same period.

Valayathum remains upbeat, citing unlisted deals in SA that have actually been on the increase. ‘There were only 73 unlisted deals in South Africa in 2020. This has increased to 88 in 2022, the same number as in 2021.

‘Furthermore, in the first nine months of 2022, there were 54 cross-border transactions in which one party was South Africa based. Interestingly, in the same period, 13 deals were concluded between South Africa and the United Kingdom,’ she says. This, in part, is a reflection of the continued internationalisation of SA business and its interest in the rest of the continent.

‘A great deal has shifted,’ says Du Plessis. ‘We used to think that M&A required the maximum-possible stability if it was to flourish. But the pandemic and especially the bounce-back in 2021 has changed all that.’

In fact, disruption has been shown to be good for M&A activity. ‘Around the world, companies have found it necessary to restructure and reposition in light of digitalisation, the energy transition and ESG,’ he says, adding that these shifts have increasingly thrown the spotlight on Africa. ‘Sub-Saharan Africa is much more attractive now than it used to be,’ he says.

There’s a massive focus on battery and other ‘green’ minerals such as lithium, cobalt and copper. ‘Many African governments are getting their acts together in terms of investment climate variables,’ says Du Plessis. He predicts an increase in M&A and, in fact, general business activity in sub-Saharan Africa.

He adds that disruptive technologies are a part of the interest in sub-Saharan Africa, but makes the point that these aren’t the only factors driving M&A activity. ‘We have clients in Japan and an office in Tokyo. For a while now, my presentations to them have been full of talk about fintech and e-wallets in Africa. But there’s been a shift. They’ve moved back to an interest in traditional M&A drivers like mining, banking and insurance.’

Valayathum concurs. ‘As technology advances and people strive to stay connected and improve access to information and resources, we anticipate considerable deal activity in technology and fintech. Disruptive technologies will form a big part of future activity as business looks towards achieving increased efficiencies.’ She adds that ‘as the world faces a global energy crisis, we will see a significant focus on deals in the resources and renewable-energy sector’.

Greig argues that ‘the secondary market for private renewable-power assets is starting to come of age’. She cites a recent deal where global sustainable-energy investor Actis and its implementing partner Mainstream sold the Lekela platform to Infinity Group and the Africa Finance Corporation for $1.5 billion. The platform owns wind farms in SA, Egypt and Senegal.

In the early stage of the development of a private-power market, assets will almost invariably be owned by the original implementors. But once they are up and running, the original player will want to move on to new projects that allow full scope for their capacities. Their exit, in favour of more passive investors such as pension funds, is part of the efficient working of the market and a sign of maturation.

Over the past decade, there’s been criticism of the interventionist aspects of M&A regulation in SA. The Competition Commission, which falls under Minister Ebrahim Patel’s Department of Trade, Industry and Competition, has the right to intervene in deals ‘in the national interest’. This is a very considerable power as all M&As conforming to certain criteria (a value of more than R600 million or an annual turnover above R100 million) have to be approved by the Competition Tribunal.

Fears have been expressed that some of the conditions for the deals approved are onerous and a disincentive to investment in SA. The deal whereby privately owned international beverages company Heineken bought SA spirits- and cider-maker Distell, for R40.1 billion, was approved in early March after an 18-month process. The approval has a long list of conditions attached, including the sale of the smallest of the new company’s three cider brands (Strongbow), with support for the new brand owner in terms of production, packaging, distribution, marketing and IT knowledge, being mandated by the Competition Commission. Effectively, for Heineken’s acquisition to be approved, it has to support a rival for one of its major lines of business.

Other conditions, including specified direct investment, BEE ownership, employee ownership, limits on ‘restructuring’ (effectively employment guarantees) and various social and small-business development projects, have been typical of not only the Heineken deal but, also, earlier foreign acquisitions of Pioneer Foods (Pepsico), Burger King (Emerging Capital Partners) and Massmart (Walmart).

Judge Dennis Davis has described these sorts of conditions as ‘rent-seeking’, which implies they are an impediment to doing business. Du Plessis, however, is not perturbed. ‘Competition authorities have become more interventionist all over the world,’ he says.

‘The sorts of things demanded in South Africa are similar to what is required in the UK, the US and the European Union. These requirements are often imposed in the name of “national security” in the face of competition from China and Russia’s invasion of Ukraine. There is increased oversight of M&As all over the world.’

Both Du Plessis and Valayathum suggest that M&A activity should rebound over the next 12 to 18 months. In the interim, there is still considerable activity.

Valayathum singles out ‘the real-estate, resources and technology sectors’ as areas of ‘significant current M&A activity’. Du Plessis says that fintech in Africa is an area to watch. ‘They’re doing some really interesting stuff in places like the Nairobi Securities Exchange. In some respects, Kenya is ahead of South Africa. It’s important to keep an eye on this.’

Du Plessis has a request of the SA government. ‘It is important that all departments are on the same page. That sort of uncertainty – the kind that comes from mixed messages – is nothing like the positive disruptions that can drive fresh deals. It puts off investors,’ he says.

That doesn’t seem a big ask if the result is to increase deal flows for SA.

By David Christianson
Image: Gallo/Getty Images