Is the dealmaking party over? Or it is just happening somewhere else?

It was the largest-ever deal involving a South African company. Yet, seven years later, it remains a cautionary tale of why gargantuan acquisitions have fallen out of favour.

In 2016, the end-game for SA Breweries’ former CEO Graham Mackay came to fruition when Belgian-based and Brazilian-run brewer Anheuser-Busch InBev finally closed a $106bn deal to buy the company, which traced its roots to Joburg in 1895.

The deal encapsulates all that is good and very bad about dealmaking.

For years, SAB had executed a disciplined acquisition strategy: after it listed in London in 1999, its goal had been to bulk up, to ensure it was a player in the consolidation of the global beer industry. It was immensely successful, buying brewers in other African markets, then in Asia, Eastern Europe, the US and, finally, in Western Europe.

But after InBev bought Anheuser-Busch in 2008, it became clear that SAB wouldn’t win the race. From then on, its goal seemed to be to secure the best price from AB InBev.

While the 2016 deal was excellent for SAB shareholders — the offer was at a 50% premium to its share price — it was appallingly bad for AB InBev. So bad, indeed, that it features in the book The Merger Mystery, written by Geoff Meeks and J Gay Meeks, as one of the worst of all time.

Today, AB InBev’s share price is stuck at about 50% of the level at which the deal was done, probably because it still sits with about $100bn of the debt it raised to pay for the deal.

The Meeks’ book flags the astounding scale of advisers’ fees involved in the mega beer deal: $1.5bn — equal to 1.9% of the deal value.

“Towards half a billion of this was spent on advice from banks and management consultants; three-quarters of a billion for arranging the borrowing used to finance the deal. The rest went to lawyers, PR consultants and accountants,” the book says.

The battle for beer supremacy represents an extreme example of how mergers can go badly wrong.

David Holland, director of Fractal Value Advisors, tells the FM that hubris, empire building and an unrealistic belief in the benefits of financial engineering explain why so many bidders are persuaded to pay over the odds for their targets.

The AB InBev deal ticked all those boxes. And it didn’t help that extraneous factors (such as interest rates) quickly turned hostile for the beer giant. All deals involve a certain amount of luck and, by 2016, AB InBev had run out of it.

It’s a fallout that has left a stinging legacy. The fact is, no big deals have been announced involving a large JSE-listed entity in a long time.

That’s not entirely bad news: had there been greater introspection at AB InBev before the SABMiller deal, the company would have asked why so many takeovers, globally, have resulted in heavy value destruction for shareholders.

As business magazine Forbes puts it: “Studies show that more than 60% of mergers destroy shareholder value, with some estimates as high as 90%.”

The Harvard Business Review takes it up a notch with its estimate that between 70% and 90% of acquisitions fail. So it’s not as though the lack of success of M&A activity is a contentious conclusion.

The Meeks’ insightful account of why these deals persist, despite the lack of success, lists several explanations, including the large incentives for advisers and deal participants such as executives, who earn millions from buyouts. This creates “perverse, inefficient results”.

Consider SABMiller: Alan Clark, its CEO at the time, walked away with a R1.2bn payout from bonuses and share options after the deal was concluded. You’d be a brave CEO to reject such an offer, even if you’d been inclined to do so in the first place.

Casting a long shadow

The SABMiller deal has cast a long shadow over dealmaking globally. These days, you have to dig deep to find signs of life, with the macho mega acquisitions a thing of the past.

ENSafrica chief Michael Katz tells the FM the end of the era of cheap money has been the biggest blow to global M&A sentiment. “It was relatively easy to get good returns when there was no cost to money,” he says.

Katz believes there are other issues too: “Next year’s elections in the US, UK and South Africa mean there’s lots of uncertainty, and that always affects deal sentiment.”

In this context, the era of ultra-low interest rates, which stretched back to the 2008 global financial crisis sparked by Lehman Brothers’ collapse, meant that putative buyers could raise capital easily. Today, it’s not a low-cost option.

Anthony Clark, analyst at SmallTalkDaily, argues that the hiatus in dealmaking also speaks to South Africa’s precarious position.

“I don’t think anyone worth their salt would currently want to list a company,” he says. “The economic environment is uncertain, we have infrastructure and electricity woes and high interest rates [and] we’re in an election cycle where there is no certainty around as to who will be the ruling party ... next year.”

There are other factors too. Regulators across the globe are examining transactions more closely, which delays deals. As one adviser tells the FM, the longer the time between announcement and completion, the more opportunity for unexpected factors to derail the deal.

Shabbir Norath, head of corporate finance at Nedbank’s Corporate Investment Bank, says it can take a year to jump through all the hoops created by the JSE, the Takeover Regulation Panel (TRP), the Competition Commission and the BEE Commission.

If it’s a large merger involving competitors, it can take far longer to get through the competition process, particularly if trade, industry & competition minister Ebrahim Patel decides there are public interest issues. In 2016, AB InBev had to give all sorts of undertakings to the Competition Commission, while in 2012 US retailer Walmart faced similar pressure getting the green light for its R16bn acquisition of Massmart.

As for the BEE hoops, one analyst tells the FM that it often feels as though the BEE commissioner is intent on blocking every deal put before her.

Charles Boles, founder of Titanium Capital, describes a near-impossible situation: a high interest rate environment that demands high returns, and in which even the purchase of distressed assets is thwarted by the Competition Commission’s public interest demands.

“How much cash do we need on the balance sheet if we get passed on to stage 6 load-shedding or if there are water shortages?” he asks.

Mark Barnes, former banker and ex-CEO of the Post Office, says there’s also far greater scepticism over the “market price” of listed entities. “There’s much less faith that the market price is the ‘fair price’ and there’s also more interrogation of liquidity levels in a share and precisely what drives trading,” he says.

Barnes cites the example of Steinhoff, which spent years using its inflated share price to acquire real assets. And nobody wants to be the new Steinhoff.

On life support, but still alive ...

In this context, perhaps it’s surprising that there are any deals happening. But while the cogs are turning over, the nature of dealmaking has changed. 

This is clear from transactions logged in South Africa in the first half of 2023, which were as likely to be disposals or reorganisations as they were to be acquisitions.

The biggest deal in those six months, according to DealMakers, was Glencore’s sale of a 15% stake in Viterra to Bunge in exchange for a 15% stake in the enlarged entity. That $4.1bn deal pipped Steinhoff’s $4bn sale of a 45% stake in Mattress Firm.

Of the outright acquisitions, the biggest involved mining companies: Glencore bought assets from Norsk, Gold Fields bought from Osisko and Thungela bulked up with more Australian assets.

Investec also featured on the list, exchanging its shares in Investec Wealth & Investment for a 41.25% stake in the enlarged British asset manager Rathbones.

Ask anyone in the business — bankers, lawyers and advisers — for signs of activity, and they invariably refer to years-old deals such as Mediclinic, Distell, Absa, Imperial and Investec, underscoring how quiet activity has become.

The £3.7bn Mediclinic deal was part of a tidying-up exercise by Remgro, which held 45% of the international medical group and wanted to buy out the minorities. The deal, completed in May, resulted in the delisting of another large blue-chip firm.

It was similar at Distell. Heineken had offered to buy 65% of Distell, with Remgro retaining its 35% stake in the new entity. After the $2.56bn deal was finalised in late April, the South Africa-based drinks group was delisted — 18 months after the offer was tabled.

In March 2022, 12 months after announcing its offer, Emirati multinational logistics company DP World finally completed its $890m takeover of Imperial Holdings, leading to the JSE losing another blue-chip investment.

Absa’s deal was neither merger nor acquisition and, happily, didn’t involve a delisting. It was the allocation of R11.2bn worth of shares to two BEE structures.

It fits into a new stretched definition of dealmaking, along with share buybacks, which involves lots of professional advice and fees. Because, well, something has to be put in the dealmaking box.

Decade of destruction

This reticence is understandable, given the past decade, where only a slim number of headline-grabbing deals led to anything other than disaster.

AB InBev might have been unlucky, but no amount of luck would have saved Tiger Brands’ ill-considered and poorly executed $190m acquisition of a controlling stake in Nigeria-based Dangote Flour Mills in 2012.

Within two years, most of that purchase price had to be written off. In December 2015, after enduring four years of losses, Tiger sold its stake back to Aliko Dangote for $1.

Within a year, and helped by a huge injection of funds, Dangote Flour Mills was pumping profits. Little wonder Dangote is one of Africa’s richest men and Tiger’s share still chugs along at the same price it was 15 years ago.

These factors — hubris, empire-building and bad luck — are common features in the worst stories. It was that way with Nampak’s foray into Africa, just as it was with Tiger, PPC, Shoprite and Woolworths’s extensions north into the continent.

Woolworths had even less success in Australia. That was a deal that highlighted that it’s not just money that vanishes in a bad deal — Woolworths lost almost all the A$2bn it paid for David Jones back in 2014 — it’s also board and management focus.

Though there’s been some recovery, there’s little doubt Woolworths would be a considerably stronger competitive force in the South African market had the board and shareholders exerted some restraint on former CEO Ian Moir’s hubris back in 2014.

Spar’s post-2014 ventures overseas have also weakened its competitive position locally, though it has finally pulled the plug on its ill-fated venture into Poland. As Fractal’s Holland tells the FM, “though the exit NPV [net present value] is negative, it is not as horrific as continuing with a poor investment”.

And to prove it’s not only South African companies that get M&A activity wrong, just recall that Bain Capital’s debt-fuelled acquisition of Edgars was the principal reason for the collapse of a once-great clothing retailer.

Massmart, which was far from ever being a great retailer, was acquired by Walmart in 2012, in a bid by the US retailer to stake a claim in Africa. Last year, in a desperate bid to do something with the hapless South African retailer, Walmart bought out the minorities and delisted the business.

The mining sector has probably had more than its share of horror stories, given that its cycles are so much more severe and that deals are generally done in a rising market.      

Gold Fields, for example, first bought into South Deep in 1996 at a hefty premium — but it never came close to hitting its production targets. Another upcycle disaster was Anglo American’s hopelessly overpriced purchase of the iron ore deposit at Minas-Rio in Brazil.

But as Sibanye’s Neal Froneman has demonstrated, with discipline it’s possible to do great deals. His purchase of Lonmin for $286m in 2019 had all the ingredients of a winning deal, including a lame board at Lonmin. When the platinum price subsequently surged, it looked like astute timing. But even great deals can turn sour.

Lessons learnt?

Fingers crossed, some of these lessons have been learnt. The good news for dealmakers is that deals are still happening — if not the big macho deals. Rather, they frequently involve small listed companies or unlisted ones, and private equity firms.

Because they are happening in such a tough environment, they tend to be much more disciplined. “There’s more pressure to do proper deals and people are being much more selective,” ENSafrica’s Katz says.

He says while the law firms aren’t as busy with deals as they used to be, there are plenty in the pipeline, waiting for conditions to become more favourable — “they have to be triggered and clients are delaying the triggering”.

PSG Capital head Johan Holtzhausen says his company is “busy with quite a few transactions” behind the scenes, “but most of these are not yet near to an announceable form. There’s a fair bit of private equity activity.”

Holtzhausen reckons one or two of those deals might be announced before year-end.

Boles says the parties that eventually do complete deals will be the “extremely hard-nosed, shrewd operators”. This shows that “you, as an investor, might not make fortunes being bought out by them”.

Nedbank’s Norath agrees that there’s plenty of activity bubbling below the surface.

“There’s a lot of private equity funds that are looking for big lazy companies that could benefit from investors who know how to operate in Africa,” Norath says.

Cross-border deals are complicated by unpredictable currencies, even if many companies are cheaper than ever.

“Valuation levels are still very attractive for global firms looking for opportunities in Sub-Saharan Africa,” RMB’s Irshaad Paruk tells the FM. “The continent continues to be seen as a huge opportunity.”

The traditional sectors might not be active as historically — but new areas, such as infrastructure and energy (particularly renewable energy), are seeing a lot of activity.

Still, says Paruk, “the rationale for doing deals now needs to be even more robust”.

For many years, this wasn’t the case. And shareholders ended up carrying the baggage of that value destruction.

If anything positive comes from the steep slowdown in big-ticket deals, it’ll be a sharper focus on what real value can be created in the process, and a welcome recognition that chest-thumping, deal-at-all-costs CEOs are past their sell-by date.