Following a lean 2018, the market consensus suggests that the JSE looks well priced for an uptick in mergers & acquisitions (M&A). Investors also expect that a more stable local climate after the elections will drive an economic recovery that spurs deal activity.
This view is supported by the "Global Transactions Forecast" from Baker McKenzie and Oxford Economics, which estimates that local M&A activity could reach $6.2bn in total value — up from $4.3bn in 2018 — thanks to President Cyril Ramaphosa’s growth policies and anti-corruption efforts.
Large local blue chips with healthy balance sheets looking for growth and access to new markets will likely head offshore as the weak local economy offers scant support for organic growth.
Eldad Friedman, co-head of investment banking at Investec, highlights the UK as a focus area for local corporates with international ambitions. "Brexit uncertainty offers opportunities to acquire assets at attractive prices, but also poses risks due to a lack of certainty about its impact."
Additional opportunities exist in Eastern Europe — a region with higher growth prospects for niche opportunities — and Sub-Saharan Africa, adds Friedman.
"While interest has waned for the latter, the region may have select M&A transactions for higher-quality targets."
According to Andre Bresler, managing partner: operations at Benchmark International SA, the company has experienced an increase in outbound inquiries from companies in the industrials sector.
"The relative decline in local mining and manufacturing has prompted companies to explore international markets for growth. Outbound investment from pharmaceuticals and food service companies is also strong."
Local deal activity will continue to face many challenges. Friedman says SA’s economic, political and parastatal headwinds will affect the local market. Significant concerns include a potential credit rating downgrade and the growing likelihood that SA will enter a technical recession.
Andrew Bahlmann, MD at Deal Leaders Africa, says: "The 3.2% contraction in GDP in the first quarter of 2019 has resulted in a more cautious approach, with deal timelines shifting out from 12 to 14 months on average, in our experience."
Shabbir Norath, head: advisory at Nedbank CIB, says corporate SA is going through a challenging time. "[But] there will always be some level of M&A activity, be it distressed companies disposing of assets, exits from positions to reduce exposure to the local market, or cash-flush businesses looking to exploit opportunities in companies with depressed multiples."
Norath says few "transformational" deals are happening right now, unless the price is right or they make significant strategic sense. "Small bolt-on deals dominate local activity, which are mainly opportunistic in nature, when acquirers can realise deep value in an asset."
This local activity is also sector-specific. Friedman says: "The property sector is a hotspot as real estate investment trusts dispose of assets and consolidate to reduce their debt exposures. There’s also niche telecom plays, including the fibre and spectrum space."
Norath identifies opportunities in the IT and contact-centre sectors. "They present unique skills and assets, which are exportable. This offers a local cost base that earns dollar-based currency."
Bresler adds that the medical, health-care, food services and business services sectors are in high demand, in line with international trends.
"The burgeoning African middle class will also attract companies active in the consumer sector. As such, companies that have managed to navigate the logistics and barriers to African trade represent viable platforms for acquirers to access these regions."
However, dealmakers will need to structure local deals intelligently to manage the challenges. "They’ll also need to bridge a seller’s expectations to what buyers are willing to pay," says Norath.
Bahlmann says pricing deals properly will make them attractive, but growth opportunities are what matter most at present. "Larger serial acquirers who struggle to grow organically will continue to acquire growth, but due to a shortage of healthy businesses to buy, greater due diligence is required."
Bresler adds that there is a trend towards innovative structuring, thanks to active interest from a growing pool of private equity and corporate players. "[This] has facilitated the introduction of mechanisms to de-risk transactions and amplify value."
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