Cash stockpiling a sign of uncertain times
"There is a lot of capital waiting to do something," said Bravura's Rob Bergman.
“Investors are opting to sit on cash as they increasingly face a shortage of good assets to acquire in South Africa,” said Rob Bergman, a principal in corporate finance at Bravura.
Political uncertainty and distrust between the public and private sectors are major issues, which are prompting more investors to either not commit to large investment decisions or to be cautious about investment prospects in South Africa.
“There is so much capital waiting to do something,” Rob told M&A Africa.
“There are simply not enough good investment opportunities coming to the market. Acquirers typically value businesses based on future cash flows and they are struggling to form high conviction views around growth and delivery of these flows. There is frequently a significant gap between investors and sellers regarding their views on value and risk, resulting in a low conversion of investment opportunities to closed deals.”
It is arguably not hard to see why investors are bearish and sitting on cash. In a low-growth economy like South Africa – where 0.8 percent growth has been pencilled in for 2018 – growth in profitability and cash flow will likely be limited.
“After all, investors typically want to acquire sizable assets with good strategic value and potential of generating strong cash flows in the medium-to-long term,” said Rob.
The trend of investors holding onto their cash piles during uncertain times has been long in the making. Supporting Rob’s views is recent research from the University of Johannesburg’s Centre for Competition, Regulation and Economic Development, which found that South African companies are accumulating cash reserves.
The research, which was funded by the Department of Trade and Industry, concluded that cash reserves in the JSE’s largest 50 companies had increased from R242 billion to R1.4 trillion between 2005 and 2016. The research considered the investment decisions of the largest JSE-listed companies to shed light on the much-talked-about investment strike in South Africa.
Low M&A activity
The dearth of good assets for investors to acquire is leading to low mergers and acquisitions (M&A) activity.
Rob added: “Despite this, astute investors may view this period as an opportunity to acquire market-leading assets at potentially discounted valuations, following a buy-to-hold strategy through the bearish cycle which should pay off as market conditions improve.”
Of the deals that are taking place, most are large corporates making strategic decisions to sell their non-core assets or owners that are forced to sell assets because of various family circumstances or a choice to diversify part of their wealth offshore.
On the rare occasion that a highly cash generative asset with strong growth prospects and a defendable market position is offered for sale, there is an immediate rush of acquirers wanting to buy it. “Acquirers in this scenario risk materially overpaying for the asset, putting further pressure on investment returns” said Rob.
“Most businesses are facing a tough market with stable or more negative outlooks. That is not a good moment to sell. But if you are sitting on a very good asset, you could sell it for a good price because there is a lot of capital in South Africa waiting for good assets. But where do you go from there? Most owners therefore opt to stick with their existing assets during tough economic times”
Rob would know this as he is a highly experienced corporate financier with years of experience working in South Africa, the United Arab Emirates and the Netherlands. His experience spans across working for Talem Africa in Dubai, where he was responsible for managing a USD 500 million investment mandate for an Africa-focused family office, and EY in the Netherlands and South Africa. He decided to return to South Africa in November 2016 and subsequently joined Bravura in 2017.
At Bravura, which is an independent investment banking firm specialising in corporate finance and structured solutions, the main part of Rob’s work involves advising on M&A transactions in the African continent, with clients from with clients from Europe, the US, Sub-Saharan Africa and South Africa.
South Africa a tough sell
Although investors are flush with cash and on the prowl for good assets, Rob regards South Africa to be a tough sell at the moment. “We are trying to raise capital for a couple of South African projects for which we are also approaching international investors. Most of them tell us that South Africa is on their red flag list due to recent negative news, making it very difficult to close deals. South African projects are difficult to execute and approve because of the political uncertainty.”
Since returning to South Africa and joining Bravura he has only seen limited interest from offshore funding for South African projects. Rob admits that it is currently easier to convince investors to invest north of South Africa’s border, where investment prospects are complimented by high growth economies, rising population and consumerism, and diverse sectors that are ripe for disruption.
But this doesn’t necessarily mean that Rob has completely written-off South Africa. Compared with most African countries, he still regards South Africa as having a first-world business community, sophisticated banking and finance infrastructure, one of the world’s best-regulated securities exchanges (the JSE) and reasonable ease of doing business.
Asked about how M&A professionals can navigate a market where asset owners and investors are sitting on the sidelines and not making investment decisions, Rob said relationships, networks and innovative ideas are important, not only in South Africa but across the whole continent.
“Relationships are important if you want to do deals in Africa. Everything is relationship-based especially when you want to do business.”
Deals 2017 & 2018 at Bravura (announced only):
- Exclusive financial advisor to the Bowler Consortium and assisted them in raising capital from a mezzanine funder with regard to their acquisition of 50.4 percent of AB InBev’s Chibuku Products Limited in Malawi (2018)
- Financial advisor to Efficient Group Limited, the JSE listed financial services company, regarding the cancellation of its profit share agreement with management and its subsequent required capital raise (2018)
- Financial advisor to Invicta Holdings Limited, the JSE listed group active in distribution of engineering products and capital equipment, regarding the process of internationalising the group in order for it to be able to list offshore (2018)
- Deal originator to Westbrooke Investments (Pty) Ltd in their disposal of Forge Group’s Industrial division to Invicta Holdings Limited. The Forge Industrial Group comprises of importers and distributors of engineering related products (Toolquip and Allied), machining tools (F and H Machine Tools) and industrial conveyer belting and related components (Belt Brokers). It operates through eleven branches countrywide, including three distribution centres in Gauteng (2018)
- Financial advisor to Forge Group (Pty) Ltd, a subsidiary of Westbrooke Investments (Pty) Ltd, in their disposal of Tecsa (Pty) Ltd (“TecsaReco”). TecsaReco is South Africa’s leading importer and value added distributor of domestic appliance parts, domestic and commercial refrigeration components and air conditioning. TecsaReco was acquired by Swedish multinational refrigeration group Beijer Ref AB (2018)