Part one: South Africa's M&A activity value reaches $4.3 billion in 2018

Although M&A activity dropped from 2017's $7.5 billion, a rebound is expected in 2019.

The value of mergers & acquisitions (M&A) and number of deals concluded in South Africa have fallen off a cliff in 2018, as Africa’s most industrialised economy continues to battle with slow economic growth.

Political uncertainty in South Africa, economic growth that is expected to average less than two percent in 2018, and exogenous factors such as risk-off sentiment towards emerging markets, is the main cause, according to M&A practitioners.

Latest figures from Global Transactions Forecast issued by global law firm Baker McKenzie and Oxford Economics indicates that South Africa concluded $4.3 billion worth of deals in 2018 – a drop from 2017’s $7.5 billion.

In terms of deal volume, the Global Transactions Forecast figures indicate that 136 deals were concluded in 2018 compared with 182 deals concluded in the previous year.

Deals have declined in South Africa despite the African continent as a whole showing signs of financial and economic stability, which should help investors have a more bullish view on the continent.

Inbound and outbound investments

Baker McKenzie’s analysis of Thompson Reuters data shows that investors from the US announced the most deals in South Africa in 2018 (14 deals), Mauritius (ten deals) and the UK (nine deals).

“The US has been a significant investor in South Africa, and the African continent as a whole, for some time,” said Morne van der Merwe (pictured), the head of corporate/M&A at Baker McKenzie in Johannesburg.

The US outlined its new Africa strategy in December last year by reiterating its commitment to strong partnerships and trade with key countries in Africa, he added.

In terms of outbound investment, key target countries for South African investors in 2018 were the UK (18 deals), Australia (11 deals) and the US (eight deals).  Nigeria was the most popular target country in Africa for South African investors, with six deals concluded in 2018.

“The ease of doing business with the UK and Australia, brought about by various factors, including, language, historical ties and familiarity, has meant that investment between these countries has always been good,” said Morne.

A rebound in 2019

Although South Africa showed a dismal M&A activity performance in 2018, practitioners expect 2019 to be promising in terms of a rebound in deals. The Global Transactions Forecast indicates that the value of deal will rise to $6.2 billion in 2019 and the number of deals concluded is expected to climb to 199 in the same year.

Morne said that signs of more market-oriented policies and anti-corruption efforts under the leadership of South African President Cyril Ramaphosa should lead to economic recovery.

“Further, it is expected that some of the deals that were announced last year but not finalised could now go ahead, contributing to the higher volume and value of M&A deals in 2019 compared to 2018.”

The Global Transactions Forecast notes that after a rebound in the value of M&A activity in 2019 ($6.2 billion), a drop to $5 billion in 2020 and US$4 billion in 2021 is expected. The same downward trend is expected for the number of deals; 199 in 2019, 178 in 2020, and 159 in 2021.

“South Africa’s slight drop in M&A activity in 2020 and 2021 is partly because it is following this global cycle. The good news is that the Forecast also predicts a new global upcycle could begin in 2021, and South Africa could see the benefit of that in future years,” said Morne.

According to the Global Transactions Forecast, more stabilisation is expected globally in 2021 after a period of adjustments: interest rates should have reached a stable level in the US; equity markets will be in a more sustainable position and, barring further escalation in trade tensions in the meantime, companies will have more certainty about their ability to trade across borders.

Sectors

In terms of sectors that saw the most activity in South Africa, inbound investors completed the most deals in the industrials sector (15 deals), followed by consumer products (ten deals) and financials (also ten deals).

South African investors looking for deals in other jurisdictions concentrated mostly on the industrials (15 deals) and materials (11 deals) sectors. There were ten deals each announced by South Africa outbound investors in the consumer products and services, financials and high technology sectors.

“The industrials sector in South Africa is well established and thus provides many opportunities for investment. It is also a good entry point for investors looking to expand into Africa as this sector is a focal point for developing economies,” said Morne.

“In addition, a rapidly growing middle-class, improved access to new technology and demand for accessible financial services has boosted investor interest in the consumer, technology and financial services sectors in Africa.”


Part two explores M&A activity in Nigeria