Q&A interview: Franita Neuville on how global risk-off sentiment is hitting M&A activity

Refinitiv's Franita says companies are holding on to their capital instead of spending it.

Sub-Saharan African investment banking fees reached an estimated US$93.5 million (R1.3 billion) during the first quarter of 2019, according to research from Refinitiv, one of the world’s largest providers of financial markets data and infrastructure. The figure is 24 percent less than the value recorded during the same period in 2018 and the lowest first-quarter total in five years.

Investment banking fees are an indicator of mergers and acquisition (M&A) activity as they indicate whether advisory firms are attracting new clients on transactions – whether on the buy or sell side.

According to Refinitiv, the value of announced M&A transactions with any sub-Saharan African involvement reached $8.8 billion (R124 billion) during the first quarter of 2019. The figure recorded is up 41 percent compared with the same period last year.

Franita Neuville (pictured), the market development manager for investment and advisor for the Middle East and Africa region at Refinitiv, spoke to Mergers and Acquisitions Africa about the findings of the research.

M&A Africa: From the research, was the environment during the first quarter of 2019 conducive for M&A activity?

Franita Neuville: Unfortunately, M&A fees were down 24 percent when compared with the previous year’s first quarter. If you look at fee elements, we break them down into four: M&A fees, Equity Capital Markets (ECM) fees, Debt Capital Market (DCM) fees, Loan Fees. Equity capital markets contributed to the four elements, which were down 70 percent. That is not great. DCM fees were down by 50 percent. Both were main numbers that dragged down the investment banking fees. The activity in the M&A space was up 41 percent but it was mainly due to the spinoff of Multichoice by Naspers. On the ECM and DCM side, the activity was very sluggish. In equity capital markets we mostly had follow on offerings, with only one IPO that came from Malawi. In the DCM space, we didn’t see a lot of debt issuances, with fees being down 53 percent. What was encouraging to see in the DCM space is that we saw some corporates coming to the market. That is quite encouraging because usually, the last couple of quarters we saw both the government and development finance institutions raising most of the debt capital.

M&A Africa: Compared with past quarters in recent years, how does the decline in investment banking fees compare on a historical basis?

Franita Neuville: It is the lowest we have seen in five years. And that is generally a reflection of elections that happening in sub-Saharan Africa in the first half of this year [in Nigeria, Senegal, and Guinea-Bissau]. There is a general risk-off sentiment globally. Things are not going great in the US and UK with Brexit. This is just leading to companies in these countries being more inward-looking and not necessarily investing in offshore markets and investing in African countries. Local companies are holding off and waiting to see what is happening on the elections side. There is a general risk-off sentiment. Everyone is being impacted by what is happening in the economy.

M&A Africa: And access to money and capital is not an issue for companies?

Franita Neuville: No. Companies would rather hold on to their capital and cash instead of spending it and taking on the risk. It’s definitely a risk-off sentiment, where they would rather hold on to their capital or pay it out to investors in the form of dividends rather than embarking on new projects or acquisitions.

M&A Africa: Is South Africa a big market in terms of M&A and investment fees?

Franita Neuville: This is the case especially on mergers and acquisitions side and ECM side. It’s not a big market on the debt capital side. A big reason for this is that we usually see countries and their governments outside of South Africa feature more in the debt capital space by raising capital. The numbers are also skewed because the African Development Bank is based in the Ivory Coast and they issue a lot of debt and that skews the numbers.

M&A Africa: If the Naspers deal to spinoff Multichoice didn’t happen, does it mean that there would be a decline in M&A deals concluded in the first quarter?

Franita Neuville: That is definitely true. If you look at the top investment banking fee-paying industries, media and entertainment, which was essentially the Multichoice deal, comprised 33 percent of total top fee-paying industries. From that perspective, if we didn’t have the deal, we would have not seen the level of increase in M&A activity.

M&A Africa: There is a belief that companies will not make huge investment commitments until elections are concluded. Is this something that you are also seeing?

Franita Neuville: Election cycles could have an impact on M&A activity. If you look at the investment banking fees, they were down. We had Nigeria going through the polls this year in the first quarter. With South Africa going to the polls next month, it should have a flow through to the second quarter as well. One positive is that the recently announced spinoff by Naspers of its international internet companies into a separate Netherlands-listed company will continue to boost the media and entertainment industry.  We will keep seeing the trend of media and entertainment featuring quite highly in the M&A activity and investment fees space.

M&A Africa: Are you anticipating that the uncertainty that an election cycle brings would possibly impact investing banking fees and M&A activity in the quarters to come?

Franita Neuville: Because South Africa is going through to the polls in the second quarter of 2019 [May 8 specifically], we could still see subdued numbers for the second quarter as well. We could see companies not making big investments until the elections are completed.

M&A Africa: What are your expectations when it comes to M&A activity in the next few months?

Franita Neuville: Something that is going to impact the market is Naspers spinning off their global internet assets. We will likely see is more companies coming to the market in terms of initial public offering (IPOs) in sub-Saharan Africa. The IPO market has been very sluggish in the last couple of years. We need these companies to come to market and make money, so investors are offered a diversified option when they invest in sub-Saharan Africa. That’s what we would like to see, more IPOs and not just follow up offerings.

M&A Africa: Which is the most targeted market for IPOs in sub-Saharan Africa?

Franita Neuville: Recently, most IPOs have only been in South Africa. We did see a big IPO in Malawi [the IPO of Icon Properties, raising U$20.4 million on the Malawi Stock Exchange in January]. That helped push the numbers. That’s just about it. We haven’t seen a lot of other nations in the African continent enter the market. Nigeria had a couple of follow up offerings. But we definitely want to see more IPOs outside of South Africa.

M&A Africa: Is South Africa a conducive market for IPOs and other M&A transactions given the slow economy and constrained business confidence?

Franita Neuville: We are still seeing a risk-off until elections are done. After that, we might see a different situation and we will see if companies are becoming more positive.

M&A Africa: What is it about elections that scares investors?

Franita Neuville: Since 1994, elections in South Africa have been quite peaceful. The market didn’t really react dramatically to previous elections held. Generally, elections in other parts of the African continent have been more volatile, and markets react to that. It’s just the fear from global investors especially if they are further removed from South Africa. It’s people who are further removed from the market than people in the African region who generally have those anxieties about a potential change in policy after elections and violence. Unfortunately, there is usually a contagion effect where global investors see sub-Saharan Africa as one homogenous region.

M&A Africa: Is South Africa still a gateway to the continent for foreign investors?

Franita Neuville: If you look a country like Nigeria, which has surpassed South Africa in terms of size, then you would think that other countries besides South Africa would be a gateway into Africa. Nigeria is the largest economy in sub-Saharan Africa, and it is closer to Europe than South Africa. The same with Kenya. It is closer to Europe and the Middle East, where a lot of investors are coming from. But South Africa has by far a developed market in Sub-Saharan Africa. This plays a big role when foreign investors make investment decisions. It also comes down to if local governments create an environment that would be attractive for foreign investment. People go where they are comfortable and feel welcomed.