Mergers & acquisitions deal value rockets in South Africa in first six months of the year, but volume is down

By Morne van der Merwe, Managing Partner and Head of the Corporate/M&A Practice at Baker McKenzie in Johannesburg

While market sentiment has been largely negative in South Africa in recent years, due mainly to political and economic uncertainty and the ongoing reports of state capture, the latest data is pointing to a potential new narrative for Mergers & Acquisitions (M&A) investment. While the country is seeing a lower volume of M&A deals, analysis by Baker McKenzie of Refinitiv M&A data for South Africa shows that inbound M&A transactions completed in the first half of this year have been much higher in value compared to the same time last year. So while we could see less M&A deals in the coming years, market conditions and opportunities to capitalise on demand in certain sectors could be setting the scene for a trend towards high value M&A transactions going forward.

Inbound M&A data

South African M&A deal values rocketed by 347% in the first half of 2019 from US$3.7bn in H1 2018 to US$16.6bn in H1 2019. The rise in deal value was thanks mostly to three large deals, with a combined deal value of US$ 15 billion.

Deal volume, however, fell by a quarter half year-on-half year – in H1 2018 there were 182 M&A deals recorded, compared to 136 in H1 2019.

In terms of cross-border M&A, deal values were up by 289%, with deal value in the first half of 2019 recorded at US$11bn versus US$3bn in H1 2018.

Outbound M&A

Outbound M&A deal value, however, fell, from US$ 2.2bn in H1 2018 to US$ 1.5bn in H1 2019. A large percentage of the value recorded for outbound deals was as a result of Naspers’ acquisition of Russian company, Kekh eKommerts OOO for US$1.2bn.

Domestic deals

While domestic M&A volumes in South Africa declined by 27% from 83 in H1 2018 to 61 in H1 2019, the largest rise in deal value were found in domestic M&A, with values growing from US$878m in H1 2018 to US$5.6bn in H1 201, an increase of 538%. Domestic M&A experienced a huge rise in value largely due to the US$5bn spinoff of pay TV group MultiChoice to its shareholders by its South African parent, Naspers.

Domestic dealmakers appear to have had a stronger risk appetite for high value transactions in uncertain environments both in South Africa and further afield in Africa. In Africa, deal values from domestic activity recorded a substantial rise of 276%, from US$ 1.8bn in H1 2018 to US$ 6.7bn in H1 2019. Deals are considered domestic when the target company is in the same country as the acquirer parent company.

Total M&A – a story of three deals

Total South African M&A in H1 2019 has really been a story of three M&A deals, two of which have involved the internet and media conglomerate, Naspers. The first being the MultiChoice spinoff; and the remaining two are Total SA’s acquisition of Anadarko Petro-African Assets for US$8.8bn and Naspers’ Russian acquisition.

South Africa – a new narrative emerging

After a prolonged period of political and economic uncertainty in South Africa, it appears that President Ramaphosa’s agenda to tackle state corruption could be beginning to impact positively on investors’ willingness to participate in high value transactions. Ramaphosa’s commitment to finalising legislation, closing the fiscal gap, stabilising debt, addressing unemployment, focusing on 4IR technology and restoring state-owned enterprises to health are all moves that have been expected to encourage investment. Ramaphosa further noted in his latest State of the Nation address that he was prioritising reforms to improve the ease of doing business by consolidating and streamlining regulatory processes, automating permit and other applications, and reducing the cost of compliance.

The energy sector

In terms of sectors attracting high value M&A investment in South Africa, the energy and power sector recorded the highest value, with US$8.8 bn from four inbound M&A deals in the first half of the year.

In South Africa, uncertainty surrounding the country’s future energy policy, political changes, as well as financial and governance concerns at the state-owned electricity supply company, Eskom, have all resulted in an uncertain energy landscape and a loss of potential direct foreign investment in the electricity sector in recent years.

Investors in the sector have begun to receive some clarity, but more is needed. For example, last year, 27 new projects from rounds 3.5 and 4 of the renewable energy independent power producer procurement programme were signed. And although it is not yet finalised, a draft version Integrated Resource Plan, a long-term plan that will address the way in which the country will meet its energy needs, was published for public comment in 2018, with an updated version released in March 2019. President Ramaphosa said recently that the country needed a reliable and sustainable supply of electricity in order to improve growth and that the country could be at the forefront of green growth, low-carbon industrialisation and pioneering new technologies.

Across the whole of Africa there are growing opportunities to implement new technologies and localised energy generation systems, that could lead to innovation that will change how the world generates, stores and distributes power. The combination of the rise of cost-effective renewable energy, the decentralisation of energy production, and improvements in energy storage, smart metering and other digital technology all have the potential to revolutionise the way power is generated and consumed in South Africa and Africa as a whole.

The consumer sector

The consumer staples sector was the second highest sector for inbound M&A value in the first half of 2019. The sector recorded deals valued at US$ 405 million from two transactions. The increase in growth in the middle class in South Africa, and in Africa overall, means that consumer growth is high, with more demand for foreign brands, online retail services and products. In addition, the continued development of technology and telecommunications industries and the opportunities in e-commerce that this creates for retailers, has been a key driver of high value investment.

The technology sector

The expanding middle class and increased access to mobile and online banking, as well as the development of fintech, whereby previously unbanked and uninsured populations are now able to access financial products and services, has also boosted investment appetite in the technology sector.

Inbound deals in the high technology in South Africa in the first half of the year were valued at US$ 8mn, although some of the deal values in this sector were undisclosed. Outbound M&A deals in the technology sector were valued at US$1.17 bn. This is because South African investors in this sector are targeting offshore investments in companies that will deepen their access to new technologies, markets and talent.

Investment in the TMT sector, whether outbound or inbound, is important. The rapid international development of a “new economy” based on artificial intelligence, sophisticated systems and markets means that South Africa needs to encourage innovation, technological advancement and skills development and implement laws to protect innovators and users.

In April this year President Ramaphosa announced the formation of a new commission on the fourth industrial revolution, with the aim of assisting the government to take advantage of the opportunities presented by the 4IR. It has become critical for South Africa to have the correct policy and regulations in place to ensure the country can effectively roll out the TMT infrastructure and services needed to implement 4IR technology. But there is significant policy and regulatory work still to be done in this arena before South Africa will be on par with other countries who are much further along in the process. If the challenges can be addressed via policy and regulatory certainty, this will provide a catalyst for further high value investment in TMT infrastructure and services in South Africa, which will enable the country to implement and reap the benefits of 4IR technology.
There have been number of elements causing the M&A market contraction in South Africa in recent years. Issues around state capture and bribery and corruption in both the private and public sector have made international investors cautious. Economic concerns, issues around service delivery, as well as the country having just held its general elections, meant that investors were holding back. The high value of deals completed in the first half of this year both by domestic, and cross-border investors could signal the beginning of a change in sentiment and increased investor willingness to engage in high value transactions, although at a potentially lower volume, in South Africa going forward. But we should not be complacent, there is a lot of work yet to be done to ensure that investors feel comfortable to begin to capitalise on the many opportunities in the country.