Shining in a slow M&A market
Shining in a slow M&A market
Cliffe Dekker Hofmeyr (CDH) was recognised by DealMakers for the ninth successive year, at last week’s annual DealMakers Awards, as the local law firm that has consistently advised on the most number of Mergers and Acquisitions (M&A) deals in South Africa. The firm clinched the prestigious M&A Deal Flow award with deals totalling R119.6bn in value and was awarded second place in the M&A Deal Value category. The firm also achieved notable M&A Deal Flow and Deal Value rankings in the BEE and Africa categories.
Advising on 82 M&A deals in 2017 (an increase on the previous year’s 77), means that CDH accounted for 25.15 per cent of market share over the period. In the General Corporate Finance category the firm won both the Deal Flow and Deal Value categories. CDH has now won the General Corporate Finance Deal Flow category for six out of the last seven years
The firm’s top award comes in the context of a decline in inward bound M&A activity in South Africa in 2017 as investors became increasingly risk-averse amid a ballooning deficit and depressed business confidence.
According to the 2017 Mergermarket regional M&A report for Africa, last year marked the lowest deal value since 2009 with a total value of only R246bn (US$21.1bn) across 226 deals. Despite this challenging regional environment, CDH drew on its extensive African experience to achieve second place in the DealMakers Africa category for both M&A Deal Value and M&A Deal Flow. Excluding South Africa, the firm facilitated a total of 14 deals totalling US$3.6m.
CDH also demonstrated its successful transformation efforts by achieving second place in the DealMakers BEE category for both M&A Deal Flow and M&A Deal Value. The firm facilitated a total of five BEE deals totalling 19.23% of market share.
There was also a significant drop in cross-border mergers and acquisitions over the year 2017 across all regions – down 3.2 per cent in value from 2016. The South African M&A industry was up against a challenging environment in 2017. There was a sharp decrease in deal value – down 70.2 per cent from 2016. “This was largely due to the local political uncertainty, a struggling economy and depressed business confidence that persisted throughout most of last year,” says Johan Green, a Director in the Corporate & Commercial Practice at CDH.
In the 2017 General Corporate Finance category, CDH was awarded first place for Deal Flow for working on 26 transactions, totalling R279.5bn. In addition, CDH advised on the DealMakers Deal of the Year, the R34.6bn cross-border acquisition by Vodacom of a 34.94 per cent indirect interest in Safaricom in Kenya.
Fellow CDH Director Clem Daniel, comments: “Given the significant contribution South Africa makes to M&A activity in Africa, it’s not surprising that this has impacted regional deal levels. The total 2017 deal value across leading law firms across the African continent was significantly down.”
According to Daniel, dealmaking in South Africa during 2017 was impacted to a large extent by political uncertainty, as well as by the knock-on effects of this uncertainty, but he expected an uptick in 2018 due to several factors: “With the resignation of Jacob Zuma as President and the swearing in of Cyril Ramaphosa as his successor, we have seen an increase in optimism and positive investor sentiment. This will hopefully present an opportunity for the M&A industry to take advantage of potentially positive levels of investor confidence. Business is no doubt anxiously awaiting clarity from Government on some of its key policies, including in respect of the mining sector,” says Daniel.
Daniel goes on to say that South Africa saw a strong and positive message delivered at last month’s World Economic Forum in Davos; a start to repositioning ‘Brand South Africa’ internationally.
According to Green, however, last year was to a large extent a ‘waiting game’ for investors. “We expect that most of the M&A activity for 2018 will be in planning phases during the first half of 2018, and will only come to fruition towards the latter half of the year. We do not expect an upturn in M&A activity so soon as the next few months, though we should see a significant surge in activity later this year.”
Roelof Bonnet, also a Director in the Corporate and Commercial practice area at CDH, explains that it is those sectors and industries which have suffered most from the prevailing political uncertainty in South Africa that will likely see some benefit from the changed political landscape in the short to medium term. “It is likely that investors, both local and international, will be cautiously optimistic that the investment environment will improve, particularly in regard to investment security,“ says Bonnet. “Large-scale and long lead projects may once again become more attractive in the projects, infrastructure and mining space. However, it remains to be seen how significant the adverse impact of the credit downgrades experienced by South Africa during 2017 will be in the coming year, and whether and how fast the positive change in the political landscape will translate into economic growth,” cautions Bonnet.
Compared to the last decade, Green says that 2017 was an underwhelming year for the listed property sector in terms of performance and M&A activity. “Downward pressure on market rentals fuelled by a sluggish economy and the sector's increased offshore focus at a time when the rand strengthened, hurt earnings and resulted in the large-scale repricing of the sector,” says Green. “These factors are expected to reduce investor appetite to participate in capital raisings in the short term. Thereafter, we are likely to see a surge in property M&A activity in South Africa as larger REITs, in particular, take advantage of opportunities to acquire yield enhancing assets, and small and medium cap funds look to grow through consolidation.”
Head of Cross-Border Mergers and Acquisitions: Africa and Asia at CDH, Deepa Vallabh, explains that while political, economic and regulatory uncertainty continues to present challenges to investing in the mining industry, she expects mining to continue to be a significant sector for African M&A. “In South Africa, for example, commentators expect more M&A to follow Sibanye-Stillwater's Lonmin acquisition in the struggling platinum industry. A number of commentators also believe that steady urbanisation and a burgeoning middle class, which have been continuing themes in South Africa, may result in increased M&A activity in the consumer goods, financial, healthcare and transportation sectors in 2018. Naturally, this will also be bolstered by an improved outlook for economic growth and political stability,” she adds.
Green points out that a number of South African listed companies have burnt their fingers with large offshore acquisitions in recent years. “We anticipate reduced appetite among shareholders to support such large-scale transactions: so while there will be continuing internationalisation, the focus may shift to smaller, more digestible targets,” he says.
Regarding the decrease in M&A activity within the African continent, Vallabh believes that this is consistent with a global M&A decline. She explains that uncertainty in the global political sphere was compounded with uncertainty in the continent's hubs. “Nigeria, for example, has experienced a consistent three-year decrease in deal values, owing to policy and economic uncertainty, and a decline in oil production which knocked its oil-dependent economy. But Nigeria's oil production saw an increase late last year, and commentators are optimistic about the nation's prospects going forward,” says Vallabh. She goes on to say that despite South Africa’s M&A slowdown during 2017, a large portion of the African continent's total deal flow (roughly half) still moved through South Africa. “This remains a strong indicator of the important role which South Africa still plays in the minds of many investors, despite the political and economic instability which we experienced during 2017. It seems that South Africa, with it's strong financial and banking infrastructure, remains a key player on the African continent. With recent changes in the domestic political environment, and its improved economic outlook for 2018, we expect that this should remain the case during 2018,” says Vallabh.
East Africa, in contrast, has had a strong run compared to Southern Africa, continues Vallabh. However, she explains that political problems in Kenya and Tanzania compared to improved sentiment in Southern Africa, including Zimbabwe and Angola having undergone important political transitions, may result in a renewed investor focus on Southern Africa.
“As seen in the recent World Economic Forum in Davos, South Africa is already being rapidly repositioned on the international stage to attract foreign investment. And while it is likely to take time to filter through to the actual deal table, we should expect to start seeing an uptick in inward investment,” concludes Daniel.
The information and material published on this website is provided for general purposes only and does not constitute legal advice. We make every effort to ensure that the content is updated regularly and to offer the most current and accurate information. Please consult one of our lawyers on any specific legal problem or matter. We accept no responsibility for any loss or damage, whether direct or consequential, which may arise from reliance on the information contained in these pages. Please refer to our full terms and conditions. Copyright © 2023 Cliffe Dekker Hofmeyr. All rights reserved. For permission to reproduce an article or publication, please contact us email@example.com.
We support our clients’ strategic and operational needs by offering innovative, integrated and high quality thought leadership. To stay up to date on the latest legal developments that may potentially impact your business, subscribe to our alerts, seminar and webinar invitations.Subscribe