Rise in M&A activity will depend on road we choose to travel
In various foreign markets, such as the US, there has been a strong resurgence of M&A activity, writes Kevin Cron
At the time of SA’s transition to democracy, scenario analyst Clem Sunter analysed the country’s economic prospects in terms of a "high road" or "low road", the former leading to growth and improved prosperity, the latter to economic decline and stagnation.
SA finds itself at a similar juncture today, with the nation facing choices that could have an effect on the future economic path of the country. The effect of these choices will play a large role in determining the outlook for the merger and acquisition (M&A) market in the short to medium term.
While the M&A market has never returned to the giddy heights that prevailed prior to the 2008 financial crash, the market has recovered to some extent.
In various foreign markets, such as the US, there has been a strong resurgence of M&A activity. But domestically, the market has remained essentially flat or, at best, shown modest growth in both the value and number of deals being done.
This is reflective to a large extent of the flat South African growth rate over the past two years. While there have been a number of major deals in the market over this period, many were long-running deals that had started some time ago. For example, the recapitalisation of Cell C or the protracted process around the disposal of Neotel.
Given the economic conditions, it is surprising that the M&A market has held up as well as it has, with most of the major law firms and investment banks reporting that they remain busy.
This is a product of deals that arise in the ordinary course of business and can be considered divorced from the general state of the economy or the rate of growth in GDP.
The disposal by Barclays Bank of the majority of its interest in Barclays Africa (Absa) was, for example, a transaction driven by factors external to the domestic situation, the result of a strategic decision taken by Barclays to refocus its interests internationally.
The level of interest in SA as an investment destination is not good, but there is not a complete dearth of foreign investment
Tougher economic conditions and regulatory challenges are also relevant factors in driving transactions.
For example, the disposal by certain large coal producers of their mining interests were a direct result of economic and regulatory challenges applicable to coal mining operations in SA.
Similarly, in times of economic stress corporate restructurings and distressed disposals of assets can be expected. While there have been a number of these transactions, most notably the debt restructuring of Edcon, there have not been as many transactions of this type as one might have expected.
If the difficult economic conditions continue, one can expect more transactions of this nature to happen.
Although activity in the M&A sector continues, most participants in the market will concede that the size of transactions (in value terms) tends to be in the medium to smaller categories, and one certainly does not see the volume of transactions that existed historically. There is also a fragility to the market, in the sense that many transactions are mooted but fail to gain traction for various reasons. The popularity of SA as an investment destination is also noticeably reduced, as evidenced by the failure of the PepsiCo deal in 2017.
As a general proposition, the level of interest in SA as an investment destination is not good, but there is not a complete dearth of foreign investment as a certain degree of interest remains, mainly in the private equity and hedge fund sectors.
Even the flow of Chinese investment has been muted, although this is also due to tighter conditions and controls imposed in China.
Therefore, the position is that while there is a reasonable degree of activity in the M&A sector, measured against activity levels in other countries, it is below what one might have hoped for.
Looking forward, are we facing a high road or a low road? The outcome of the ANC’s elective conference in December and the subsequent recall of Jacob Zuma as president have generally been perceived as positive for business and may well result in a resurgence in economic activity as a result of an improvement in business confidence.
However, much remains to be done to restore full confidence in the economy and restore the regulatory frameworks in various industries, particularly mining, to provide the requisite degree of certainty to be attractive to investors.
The health of the economy is therefore still dependent on political developments over the remainder of the year.
It is only when real growth is restored that one can look forward to a significant increase in M&A activity.
Pending a revival of the South African M&A market, any real growth is likely to be sought in neighbouring African jurisdictions and in the rest of Africa. The recent political changes in Zimbabwe may, for example, be a precursor to a number of opportunities in that region.
• Kevin Cron is a corporate/M&A lawyer with Norton Rose Fulbright SA.