Big deals are flowing into SA
PepsiCo’s billion-dollar acquisition of Pioneer Foods is a major boost for the national economy
The deal by food and beverages giant PepsiCo to acquire Pioneer Foods for $1.7bn is a massive boost for the economy, despite the perceived and actual political and socio-economic risks in the country and the broader region.
The growth opportunities afforded by Pioneer far outweigh the risk of investment.
Add to this the fact that PepsiCo is paying a premium of 56% over the weighted average share price prior to the transaction being announced. If this isn’t a vote of confidence I don’t know what is.
It is a fact that assets are trading at very attractive valuations in SA — particularly those in the broader industrial sector, given the moribund economy. Growth over the next few years is forecast to be tepid, at best. And, in US dollar terms, given the rand’s steady long-term decline after the rebound after the global financial crisis, our local assets are even more attractive.
To put the price of this deal — in dollars — in perspective: PepsiCo is paying just less than half as much — in monetary terms — for Pioneer Foods as it did for Sodastream ($3.2bn), a transaction it announced in 2018. But, it’s getting as good a deal when it comes to valuation.
For Sodastream, the price represented about 20 times forward earnings before interest, tax, depreciation and amortisation (ebidta), or core profit. With Pioneer Foods, PepsiCo is paying about 11 times the consensus ebidta for its 2020 financial year.
Acquirers are still willing to pay significant premiums — as in the case of PepsiCo — because they take long-term views as far as their investment horizon is concerned. A bigger premium removes the risk of protracted wrangling over valuation. We are seeing a growing trend with international acquirers looking at far longer-term investment timelines than your average local investor.
Far too often, South Africans are distracted by the noise of the daily news cycle. In this deal, and other recent ones like the R4.8bn buyout of Clover by Israel’s Central Bottling Company, as well as Aton’s longer-term pursuit of Murray & Roberts, these foreign firms are investing despite negative economic growth, the uncertainty surrounding Eskom, and the risk of a further investment downgrade by ratings agency Moody’s in November. One might argue that the risk of a credit rating downgrade is already priced in.
One cannot simply look at the SA “economy” as a whole when making these sorts of investment decisions. One has to look at each industry in isolation and realise that every investment destination has its pros and cons.
From the businesses we have engaged with in recent months, it is clear that construction and ancillary industries are under tremendous pressure. But this is not a situation unique to SA. This is the case in many, many markets globally.
And, while the broader industrial sector domestically remains strained, we have seen positive traction from acquirers abroad for attractive targets. Given the nature of our firm, seeing this traction from a relatively small target list clearly demonstrates that there is still appetite for the right business in the right industry. Clients of ours that are exporting goods to overseas markets are attractive to international acquirers based on obvious cost advantages.
One also needs to remember that investors weigh up relative returns in these kinds of calls. A low-risk investment in the US may yield a 10% return versus a higher-risk return in the likes of SA at a possible 40% return. These calls are all about risk versus return.
It is clear that PepsiCo sees SA as a strategic investment destination and an investment conduit into the rest of Sub-Saharan Africa. It has pointed to the fact that this transaction will help it “gain a solid beachhead for expansion into Sub-Saharan Africa by boosting the company’s manufacturing and go-to-market capabilities, enabling scale and distribution”.
PepsiCo’s nearly R25bn investment in SA is a further boost to President Cyril Ramaphosa’s investment drive.
In 2018, he launched a campaign to raise $100bn (R1.4-trillion) in investments over the next five years to help kickstart the economy. Foreign direct investment inflows more than doubled in 2018 to R70.7bn. This trend has continued into 2019, with the Reserve Bank’s Quarterly Bulletin in June revealing R11.7bn in direct investment in the first quarter of 2019.
This turnaround is a strong reversal of the sharp declines in foreign direct investment we have seen since 2014.
• Bahlmann is the MD of Deal Leaders Africa, a boutique M&A advisory firm in Johannesburg