ANDREW BAHLMANN: The energy transition may drive deal flow in Africa in 2022

The jury is in: for the year to come it looks like nothing — not the latest surge in Omicron cases, the hesitant Ramaphosa administration nor economic uncertainties — will be able to derail the thundering pace of merger and acquisition (M&A) deal making.

The bullish outlook is particularly strong for privately owned businesses, according to various M&A surveys such as Dykema in the US, which found that nine out of 10 survey respondents expected more deals in 2022 involving privately owned companies.

If anything, SA and Africa are outperforming the surging global M&A market, and it is being fuelled by three factors — availability of capital (primarily private equity firms that have plenty of “dry powder”), financial markets (the JSE is again at new highs) and generally supportive economic conditions in the post-Covid-19 recovery — support the notion that all the fundamentals needed for a bull market are in place. All of this coincides with recent data showing this year’s global M&A activity is on pace to be the biggest in history.

The buoyant M&A volumes seen in 2021 were similarly largely driven by a highly supportive macroeconomic environment, specifically a lower cost of capital provided by low interest rates. This enables acquirers to raise net debt cheaply and efficiently, to be supported by the substantial amount of spare cash in the hands of private equity and alternative markets. Consequently, many parties are well positioned to move tactically for target acquisitions in planned or opportunistic deals.

For now, the themes remain the same as in 2021: what stands out is the technology sector’s dominance, and simmering potential of the energy sector. Domestically, we are seeing an international acquisition drive for SA technology companies. ICT skills are in short supply everywhere, including SA, but international firms are cottoning on to the notion that those skills we have in this country are special — and cheapish. I believe local ICT companies will be the primary targets for inbound deals in SA — whether those skills are to work remotely from SA or through help with relocating.

Digital transformation has been key to many industries for years. Due to the global pandemic it is likely to play an even bigger role in business planning. Businesses that have already embarked on a digital transformation journey generally experience more productivity, better efficiency and reduced operating costs. Digitising nearly every aspect of a consumer’s life has made them much more comfortable with the shift. It is clear that tech is making the world a more convenient and connected place to live, and there is a strong possibility that this trend will manifest in increased M&As in 2022.

The energy transition is another theme which may drive deal flow in Africa during 2022. This transition of energy power to renewables is fast finding traction in Africa — as we saw recently with Shell’s halting of seismic along the Wild Coast marine home of whales, dolphins and seals. Like Shell, the oil majors are playing a retreating role with new players entering either in oil and gas, or renewables.

Further fuelling matters is that there is an established pattern of deals surging after an economic downturn. This should continue in 2022, with companies actively exploring M&A, divestitures and other transactions. However, I caution clients that access to capital and an appetite for investment aren’t enough for deals to succeed. Potential acquirers still face high valuations for many assets, and they need to be acquainted with the various elements for unlocking meaningful value in deals and double down on identifying basic value levers.

Potential sellers in turn should look beyond their currently challenged businesses to proactively optimise their portfolio by identifying divestitures. Above all, the parties to an M&A must carefully study the “business fit” in a transaction. In our experience those deals deliver better returns.

A focus on value creation in 2022 is crucial in today’s environment of high multiples and investor expectations. The surging M&A market suggests many companies are navigating the competition for assets in different ways. This includes targeting smaller and midsized transactions that could still deliver solid proceeds and ultimately be scaled for larger deals.

Given international interest in SA the currency will play a major factor in the quantum of M&A for the forthcoming year. Investment bank Morgan Stanley recently issued a report suggesting emerging market currencies are now in a better position to withstand US Federal Reserve rate hikes when they come. It argues that a Fed rates lift-off has tended to mark a peak for the dollar, at which point developing-nation currencies tend to perform relatively well. We already see this happening — the rand has risen 3% against the US dollar so far in 2022 in tandem with other major developing-nation currencies.

We have never been busier as 2022 dawns. M&A activity was certainly curtailed in 2020 by the effect of the Covid-19 pandemic, but this was much less marked in 2021 and will be even less so in 2022. Business SA has adapted to an environment of an ongoing global pandemic and is well into a process of functioning in the new normal.

• Bahlmann is CEO of corporate advisory firm Deal Leaders International.