Deal-making activity will remain strong in 2022

Foreign investor interest in undervalued SA businesses could spur local corporates to accelerate investment, mergers and acquisitions (M&A).

In the recent past several well-known SA companies were acquired by foreign investors, which may prove to have been the catalyst for local firms to tap their large and growing cash piles to invest in attractive local opportunities or risk missing out in 2022. 

Many great SA businesses were and still are trading at attractive valuations — not just when compared to developed markets but also to their history and emerging market peers, hence the sharp rise in foreign direct investment (FDI) in SA across various sectors. 

Despite attractive investment cases, these businesses’ share prices have in many instances stagnated, trading at relatively large discounts to intrinsic value, enhancing their appeal to foreign investors. Buyout premiums during 2021 were on average in the 45%-50% range, underlining just how attractive valuations had become. 

According to our analysis of the 12 months ended December 2021, more than 430 M&A transactions were recorded, just more than 70 of which, valued at about R750bn in total, involved foreign buyers. The number of announced and concluded deals involving foreign buyers increased nearly 10% compared to the same period in 2020. 

Last year Heineken offered to acquire Distell and thereby became a beverage leader in Africa; Ardagh, a major international metal and glass packaging provider, agreed to acquire Consol; JSE-listed logistics giant Imperial was acquired by Dubai-based DP World; the delisting of Afrox by Linde was completed; and in 2020 PepsiCo established a greater African foothold by acquiring Pioneer Foods. 

There were many others. 

This year foreign and local investors will remain interested in SA companies because they are in many cases still undervalued relative to comparable peers globally, particularly in the context of the quality of businesses and their upside potential for future earnings. 

We expect to see SA corporates use their strong balance sheets to accelerate investment back into the economy, both for organic growth and M&A as the economy recovers. Valuations will look more attractive as investor confidence grows. SA corporates will, however, need to be bolder in pursuing strategic opportunities or risk missing out on them. 

The general wait-and-see approach from SA corporates and investors, in the face of uncertainty in the country, has made sitting on cash sensible — particularly in the face of managing the effects of the Covid-19 lockdown measures.

Last year several SA companies and investors did make some strategic investments. Mr Price acquired Power Fashion and Yuppie Chef, thereby extending into both the value and premium segments. Vodacom bought a strategic stake in Community Investment Ventures’ fibre assets. TFG bought digital shopping and delivery group Quench, allowing the group to further capitalise on strong growth experienced in the online retail channel over the past two years. Old Mutual Private Equity put forward a proposal to acquire and delist Long4Life. 

Most recently, after conducting due diligence for more than two years, Pepkor announced the acquisition of a controlling stake in Grupo Avenida, providing Pepkor with a strategic entry point into the Brazilian value retail market.

While the delisting of several companies from the JSE is unfortunate in some respects, it may prove to be a positive catalyst for companies looking to access the equity capital markets through new listings on the JSE as institutional investors look to support the listings to capture alpha and increase portfolio diversity. The delistings in recent years have created demand, particularly from institutional investors, who are chasing fewer opportunities, resulting in a fertile ground for new listings. 

The macro backdrop also looks reasonably supportive. The SA economy has rebounded strongly in 2021, with real GDP estimated to have grown 4.7% after contracting 6.5% in 2020. RMB Global Markets Research expects the economy to continue recovering from the Covid-19 shock, albeit at a slower pace, with real GDP expected to reach pre-Covid-19 levels before the end of 2022. 

Accordingly, we expect increased activity in terms of potential new JSE listings later in 2022.

Buying SA companies will continue to require a meaningful focus on empowerment ownership and public interest considerations. Much has been written on the acquisition of Burger King by Emerging Capital Partners, which was only approved by regulators after improvements were made to the proposed public interest package. We expect the enhanced level of focus on this element by regulators to continue into 2022, especially where transactions involve foreign buyers. 

With the benefit of hindsight, recent deals may be looked at as bargains, but we believe 2022 will be a year in which deal-making activity will remain strong. 

For foreign investors, interest in SA assets is likely to remain strong given meaningful current levels of liquidity in global markets, SA opportunities of scale being available at attractive valuations, and local businesses continuing to provide a gateway to higher-growth markets on the African continent. 

As such, we hope SA corporates and investors will skew their capital allocation frameworks towards attractive local investment opportunities. 

• Nagar, Thobejane and Parbhoo are with RMB Corporate Finance.