SA remains attractive for global M&As despite decline

Despite the effects of the pandemic and periods of civil unrest, SA experienced robust merger and acquisition (M&A) activity last year, with more than 430 transactions totalling about R750bn. In 2022 there has been a decline in M&A activity from 2021 levels.

Yet, the fundamentals that drove deal activity in 2021 remain largely intact, with local companies continuing to produce solid financial performance, valuations remaining generally attractive (with the upside potential for future earnings), the rand being weak, and interest rates remaining within expected ranges despite the series of recent hikes.

The Africa Continental Free Trade Area agreement is also likely to bolster investment in the country.

Combined with the fact that many global investors are still sitting on cash reserves after a protracted period of inactivity throughout the pandemic, these factors point to sustained levels of African M&A activity throughout 2022 and beyond. SA companies, including those that may be distressed given the effects of the Covid-19 pandemic, will continue to have opportunities to look to global sources of capital for development and growth.

Investment by these established internationals can, and frequently does, unlock previously untapped synergies for SA businesses. In turn, this provides avenues for business optimisation and growth that would otherwise not be available. Global players in developed markets will also be searching for growth and synergistic opportunities outside their established territories, which are typically characterised by competition for market share rather than industry growth.

We also expect foreign investment to drive enhanced activity in the market from local players. Those that face a depressed local economy and have deployable capital will continue to look north of the border to other accessible developing markets as a means for growth, or to more mature markets in which to deploy capital as a means of consolidating their position.

The same fundamentals that drove deal activity in 2021 and the need to grow through acquisition will drive healthy competition among local companies.

The technology, media & telecommunications sector has seen sustained levels of activity during the pandemic and since the easing of lockdown restrictions. Linked to this, we expect sustained and potentially increased M&A activity in the short to medium term in the financial services, retail & logistics and supply chain sectors, with businesses continuing to look for growth opportunities to address increased consumer demand for technology solutions to meet daily needs, such as online shopping and delivery services.

Energy sector

In the context of this investment in technology our expectation is that major investments will continue to be made in data centres, of which there are now more than 50 in SA, with the country positioned for growth due to its geography, advanced IT and fibre infrastructure and enhanced potential for captive renewable energy generation.

Investment in the energy sector, particularly focused on the energy transition, is also likely to continue its upward trajectory, with the SA government under pressure to address the energy crisis and its effect on the economy by removing red tape hindering private sector involvement. We expect significant activity and investment in renewable energy across the board. This will be driven by the government’s renewable energy independent power producer procurement programme and the need for commercial and industrial operations to secure private power supplies. 

Recent regulatory changes after President Cyril Ramaphosa’s 10-point power crisis plan permitting private power projects of up to 100MW without licensing requirements having to be met, have spurred considerable activity. The recently announced financial close of Sola Group’s two 100MW PV solar projects to supply power to Tronox Mineral Sands sites in SA is an example. We expect this trend to continue, considering the imminent removal of any licensing cap on private power projects.

The transition away from fossil fuels will continue to have consequences for M&A activity in SA. Traditional powers in conventional energy have in many instances embarked on corporate activity to separate and even sell down their interests in coal assets to newer and smaller market participants, which may not be subject to the same global investor pressures.

These participants are capitalising on the practical reality that despite a move towards renewable energy, conventional energy will continue to account for most of SA’s electricity demands for some time given the constraints on existing electricity infrastructure. Similarly, as commercial & industrial and other captive power projects become common, we will continue to see investment across the sector. This is likely to result in a consolidation of industry participants as this sector matures.

National security

Recent changes to competition and antitrust law will continue to affect M&A activity. The competition authorities are focused on public interest considerations and have started requiring a greater spread of ownership by historically disadvantaged people and workers in M&A transactions. They are also examining digital firms and markets more closely and have proposed that small mergers in this sector be notifiable as, despite often falling below the notification thresholds due to the firms involved usually being start-ups, these mergers are likely to have an affect on competition and market dominance.

Another proposed amendment to the Competition Act will look at determining whether mergers involving foreign acquirers may have adverse effects on SA’s national security. In line with global trends, environmental, social & governance (ESG) considerations have also become central to SA M&A. There is increasing stakeholder activism in SA, and acquirers and lenders alike are applying more stringent ESG standards to targets and borrowers to mitigate reputational risks and in support of global imperatives of driving sustainable business.

In terms of corporate governance, there are plans to amend the Companies Act to give workers the right to appoint directors to the boards of companies, and to extend directors’ fiduciary duties to consider the interests of employees and other stakeholders (in addition to shareholders), which will undoubtedly affect boards’ consideration of future M&A transactions.

While SA seems likely to continue to face political and economic headwinds for some time, several macroeconomic factors remain conducive to sustained levels of corporate activity across various industry sectors. As a resource-rich nation, impediments to the country’s ability to capitalise on these resources remains mainly structural. At a political level industry participants require enhanced regulatory certainty.

In terms of infrastructure, the country still requires development and improvements in energy supply and infrastructure across ports, roads and rail. While these structural issues are now impediments to investment in many cases, they also present opportunities for investors and market participants. Ultimately, it comes down to identifying the opportunities within challenging local conditions to position a business for growth and make it an attractive investment target for global role players.

There are external factors such as the uncertainty introduced into global markets by economic sanctions on Russia and high levels of inflation, which are likely to have an affect on M&A activity. However, corporate SA has proved that is able to navigate crises while still being able to harness growth opportunities, and there is no reason to believe this trend will not continue into 2023 and beyond.

• Green is partner, and Izzard senior associate, at Hogan Lovells.