DealMakers - Q1 2019
M & A activity to stay very subdued
After what can only be described as a difficult year for mergers and acquisitions in SA in 2018 (total number of deals announced were 517 in 2018 compared to 588 in 2017, total value down from R637 billion to R610 billion in the same period (DealMakers, 2018), the sector has shown little, if any, sign of life in the first quarter of 2019. This is certainly not surprising given the growing levels of political and economic uncertainty that continue to plague the country.
SA dodged a proverbial bullet at the end of March when Moody’s Investor Service – the last of the big three international ratings agencies to make a call on SA – effectively deferred a decision on the country’s credit rating until November. However, the resulting currency and market uptick was short-lived and the reality quickly set back in that all this announcement (or lack thereof) served to do was to draw out the economic uncertainty that has put the vast majority of investors in and outside SA into something of a catatonic state over the past 18 months.
And when one adds to this economic insecurity, the growing uncertainty around which direction the country will be led in after the national elections in May, it’s easy to see why most investors are doing little more than treading water right now.
There is clear evidence of this ‘uncertainty paralysis’ effect across every major sector of the South African economy as the vital policy decision-making required to move investment forward in these sectors has, understandably, all but ground to a halt ahead of election day.
From telecoms and healthcare to mining, energy and agriculture, it seems like every industry in SA is currently waiting for big policy decisions to be made at national government level, and implemented at departmental level. There are few things that are as effective in grounding investment transactions than policy uncertainty.
Of course, the uncertainty that has characterised the SA economic landscape of late has not caused M&A activity to cease altogether. Ironically enough, that very uncertainty has forced a number of troubled larger organisations to enter into transactions that they would no doubt have preferred to postpone were the economic situation different. This has created pockets of opportunity in the markets, but these have largely only appealed to investors with iron constitutions and balance sheets to match.
The good news, however, is that irrespective of the outcome of the elections in May, simply completing the process of choosing a governing party for the next five years is likely to be a catalyst that should ignite a measure of renewed activity for M&A in SA. The incumbent government has made all the right noises about policy direction and their commitment to action should they be elected to office. With the certainty of five years at the helm of the country, the elected government should be much more inclined to make the big decisions that the SA populace, and the country’s economy, have been waiting for.
Of course, all this local market uncertainty begs the question, where can M&A investors focus their attention until SA is on a more even keel? Unfortunately, there’s no simple answer. The logical response might seem to be to look northwards into Africa or even further afield, to Europe or the USA. However, the recent challenging experiences of a number of large SA organisations that ventured into these markets has shown that M&A in Africa is by no means easy, and that success is in no way assured. In the same vein, the so-called Western markets also present numerous difficulties, not least of which is a general underestimation by local investors and organisations of the risks that may be posed even in developed markets. Adding to these challenges is a weak, and apparently weakening, local currency, which can make even the most appealing offshore M&A opportunity unaffordable.
That’s not to say that SA investors shouldn’t be looking outside the borders of their home country for M&A prospects. In fact, doing so is still potentially one of the most effective ways of insulating themselves against the effects of lingering SA insecurity. However, as is the case, even in the most positive of investment times, a prudent approach is well advised. So, for the foreseeable future, caution is arguably the best policy until it becomes clear that SA Inc. is back on track with a clear idea of exactly where it is going.
Shamu is a Principal with Corporate Finance for Nedbank CIB.