DealMakers - Q1 2020 Issue
by Marylou Greig
The effective lockdown of countries around the world is reminiscent of the collapse in global trade during the 2008/9 financial crisis.
COVID-19 has led to a sudden halt in deal-making and mayhem in financial markets globally but, to be fair, the depressed merger and acquisition activity recorded by DealMakers for Q1 is not entirely the result of the lockdown; this will be far more evident in the subsequent quarters of 2020. Prior to the full onslaught of the pandemic restrictions, the country was already grappling with downgrades to its credit rating, low investor confidence and a weakening economy. The pandemic will illustrate the importance of effective public sector institutions in managing social and economic outcomes in times of uncertainty – unfortunately for South Africa, many of these are dysfunctional.
The month of April has witnessed the stalling of a number of deals announced earlier this year and the termination of transactions first announced in the latter part of 2019; companies such as Comair and Phumelela Gaming & Leisure have applied for voluntary business rescue proceedings and the suspension of listings. Business confidence has fallen to its lowest level in 35 years.
In the short term, deals have been put on hold as management teams refocus on their businesses. Activity will rather centre on distress sales, restructuring or the disposal of non-core assets and business rescue rather than traditional M&A. This will see quality businesses up for sale at low prices as a result of restructurings and liquidity issues. In a crisis, there are always winners and cash flush corporates; international players and private equity firms will use the pandemic to access opportunities at current low pricing levels not otherwise available. Equity raising will pick up as companies require additional capital to strengthen balance sheets. M&A activity will gain momentum but timing will be critical.
The difficulty will be in valuing businesses and allowing for the provision for uncertain outcomes, which will lead to more complex structuring of deals. These are unprecedented times with no guidelines; the true impact will only be known in 12 to 18 months from now.
President Ramaphosa and his team have the unenviable job of steering the country through these extraordinary times. As Moneyweb columnist Larry Claasen aptly put it, “There are no good options. Only bad ones and the least bad of these will still cost lives, destroy businesses and take us years to recover from”. What is clear is that it will take two to three years for things to return to some form of normality.
Looking ahead, one can only hope that people in positions of influence are mindful of Sir Winston Churchill’s words - “Fear is a reaction. Courage is a decision.”
COVID-19 has been the catalyst in the acceleration of the use of digital technology. Meetings, AGMs and events are now undertaken by video conference as a matter of course and virtual data rooms are no longer just a nice to have option for dealmakers. For publications such as DealMakers, the move to digital has never been more pressing. Issues of this magazine will now be available online and free-to-read; only the DealMakers Annual edition will appear in print.