DealMakers - Q1 2022 (released May 2022)
How a two-year State of Disaster affected South African dealmaking
by Rob Bergman
South Africa’s State of Disaster was officially lifted by President Ramaphosa on Monday, 4 April 2022. Most South African investors and dealmakers would say it was a two-year period that they would hope never to repeat. But if the ongoing global uncertainty and flux has revealed anything, it’s never to say never.
The following article offers insight into what happened on the ground in dealmaking during South Africa’s State of Disaster, and what it takes to implement deals under significant economic challenges.
Following Ramaphosa’s announcement of the country’s “hard lockdown” on 23 March 2020, most sectors adopted a wait-and-see approach. Many companies focused internally, taking stock of their current situation, and looking at responsive risk-mitigation strategies. Hindsight indicates that this period of contemplation was valuable time lost, as Corporate South Africa immediately stopped payments during the hard lockdown to preserve their bottom lines. Some companies were never to recover. By the first half of 2021, almost 1000 South African business liquidations were recorded.
Dealmaking hit a massive ten-year low around the world in 2020, as deals were swiftly put on hold. But 2021 saw a massive improvement. According to PriceWaterhouseCoopers, the deals that were announced globally in 2021 exceeded 62 000, up an unprecedented 24% from 2020. Africa had its fair share in what was a “stellar year”, with deal value exceeding $85 billion (R1.3 trillion) and volume reaching nearly 1000 deals. Deals in new technologies emerged as having the most exciting potential.
Although statistics provide a broad overview of the pandemic’s impact on dealmaking, it is also important to understand what happened “on the ground” during this time. Practices that are successful in times of constraint and uncertainty can provide a valuable roadmap from which to navigate the next market shock.
During the State of Disaster, corporate financiers and dealmakers who responded differently to the mainstream were able to reap benefits. At investment banking firm Bravura, an immediate and intensive analysis of the market was undertaken in order to identify six or seven key focus areas where opportunities might exist. Following their identification, these areas were tested among existing and prospective clients. Those areas that had no immediate traction were quickly discarded, while the remainder were proactively presented to the firm’s network and put through further rigorous desktop research. The strong combination of driving relevant angles with an elaborate network of entrepreneurs, listed companies and capital providers yielded the initiation and implementation of several transactions.
As people became accustomed to the new operating conditions in “lockdown”, following the first two months of near-total economic standstill, the market began to recognise that there were opportunities for transacting. For many dealmakers, there was an expectation that companies would be responding to distressed situations. However, the inundation of distressed equity or debt raises and asset sell-offs actually did not materialise. Other interesting opportunities emerged.
Such an opportunity came through listed companies on the Johannesburg Stock Exchange (JSE) that were sitting with valuations that were dropping to all-time lows. Prior to 2020, the JSE was already under-priced, with share prices rarely reflecting fair value. But the pandemic saw discounts (particularly for small and mid-caps) becoming deeper and valuations further depressing. Responding to the financial challenges wrought by the lockdown, investors began to consider alternative strategies such as share buybacks or taking businesses private in order to optimise value for stakeholders.
Contrary to the state of play on the JSE, global markets were hitting all-time highs, with debt cheaper and more accessible than ever before. This created interesting opportunities for local private equity firms that were sitting on portfolio companies which, due to end-of-life, required divestment. With international financial and strategic parties seeking yield, the environment was flush with potential. This further enabled parties to successfully re-engage on previous deals that had run aground.
During the pandemic, certain sectors grew disproportionally. IT, fintech, e-commerce and financial services developed intrinsic growth and solid fundamentals, both in South Africa and Africa. This growth has created an ongoing need for continued capital raising.
In 2021, a year into the State of Disaster, the market was ablaze with activity as dealmakers who were actively in-tune took advantage of market opportunities. Although 2022 continues to hold good prospects for dealmakers, this will be tempered by geopolitical tensions, run-away inflation and increasing interest rates.
For Corporate South Africa, the past two years have been a tough lesson in how to react to market shocks. In 2020, market uncertainty created a static response. Hindsight reveals that it might be better for companies to think swiftly and take action rather than sitting tight. When there is uncertainty, the market itself is unsure of the next steps – thus it is not always wise to follow what the market does. Flexibility and innovation should be harnessed when engaging with what may seem like insurmountable obstacles. If companies are unsure of their next steps, turn to experts who have an ear to the ground and understand the environment; they may see what is yet to be visible.
Bergman is a Corporate Finance Principal | Bravura.