DealMakers - Q2 2020
by Marylou Greig
“There are decades where nothing happens; and there are weeks where decades happen”. The quote by Vladimir Lenin sums up South Africa’s eco-socio-political roller coaster pretty well. The catalyst to this chaos has been the COVID-19 pandemic. The past few weeks have seen SA accept a R70bn IMF loan, in spite of the tension this has caused between the ANC and its alliance partners; the President’s claim that government will crack down on corruption linked to its coronavirus response (to be actioned by nine government agencies); the capitulation to the demands of the Taxi industry; the closing of schools; and the retention of regulations which continue to strangle growth in the economy. What all this has done is highlight SA’s lack of capabilities – warts and all.
Though a decline in M&A activity was anticipated, due to economic and political uncertainty weighing on investor confidence, the pandemic has added to the falloff. M&A deal value by exchange-listed companies for H1 2020 was R134bn from 164 deals, with deals announced down 30% year on year and half of those reported in H1 2018. Property deals accounted for one third of the M&A activity during H1 as the listed sector navigates its worst year to date, with disposal reflecting the challenges facing commercial real estate.
There were nine offers to minority shareholders of South African exchange-listed companies during the six months to end-June, with the buyout of Assore minorities featuring in the top five deals by value for the period, at R7,8bn. Reported activity by private equity funds in the listed and unlisted space continues to gain momentum; 60 deals were reported during the half year, 41 of which involved unlisted companies.
Cross border activity declined and that which took place was, in the main, characterised by local companies disposing of non-core assets to reduce debt levels. MTN’s disposal of its stakes in Ghana Tower and Uganda Interco (R8,9bn) and Redefine Properties’ sale of Australian student accommodation (R5,4bn) were the top cross border deals, by value. Bucking the disposal trend were Investec Property Fund, which acquired a further stake in Pan European Logistics platform (R3,2bn), and Barloworld’s acquisition of Wagner Asia Equipment and a stake in SGMS LLC (R3bn).
Of the deals announced, four – all of which were unsurprisingly reported prior to the lockdown – have since been terminated or put on hold due to the impact of the pandemic on transaction valuations and forecast revenue streams.
Equity capital market activity, particularly in Q2, shows an increase in companies raising funds by way of stock issuance and accelerated bookbuilds (R12bn) or rights offers (c.R8bn) to shore up their balance sheet to cope with the uncertain times. Companies took advantage of the fall in share prices and repurchased shares worth in excess of R40 billion, double that seen in H1 2019, and a fivefold increase on the value in H1 2018.
Decisive policy response is needed to stimulate the economy, and while measures to contain the virus are gradually being eased, much will depend on the permanent damage already done and the risk of policy fatigue in the coming months. Already, SA’s tax loss due to imposed restrictions exceeds the value of the two virus loans. M&A activity will continue, albeit at a slower pace, while the type of deals undertaken will predominantly be restructurings, take private transactions and consolidations within sectors.