In an interview to celebrate the twenty year mark as well as the two women who made this milestone achievable, Hay and Greig share their insights on how the market has evolved and recall seminal moments that have shaped South Africa’s investment banking and Mergers & Acquisitions (M&A) market over the last two decades.
 

Looking back over the past twenty years, what would you consider having been one of the critical moments in our financial market?

 

Hay:  In the early 2000s we had the global Dot-Com Bubble crash. In addition to this, in 2002 there was a systemic crash of South Africa’s small banking system. As it is known today, the Small Banking Crisis was triggered by the announcement in early 2001 from South Africa’s then-largest bank Absa, regarding significant losses in its microlending subsidiary, Unifer. A subsequent increase in non-performing loan provisions of R1,78bn had a net effect of a reduction of approximately 11% of Absa’s capital base. 

Saambou, which was South Africa’s seventh largest bank at the time, had a very similar deposit customer base who grew jittery about ‘common exposures’. By January 2002, Saambou’s retail deposits had fallen by R861m , or 8.8% of all the bank’s retail deposits, and 5.6% of its liabilities.  This kickstarted a nation-wide run on retail deposits that ultimately saw over twenty-two small and mid-sized banks deregistered over the next two years. From 2000 to 2003, as the saying goes, “There was blood in the streets.”  

The 2007/2008 Global Financial Crisis followed, where not only blue chip companies and banks went under, but also sovereign governments. The PIIGS (Portugal/ Italy/ Ireland/ Greece/ Spain) all had to be bailed out, and the BRICS (Brazil/ Russia/ India/ China/ South Africa, as a late edition), stepped out of the shadows for investors to flock to in search of yield and growth opportunities.

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Greig:  Around the time that DealMakers started tracking M&A activity in 2000, there was a rush by major South African companies to transfer their domiciles abroad – a move that was accompanied by a good deal of ill will and frustration on the part of those companies left behind. Five South African companies left around this time, and included Billiton (Gencor), Old Mutual, South African Breweries and De Beers.  

In retrospect, this was the first wave of leavers and signalled the beginning of a gradual exodus. From having 222,532 tax-paying businesses in 2007, the latest figure now stands at 139,664 and the emigration of skilled professionals over the last decade or so stands at around 400,000.

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 How is the investment environment different today?

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Hay:  Back then, deal making was a lot simpler; we just did not realise it.  Today’s economy makes it challenging to acquire South(ern) African companies and get the desired returns. The market is shaped by the drive for companies to consolidate and the need to scale.  

In the early years of black economic empowerment, there was no road map and we largely interpreted ideals and objectives as we implemented the transactions. Today there is extensive regulatory legislation and Broad-based Black Economic Empowerment (B-BBEE) requires rigorous assessment and compliance. Most transactions in South Africa cannot be done without taking B-BBEE into account, which requires a new approach to capital raising and deal structuring. Insightful planning must take into account the complexities of ownership and how structuring could impact the long-term success of the black empowerment transaction. Transactions today require legal, financial, ethical and social disciplines all rolled into one.

Also, risk has been priced differently since the Global Financial Crisis, and all M&A transactions are influenced by this new realism and conservatism. Disasters such as Steinhoff and others also raise the risk aversion bar.

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Greig:  For the investor,  the improvement in the dissemination of information has been profound. The changes in the JSE-listed requirements obliged companies to disseminate any corporate news or price-sensitive information on the Stock Exchange News Service (SENS) and as the internet and digital platforms took hold and information became commoditised, so did the need to produce research material with deeper insight.

At the same time, the entry of international competitors into the corporate finance arena challenged the way local firms serviced their clients, resulting in more innovative and complex solution offerings. Tools combining debt and equity financing emerged with financial institutions increasingly having to bring not only their distribution capabilities but also their balance sheet strength to the table in order to secure mandates. This gave way to the need for specialised teams to keep up with the pace at which client’s businesses evolved. 

In 2000, the value of M&A activity for JSE-listed companies recorded by DealMakers was R209bn from a total of 534 deals. In 2018, M&A deals for South African exchange listed companies stood at R610bn from a total of  517 deals. While the exchange rate has a play on the numbers, the increase in the size of the deals is evident. Tough times have seen a shake-out of advisory firms – with firms either disappearing or being absorbed by stronger competitors. Listed companies have experienced a similar fate with the number of listings on the JSE almost halving over the twenty year period.

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 What, for you, has been one of the most memorable deals?

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Greig:  At DealMakers we are obviously not directly involved in deals, but one of the most memorable for me is Harmony’s 2003 takeover bid for Gold Fields. The reason it sticks in my mind is not for reasons one might think, but rather because DealMakers came under heavy criticism for how we handled the deal in our M&A and league ranking tables. 

In theory, the deal should have been considered for selection as Deal of the Year. In practice, however, there was a distinct possibility that the deal might founder. If this was to be the case, what relevance would there be if this deal was allowed to go forward for consideration and was selected as Deal of the Year and then collapsed?  In this instance, we permitted a subjective assessment to replace what has otherwise always been an objective trigger mechanism – one that we adhered to rigorously. We excluded the Harmony deal from the 2003 deal tables and rankings and we shelved it for 2004. 

The criticism that we received for this action was valid and was accepted as such. However, to defend the integrity of the entire rankings system, no other conclusion was possible but to pull the deal as we did. The fact that the deal did indeed founder aside – we are still to this day reminded of the stance we took!

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Hay:  There are two transactions that come to mind. The first involved a hostile transaction in Bravura’s earlier days, and a second, current one which is a greenfields development that we have helped to conceptualise and commercialise.  

In 2003, a straightforward management buyout of iProp – which at the time was illiquid and trading at a deep discount to its net asset value – unexpectedly turned into a bidding war when financial services company Mettle Limited made an uninvited counter-bid to the iProp board of directors.   

What followed was an intense period of counter-bids where it seemed that Mettle would continue to bid against the iProp management team’s company, Clidet. Bravura,  acting on behalf of the iProp management team, was able to negotiate and facilitate a transaction which saw the iProp management team and Mettle each holding 50% of Clidet. We helped the iProp management team some years later to buy Mettle out, thus acquiring 100% for management. In South Africa, hostile transactions were largely unchartered territory so this remains an interesting local example. Also, Petro Heydenrich has been one of the very few female CEO clients that we have had in our twenty year history.

A transaction that we’re currently concluding is within the agricultural space, for a client who exports most of their product.  Bravura was appointed to assist with a R500m + expansion of new farms bought and planted, and to advise on a transaction with a BEE partner who has more than 50% shareholding. Greenfields funding is challenging, and the transformation aspect of this transaction is particularly compelling, with great future potential. So far, the project has created more than 1600 employment opportunities. The managing director of the various farms and operations is also a woman. Keep watching this space.

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 What one piece of advice would you give investors?

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Greig:  I’m obviously not in a position to offer investment advice, but what I can offer though is the assurance that the M&A advisory teams in South Africa are amongst the best to be found. We are fortunate in that access to these skills is not limited to the big corporates; boutique players in the corporate finance space provide access for the smaller and medium corporates. More recently, DealMakers, via DealMakers AFRICA, has expanded our offering into the rest of Africa and what we have found is that the local advisory firms in the different regions are often overlooked in favour of the big international advisory firms. What DealMakers AFRICA hopes to do is highlight the work undertaken by the local advisory firms in each region, giving the recognition where deserved.

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Hay:  My investment advice is caveat emptor, which means ‘let the buyer beware’. When seeking out deals or embarking on capital raising, do your homework. Understand the industry that you’re operating in, not only from a legal and jurisdictional perspective, but also in terms of how the market behaves. For example, if you’re eyeing investment opportunities in Africa, understand that this is an environment in which private equity firms require far longer than ten-year deal mandates and where local currency will remain a significant risk. This holds true not only for Africa; every jurisdiction behaves differently with unique drivers that can have unintended consequences for a transaction.  And finally, diversify: it is never advisable to put all your eggs in one basket. 

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Kerryn McKay is a specialist writer with Connect Media.