M&A deal value down in 2018 but improvement expected in 2019

Morne van der Merwe, Head of Corporate/M&A at Baker McKenzie in Johannesburg

The South African economy’s dismal performance in 2018 – and the risk-off sentiment towards emerging markets in general –  resulted in poor M&A deal values in 2018, but 2019 looks set to offer an improvement in M&A activity in the country. According to the Global Transactions Forecast (Forecast) issued by global law firm Baker McKenzie and Oxford Economics (OE), just $4.3bn of M&A activity was concluded in South Africa in 2018.However, Morne van der Merwe, Head of Corporate/M&A at Baker McKenzie in Johannesburg says that signs of more market-oriented policies and anti-corruption efforts under President Cyril Ramaphosa’s leadership should lead to economic recovery.

“Further, it is expected that some of the deals that were announced last year but not finalized could now go ahead, contributing to the higher volume and value of M&A deals in 2019 compared to 2018,” he notes.

“South Africa is therefore expected to experience a rebound in M&A activity in 2019, with total M&A deals valued at $6.2bn,” he says.

According to the Forecast, South Africa concluded $7.5bn worth of deals in 2017, dropping to $4.3 bn in 2018. This value is forecast to rise to $6.2bn in 2019 before dropping again to $5bn in 2020 and US$4bn in 2021. In terms of deal volume, 182 deals were concluded in 2017, decreasing to 136 deals in 2018. In 2019, the volume of deals is expected to climb to 199 with a small drop to 178 in 2020, dropping further to 159 M&A deals in 2021.

“With the world economy cooling from 2019, the Forecast predicts global M&A values will decrease in 2020. South Africa’s slight drop in M&A activity in 2020 and 2021 is partly because it is following this global cycle. The good news is that the Forecast also predicts a new global upcycle could begin in 2021, and South Africa could see the benefit of that in future years, says van der Merwe.

According to the Forecast, more stabilisation is expected globally in 2021 after a period of adjustments: interest rates should have reached a stable level in the US; equity markets will be in a more sustainable position and, barring further escalation in trade tensions in the meantime, companies will have more certainty about their ability to trade across borders. As such, Baker McKenzie’s analysis of key macro drivers – and the historical pattern of M&A cycles – suggests a new global upcycle could begin in 2021.

South Africa – Inbound and outbound investors 

Taking a closer look at the key M&A trends in South Africa last year (2018), Baker McKenzie’s analysis of Thompson Reuters data shows investors from the United States (US) announced the most deals in South Africa in 2018 (14 deals), with Mauritius announcing 10 deals in South Africa and the United Kingdom (UK) involved in nine deals in the country in 2018.

“The US has been a significant investor in South Africa, and the African continent as a whole, for some time. The country outlined its new Africa strategy in December last year  by reiterating its commitment to strong partnerships with key countries in Africa and said it would also seek to promote intraregional trade and commercial ties with its African allies, shifting its focus from “indiscriminate aid” to one of trade and investment. It will be interesting to see if this new policy impacts on US investment in South Africa in future years,” says van der Merwe.

In terms of outbound investment, key target countries for South Africa investors in 2018 were the UK (18 deals), Australia (11 deals) and the US (eight deals). Nigeria was the most popular target country in Africa for South African investors, with six deals concluded in 2018.

“The ease of doing business with the UK and Australia, brought about by various factors, including, language, historical ties and familiarity, has meant that investment between these countries has always been good. For the UK, Brexit has impacted positively on investment between the UK and South Africa in that it has caused UK trade outreach initiatives to various of its historic trade partners, including South Africa,” van der Merwe says.


In terms of sectors that saw the most activity in South Africa, inbound investors completed the most deals in the industrials sector (15 deals), followed by consumer products (10 deals) and financials (also 10 deals). South African investors looking for deals in other jurisdictions  concentrated mostly on the industrials (15 deals) and materials (11 deals) sectors. There were 10 deals each announced by South Africa outbound investors in the consumer products and services, financials and high technology sectors.

“The industrials sector in South Africa is well established and thus provides many opportunities for investment. It is also a good entry point for investors looking to expand into Africa as this sector is a focal point for developing economies,” he says.

“In addition, a rapidly growing middle-class, improved access to new technology and demand for accessible financial services has boosted investor interest in the consumer, technology and financial services sectors in Africa,” van der Merwe notes.

Initial public offerings

Initial Public Offerings (IPOs) concluded in South Africa raised $1.3 billion in 2017 (mostly attributed to the Steinhoff Africa Retail Ltd IPO, which raised $1.2bn in Johannesburg),  dropping to $674m in 2018. In 2019, IPOs are expected to raise $966 million, before dropping to $349.5 million in 2020, rising again to $541.4 million in 2021. Most of these IPOs are domestic, with cross border listings accounting for just $22.4m of the capital raised in 2017, and $381m in 2018. No cross-border IPOs are forecast in 2019, 2020 or 2021.

Wildu du Plessis, Head of Capital Markets at Baker McKenzie in Johannesburg explains that the visible drop in South African IPO values from 2017 to 2018 was mostly because the figure was artificially high in 2017, due to the Steinhoff Africa Retail listing.

“However, I don’t see any more massive capital raising transactions happening until there is more political and economic stability in South Africa. Political stability will hopefully begin to return after the country’s election in 2019, but there is still a lot of work to do to stabilise the economy. The World Bank recently downgraded South Africa’s growth rates and I think there is another year of hard work before the economy starts to recuperate,” he says.

“This is also the reason for the predicted halt in cross-border IPOs by South African issuers in the coming years. South African companies wanting to raise capital in other jurisdictions in Africa are thinking twice and waiting for political and economic certainty to return before going ahead,” du Plessis adds.

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