By Shabbir Norath, Head: Advisory: Nedbank Corporate and Investment Banking
Commodity exposure and the global economy’s risk-aversion has resulted in a decrease in appetite for emerging market assets in recent months. For much of Africa, the current drought is another unexpected dampener of global acquisition appetite with a number of prospective deals falling through or being significantly downscaled as the long-term economic impact of the lingering drought becomes increasingly more apparent.
As a result of these economic challenges, the South African equity market, and many African markets as well, have experienced a steady decline in prices of many listed stocks. In addition to this, a number of SA companies (both listed and unlisted), are finding themselves in a position of distress and are consequently desperately looking for ways to bolster their balance sheets with capital injections from new strategic equity partners. For acquirers – whether local or international – with strong balance sheets and arguably even stronger constitutions, this situation presents a fairly compelling opportunity.
Activity in the South African M&A market
Notwithstanding the weak macro and local economic environment, there remains a fair amount of activity within the South African M&A market. There still appears to be appetite from offshore funders to fund deals in SA largely as a result of the deterioration in the Rand and South Africa’s continued perception as the “gateway” to the continent. This may result in local stakeholders assuming a level of confidence that is being inflated by global acquirers with the financial means to back their long-term bets on what are, right now, clearly undervalued SA companies.
Opportunities in current economic environment
Aside from the possibly artificially inflated confidence levels, the truth is that while many potential South African acquirers may have been spooked by the less than optimum economic environment in the country at present, for those who are willing and able to take a long-term view, the suppressed local markets actually present some real opportunities. Despite funding lines from banks becoming fairly hard to come by, many of these distressed businesses present a compelling acquisition proposition for those acquirers brave enough to look past the current environmental challenges and see the fundamental strengths that underpin many of these businesses – and the prospects they offer to have a stake in a high-quality asset operating in South African and African sectors that could well outperform in a few years’ time.
Over and above lower local valuations and the numerous distressed assets, diversification is another key consideration for acquirers who may currently feel the reluctance to invest due to economic and market challenges being experienced on the continent. At face value, organisations in distress may appear to be unwise acquisition targets, however, in many instances they include underlying businesses or assets that are fundamentally excellent and offer the opportunity to diversify. This obviously presents forward-thinking acquirers with a unique opportunity to diversify their own business interests, which in turn makes their organisation that much more resilient, and valuable over time.
While the combination of lower valuations and the need for diversification may drive M&A activity in South Africa, the case for acquisitions in many other parts of Africa is not so clear cut. Given the continent’s continued rise as a globally appealing investment destination, Africa undoubtedly presents savvy acquirers and investors with many opportunities.
Short-term volatility and instability aside, there are many investors that clearly recognise the opportunities to be had across Africa. South African companies and investors with the means and willingness to take a long-term view would certainly be well advised to do the same.