Merger & acquisition activity set to increase

After a relatively strong 2021, mergers and acquisitions (M&A) activity dropped off in 2022, in South Africa and globally. However, we anticipate a pickup towards the end of this year as key drivers of activity fall into place. 

Overall, the outlook for the South African investment case is beset with challenges: power outages, political uncertainty and increasing cost of living pressures for consumers. Against this backdrop, the country will struggle to deliver meaningful levels of growth, particularly as European trading partners navigate recession and geopolitical upheaval.  

However, where investor uncertainty and operational challenges for management teams will continue to curtail M&A activity, we expect buyers to take advantage of opportunities created by such turbulence. 

As seen in recent years, multinationals tend to take a long-term view on South Africa and Sub-Saharan Africa, and will continue to make material acquisitions in select sectors, acquiring quality earnings and operations at relatively attractive valuations. 

Examples include Heineken’s acquisition of Distell, Remgro and MSC’s acquisition of Mediclinic, which received regulatory approval, and the acquisition of EnviroServ by a SUEZ-led consortium.

Globally, financial sponsor 'dry powder' is almost three times what it was in 2015. Inevitably, this will translate into increased levels of M&A activity in South Africa and across Africa. 

This year should see a slightly more positive equity capital markets environment and increased equity issuance, which is supportive for M&A activity. EOH’s rights offer and the successful listing of Premier Foods in March 2023 is indicative of more positive sentiment in this regard. 

In terms of private capital availability for M&A, financial sponsors and family offices continue to have large amounts of capital available for deployment. Globally, financial sponsor “dry powder” is almost three times what it was in 2015. Inevitably, this will translate into increased levels of M&A activity in South Africa and across Africa. 

We see several trends driving M&A: 

• Public to private deals — conditions remain strong for delistings from the JSE to continue (down to 288 at the end of 2022 from 312 in 2019) by opportunistic buyers taking advantage of low trading multiples on the JSE, or existing shareholders taking the businesses out of the public domain to make structural changes to unlock value. 
• Consolidation — in periods of economic downturn and pressure on margins, large sector players take the opportunity to acquire market share from smaller, less resilient ones, or expand.
• M&A activity variation by sector:

• We expect low levels of activity in consumer-facing sectors to continue this year as management teams manage the price/volume balance to maintain margins. But major consumer groups in South Africa will assess options to unlock value for shareholders. RCL Foods' disposal of Vector Logistics is an example of a major consumer group delivering on a value creation strategy.

• Financial services will continue to be active. Sanlam’s acquisition of the remaining 62% stake in BrightRock Insurance and the acquisition of control of AfroCentric are recent examples of large players consolidating market share and leveraging their platforms. Sanlam and Allianz have also agreed to combine their current and future operations across Africa (excluding South Africa) to create the largest pan-African non-banking financial services entity on the continent. 

• In the resources sector, healthy balance sheet positions due to attractive commodity prices paired with corporate diversification strategies should be supportive of M&A-led growth opportunities. Thungela's acquisition of Ensham coal mine in Australia is an example of South African mining players with healthy balance sheet positions acquiring assets that offer geographical diversification. 

• ESG commitments and South Africa’s energy challenges are driving M&A activities in the energy sector, demonstrated by significant levels of investment in renewable and independent power generation opportunities. Seriti’s establishment of Seriti Green and its acquisition of 100% of Windlab Africa in December 2022, as well as Anglo American’s partnership with EDF Renewables to form Envusa Energy, are examples of the high levels of long-term capital being allocated to the sector. 

• In health care, increased levels of deal-making as mid-tier health-care players continue. IFC’s pending investment into Lenmed is a good example. Larger players are driving diversification strategies, such as Life Healthcare’s recent acquisitions of East Coast Radiology and TheraMed Nuclear.

• In the technology, media and telecommunications sector there are potential consolidation opportunities in South Africa and fintech acquisition opportunities in the rest of Africa.
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• Buyers will continue to look carefully at M&A options in Africa, requiring potential targets to have a proven track record of capturing consumer growth. Gaining a level of comfort in the regulatory and forex environment are also key criteria before investing. Outside South Africa, Egypt, Nigeria and Kenya are attracting strong investor interest. 

We see activity levels gradually increasing, with potential for a major jump from the latter part of the year into 2024. 

* Eb is a senior transactor and Molefe is a transactor for corporate finance at RMB