Depending on political and economic conditions in the country in the next two years, South Africa’s deal activity is expected to improve, as global economic and political risks ease and positive macroeconomic deal drivers arise, the ‘Global Transactions Forecast’ issued by multinational law firm Baker McKenzie has revealed.
Globally, 2017 has been a period of apprehension for dealmakers and, while economic growth has certainly slowed, the cliff-edge some were predicting has failed to materialise.
Following on the momentum created in the second half of this year, the ‘Global Transactions Forecast’, developed in association with Oxford Economics, predicts a cyclical peak in 2018 for several macroeconomic and financial deal drivers, with 2018 marking the high point of the deal cycle for the world's largest transaction centres.
The forecast highlights why investors around the world are feeling increasingly confident as 2018 approaches, with appetites strengthened by positive trends such as more buoyant world trade and economic growth, elevated equity valuations, and the prospect of cheaper financing in emerging markets.
"After a few soft patches in 2017 we have a more optimistic outlook for the global economy and dealmaking in 2018, as long as the brakes are not put any further on global free trade.
“We see an uplift in both merger and acquisition (M&A) and initial public offering (IPO) activity as dealmakers and investors gain greater confidence in the business prospects of acquisition targets and newly listed businesses," said Baker McKenzie global chair Paul Rawlinson.
"However, it's not a done deal, with the threat of a hard Brexit and a North American Free Trade Agreement collapse both still very real. Business will need to continue to make the case for liberal trade and investment frameworks,” he adds.
In South Africa, the forecast shows that growing political risk and a sluggish economy contributed to a halving in total M&A activity for this year versus 2016. However, the forecast predicts that the economy should improve in 2018, owing to the impact of monetary policy easing and stronger commodity prices.
But at around $9-billion in 2019, the forecast for the peak in M&A activity in this region will be less than one-third of the level seen in 2015.
Baker McKenzie Johannesburg Africa head Wildu du Plessis noted that, locally, there was no guarantee that the predicted upswing would come to pass.
“There is just too much political uncertainty. If the African National Congress National Conference in December does not deliver the solution that markets are hoping for, then deal flow and IPO activity will be affected and depressed. If, on the other hand, there is some hope of a change to the political situation, things may well indeed change for the better."
Baker McKenzie Johannesburg managing partner Morne van der Merwe added that current conditions have slowed M&A growth as international investors were reluctant to invest with the current political and economic uncertainty.
“This uncertainty has caused a reduction in foreign direct investment, which, in turn, hindered dealmaking. Owing to the downgrades and potential for further downgrades, the cost of raising capital for acquisitions has also become more expensive.
“On the positive side, a number of commentators believe the rand is currently undervalued. This provides entities with greater appetite for risk with opportunities to acquire South African assets cheaply,” he said.
Further, Van der Merwe pointed out that conditions were also enhancing dealmaking in the context of divestment deals, but while this may be a good thing in the short term, there are adverse long-term consequences.
“The requirement to meet black economic empowerment ownership targets is also stimulating the dealmaking environment. Further, there is also currently a lot of opportunity in respect of South African assets as they are comparatively cheap.
“However, there is a tendency for locals holding local assets to hold on to such assets. At present, locals will be less inclined to sell their local assets than foreigners.”
He highlighted that there were a number of assets in the mining sector that offered great value. “If there is an upswing in the South African economy, as predicted, these assets may offer significant upside,” noted Van der Merwe.
While M&A transactions were valued at $10.7-billion last year, this is expected to decrease to $4.5-billion for this year. In 2018, this is predicted to rise to $8.5-billion and to $9.2-billion in 2019.
In terms of deal volume, there were 115 M&A and IPO transactions in South Africa in 2016. This is expected to rise to 172 transactions this year, while 273 deals are expected in 2018, and 295 in 2019 before decreasing to 186 in 2020.
In South Africa, the value of IPO transactions was $718.6-million in 2016. This amount is expected to drop to $539.1-million this year, before increasing to $672-million next year.