Despite a decrease in appetite for emerging-market assets in recent months – owing to the current drought, commodity exposure and the global economy’s risk aversion – there remains a fair amount of activity within the local mergers and acquisitions (M&A) market, as well as a compelling opportunity for acquirers to take advantage of distressed South African companies, says Nedbank corporate and investment banking advisory head Shabbir Norath.
Norath said in a note on Monday that, owing to a steady price decline in several listed stocks, a number of South African companies were looking for new strategic equity partners to bolster their balance sheets with capital injections, which presented a key opportunity for offshore funders.
Norath believed, however, that many potential South African acquirers may have been spooked by the less-than-optimum economic environment in the country; but, for those willing to take a long-term view, the suppressed local markets could actually be fruitful.
“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,” he said, adding that these types of companies had a lot to offer in terms of high-quality assets that could outperform when the markets picked up.
Norath also highlighted diversification as another key consideration for acquirers who currently felt reluctant to invest. He explained that, at face value, organisations in distress appeared to be unwise acquisition targets. However, in many instances, they included underlying businesses or assets that offered an opportunity to diversify.
This would attract forward-thinking acquirers with a unique opportunity to diversify their own business interests which, in turn, would make their organisation much more resilient and valuable over time.
Norath added that, while 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 was not as a 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,” he said.
Norath also noted that there was more M&A activity in the country than many realised, notwithstanding the weak macro and local economic environment, with several offshore funders seeking to take advantage of the rand’s deterioration and the continued perception of South Africa 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 South Africa companies,” he said.