While market sentiment has been largely negative in South Africa in recent times, law firm Baker McKenzie says the latest merger and acquisition (M&A) data could be pointing to a potential new narrative for M&A investment in the country.

Baker McKenzie corporation and M&A practice head Morne van der Merwe notes that M&A deals of a higher value, but at a lower volume, have become more commonplace in South Africa.

“While the country is seeing a lower volume of M&A deals, analysis by Baker McKenzie of Refinitiv M&A data for South Africa shows that M&A transactions completed in the first half of this year have been much higher in value compared with the same time last year.

“While we could see fewer M&A deals in the coming years, market conditions and opportunities to capitalise on demand in certain sectors could be setting the scene for a trend towards higher-value M&A transactions going forward,” he explains.

Total M&A deal values in South Africa rocketed by 347% to $16.6-billion in the first half of this year, from $3.7-billion in the first half of last year.

The rise in deal value was mostly owing to three large deals, with a combined deal value of $15-billion. Deal volume, however, fell to 136 transactions in the first half of the year, compared with 182 deals in the first half of last year.  

Two of the three big deals involved the Internet and media conglomerate Naspers. The first was a $5-billion spinoff of pay television group MultiChoice to its shareholders by South African parent Naspers and the second was Naspers’ acquisition of Russian company Kekh eKommerts OOO for $1.2-billion.

Petrochemicals company Total South Africa’s acquisition of Anadarko Petro-African Assets for $8.8-billion was the third big deal.

“While domestic M&A volumes in South Africa declined by 27% from 83 in the first half of 2018 to 61 in the first half of 2019, the largest rise in deal value was found in domestic M&A, with values growing from $878-million in the first half of 2018 to $5.6-billion in the first half of this year – an increase of 538%,” says Van der Merwe.

Domestic dealmakers appear, in general, to have had a stronger risk appetite for high-value transactions in uncertain environments both in South Africa and further afield in Africa.

In Africa, for example, deal values from domestic activity recorded a substantial rise of 276%, from $1.8-billion in the first half of last year to $6.7-billion in the first half of this year.

“There have been a number of elements causing M&A market contraction in South Africa in recent years. Issues around State capture and bribery and corruption in both the private and public sectors made international investors cautious.

“Economic concerns, challenges around service delivery, as well as the country having just held its general elections, meant that investors were holding back. The increase in the value of deals completed in the first half of this year, however, could be pointing to investor willingness to engage in higher-value transactions, although at a potentially lower volume, to capitalise on opportunities in key growth sectors such as telecommunications and technology, energy and consumer goods and services,” notes Van der Merwe.