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Africa|Aggregate|Environment
Africa|Aggregate|Environment
africa|aggregate|environment

M&A activity in Africa may improve this year but challenges remain

28th February 2024

By: Schalk Burger

Creamer Media Senior Deputy Editor

     

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Merger and acquisition (M&A) activity in Africa experienced a sharp decline in 2023 compared with 2022, but there are signs of improvement for this year.

Key factors that contributed to the slowdown in M&A activity in 2023 included rising inflation, the increased cost of capital, major geopolitical events and general uncertainty affecting global markets.

These factors have impacted M&A globally, with Africa being no exception, law firm Herbert Smith Freehills (HSF) notes in its 2024 'Annual M&A Report'.

A decrease in venture capital activity and ongoing economic headwinds resulted in a sluggish year for deals, but 2024 shows signs of improvement, the firm states.

In the second half of 2023, inflation started cooling. The hopes are that inflation will continue to ease and stabilise this year.

The ongoing worldwide uncertainty and its economic effects will, however, continue to have an impact on M&A transactions in Africa.

"We expect an upward trend of M&A transactions in 2024, especially from private capital investors, but the impact of the global uncertainty remains to be seen," HSF says in its report.

Private capital transaction deal volumes in Africa in 2023 decreased by 54.5% compared with 2022, and deal value declined by 56.27%.

"The downturn in investment activity in Africa was far-reaching, as most asset classes were affected by it. One of the key areas of decline was the significant decrease in venture capital activity, which had previously boosted the deal values and volumes across Africa in 2022," HSF says.

Venture capital deal volumes in Africa in 2023 decreased by 51.27% compared with 2022, and venture capital deal value by 44.23% compared with 2022.

However, 2021 and 2022 were standout years for private capital in Africa, and the 2023 decline in activity has brought activity levels closer to pre-Covid-19 levels, the report shows.

Further, the impacts of the slowdown were also felt in capital raising, where the total value of private capital fundraising in Africa declined to $1.2-billion in 2023 from $2-billion in 2022, the law firm said.

Meanwhile, with the uncertainty in global markets and increased cost of capital, investors have become increasingly cautious when it comes to what deals they do and the terms of such deals.

"Increased caution and risk aversion have led to deals taking longer to close as due diligence and negotiations have become protracted in most cases," the report noted.

The meaningful slowdown in capital deployment in African venture capital has also resulted in businesses and founders having to focus efforts on capital preservation and slowing down their burn rates.

Globally, there was a compression in exit multiples in 2023 and again Africa was no exception to this. Where founders did manage to raise capital, valuation discussions and negotiations were often a sticking point and, in many cases, businesses had to decrease their valuations in order to secure funding, also called down rounds.

"The decline in activity and increased cost of capital also saw more bridge rounds and convertible instruments being used in venture capital, as businesses struggled to raise full funding rounds and investors opted for hybrid instruments which would give them greater downside protection in the current market conditions," HSF points out.

Additionally, the tougher funding environment in 2023 also gave rise to more recapitalisation transactions occurring where all previous funding rounds were converted from preference shares into ordinary shares and usually heavily diluted.

Such transactions result in non-funding investors losing their liquidation preference and anti-dilution protections and are usually aimed at penalising non-participating investors who do not participate in the funding round by providing the company with their pro-rata amount, which is often referred to as a pay-to-play mechanism.

SOUTH AFRICA
In South Africa, the South African Reserve Bank raised the repurchase rate (repo rate), being the rate at which private sector banks borrow rands from the South African Reserve Bank (SARB) by 1.25% to 8.25% from 7% over the course of 2023 in order to combat inflation.

This was a continuation of the rate hikes which were experienced in 2022 and, in aggregate, means the repo rate has increased by 4.5% since the beginning of 2022 to 8.25% from 3.75%, the report noted.

The repo rate was most recently increased in May 2023 and the SARB resolved to not increase it and rather hold it steady at 8.25% in September and November of 2023.

"The holding steady of the repo rate has been positive and the hopes are that there will be cooling inflation and rate cuts in 2024, which would then create a more favourable environment for investment and more market and M&A activity."

Meanwhile, some of the highlight transactions in South Africa include Bunge's acquisition of a 50% stake in Viterra from Glencore, with Glencore taking a 15% stake in the merged Bunge entity, for an estimated deal value of $4.1-billion.

Similarly, Tempur Sealy's acquisition of a 45% economic interest in Mattress Firm from Steinhoff International was for an estimated deal value of $4-billion.

Additionally, the Absa and CSI and Staff Trust black economic empowerment transaction with an estimated deal value of $11-billion was a standout transaction, the report showed.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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