Law firm Baker McKenzie says merger and acquisition (M&A) activity decreased across Africa in the first half of this year in terms of volume and value, with some exceptions, such as in Nigeria.
Going forward, dark clouds also remain over the M&A market on the continent in the short term, with economic uncertainty likely to cause a reduction in foreign investment in Africa.
However, recent developments around Africa’s policies on trade and investment, coupled with renewed partnerships with major global economies, brighten the continent’s prospects for a medium-term recovery in M&A transactions.
Meanwhile, the value of M&A transactions in South Africa dropped by 60% to $3.3-billion in the first half of the year, down from $8.2-billion in the first half of last year.
The volume of M&A deals in South Africa fell by 18% year-on-year, with 132 transactions recorded in the first half of this year, compared with 160 transactions recorded in the first half of last year.
Additionally, domestic M&A activity in South Africa also dropped by 18% to 64 transactions in the first half of the year, compared with 78 transactions in the first half of last year.
Domestic deals were valued at $1.7-billion in the six months under review, down 71% year-on-year.
Cross-border transactions reflected the same downward trend, with M&A volumes down 17% year-on-year to 68 deals in the six months under review. Cross-border deal value also decreased by 32% year-on-year to $1.5-billion.
Baker McKenzie M&A head and managing partner Morne van der Merwe says the impact of Covid-19 is now being felt across the African M&A market, with numerous deals in the pipeline having been delayed or cancelled.
He explains that in certain sectors, such as in the airline and tourism industries, Covid-19 has caused a re-think of footprint expansion through M&As.
“In general, the dealmaking space has been impacted by the sentiment that ‘life will never be the same’. A lot of dealmakers are thinking carefully about which businesses and sectors will be winners and which will be losers, and where the pandemic has created opportunity to acquire quality assets at a discount.
“It would appear as if volatility, uncertainty, complexity and ambiguity is becoming the new normal in the M&A space, requiring a smart and collaborative effort to get the deal over the line - especially in terms of cross-border deals,” Van der Merwe states.
Further, he adds that a lack of available capital and acquisition finance, as well as the difficulty of pricing deals in an uncertain market, could also cause investors to take a wait-and-see approach going forward.
Adding to the challenges are the contract changes around due diligence and the mitigation of risks owing to ongoing supply chain blockages and other disruptions. Force majeure clauses and material adverse effects in contracts are also being studied to assess where transactions could be terminated under existing agreements.
The physical constraints of doing deals during a lockdown have also made negotiation, approvals and due diligence more difficult, but Zoom and other virtual teleconferencing tools have addressed the logistical challenges somewhat and provided the ability to continue negotiations.
“However, well before the pandemic struck, we were expecting a drop in M&A deals in South Africa in 2020, owing to issues around legal, political and economic uncertainty, labour market concerns; currency volatility; bribery and corruption challenges; and inadequacies in the justice system.
“Investors were also worried about the support and performance of State-owned enterprises, land expropriation without compensation, and uncertainty about security of property rights and security of tenure, which eroded business confidence in South Africa in the last few years,” Van der Merwe points out.
In the short term, Baker McKenzie expects that most of the remaining deal activity in South Africa, and across Africa in general, will be generated by take private transactions, distressed M&A opportunities, restructurings, disposals and South African corporates possibly looking for investment opportunities in offshore markets.
In the context of distressed M&A, and with the likelihood of sector consolidation as stronger players buy weaker players, competition law will also be a key consideration for many M&A deals.
Baker McKenzie competition practice partner Lerisha Naidu says it is likely that firms will look to increasingly rely on failing firm arguments to justify the consolidation of markets associated with M&A activity before the competition authorities.
“There is no doubt that Covid-19 will also give rise to a conflict between the need for foreign direct investment (FDI), on the one hand, and the need to protect the most vulnerable sectors of the economy from predatory acquisitions, on the other.
“The Competition Commission in South Africa will likely increase its scrutiny of M&A transactions going forward, taking the view that the benefits of FDI cannot be at the expense of the economy and the public interest that the Competition Act seeks to protect. A careful balance should be struck between the two, erring on the side of bolstering the economy to the fullest extent, to ensure optimisation of the recovery phase,” she notes.
Meanwhile, in the sub-Saharan Africa (SSA) region, M&A volumes decreased by 24% year-on-year to 254 deals in the first half of the year, compared with 338 deals made in the same period last year.
The total value of M&A deals was down 56% year-on-year to $6.8-billion in the first half of the year, compared with $15.3-billion in the first half of last year.
Baker McKenzie says the majority of deals in the first half of the year for the region were cross border, with 160 transactions totalling $4.8-billion.
The law firm concludes that M&A activity in Africa going forward could come from distressed M&A transactions.
Buyers with strong market positions or balance sheets and an appetite for risk could seek to capitalise on the opportunities available in the most challenged sectors, such as retail, transport, energy, construction, hospitality and leisure, as well as the opportunities in the sectors that have performed well during the pandemic, such as those in technology and healthcare and fintech.
The oil and gas industry and noncore infrastructure sectors are also facing significant stress, which might produce opportunities for buyers. The bottom line is that there will be very few sectors who have not been badly affected by the pandemic, but this could produce opportunities for buyers who have done their homework and have an appetite for risk.