M&A activity drops in 2020 with late recovery

3rd February 2021 By: Donna Slater - Creamer Media Contributing Editor and Photographer

Law firm Baker McKenzie reports that deal-making activity in sub-Saharan Africa dropped in the second half of 2020, when compared to the second half of 2019. 

Deal-making for the full year were also down in terms of both volume and value compared with 2019.

For South Africa, deal volume and value also both dropped in 2020, with the industrials and healthcare sectors attracting the biggest investments.

Merger and acquisition (M&A) activity in South Africa decreased as a result of the Covid-19 pandemic, with the number of transactions dropping by 6%, to 186 deals in the second half of 2020. The value of the deals shrunk by 36%, down to $4.9-billion when compared with the second half of 2019.

Activity for the full-year was down 6% to 337 deals, while deal value fell by 46% year-on-year to $8.5-billion.

However, Baker McKenzie reports that monthly figures rebounded in the second half of 2020 and were more comparable to those in 2019.

In terms of cross-border transactions, the firm notes that these dropped 2% year-on-year to 164, with deal value having dropped by 47% to $4.3-billion. The industrial sector was the primary target for inbound deals with 14 transactions in 2020, up 133% year-on-year.

However, these deals were small in value, yielding a total for 2020 of $37-million. The largest inbound deal completed in 2020 was in the healthcare sector, with Aspen Pharmacare-Thrombosis acquired by Mylan NV for $759-million.

Baker McKenzie reports that the UK remained one of the primary investors for South African companies, with 25 deals − a 25% year-on-year increase.

However, the largest monetary-value deals were brought in by US investors, with total deal value amounting to $871-million. This was largely driven by the Aspen Pharmacare-Thrombosis acquisition.

Baker McKenzie corporate M&A practice managing partner and head Morne van der Merwe says the pandemic has clearly affected both the volume and value of deals announced in South Africa in 2020.

“However, South Africa remains attractive to foreign investors who have long considered the country a key gateway into Africa, even more so now that Africa Continental Free Trade Area (AfCFTA) trading has begun, and the country has been singled out as one of the early beneficiaries of intra-African free trade.”

He adds that South Africa’s infrastructure, automotive, healthcare and renewable energy sectors have seen large investments in recent years, and this looks set to continue, despite short-term pandemic lows.

“Government policy has focused on boosting investor interest in these sectors and the country’s special economic zones (SEZs) have been successful in facilitating foreign investment inflows.”

However, Van der Merwe says the uncertainty in South Africa regarding onerous policy and legislation, junk status announcements by rating agencies, currency volatility, social unrest, electricity and water challenges, skills shortages, the performance of State-owned enterprises, the security of property rights, and serious governance issues in both the public and private sector, continues to make investors nervous.

“Despite recent challenges, foreign investors in the UK, Europe and the US have long been valuable M&A investors in South Africa, and this is likely to be further boosted by South Africa being able to maximise the benefits of AfCFTA, owing to strong connections across the continent and well-established manufacturing base,” he adds.

Meanwhile, Ghana also stood out because it attracted more and higher-value M&A deals in 2020 than it did in 2019, with China being the primary inbound investor in the country.

Further, Kenya also recorded a good increase in deal value for 2020, although volumes decreased, with the financial sector being the primary target for inbound investors.

However, Baker McKenzie forecasts that, as Africa gears up for post-pandemic recovery this year, the opportunities presented by free trade across the continent, foreign investment opportunities and a post-pandemic focus on technology, healthcare and renewable energy will be key factors in attracting valuable mergers and acquisition activity to the region.