M&A activity levels could increase during 2018

Inward-bound merger and acquisition (M&A) activity in South Africa declined significantly in 2017 as investors became increasingly risk-averse amidst high levels of political uncertainty, a ballooning deficit and depressed business confidence. Yet, several factors may lead to an uptick during 2018.

Given the significant contribution South Africa makes to M&A activity in Africa, it’s not surprising that the total 2017 deal value across leading law firms shows levels of M&A across the African continent was significantly down for 2017. According to the 2017 Mergermarket regional M&A report for Africa, last year marked the lowest deal value since 2009 with a total value of only US$ 21.1bn across 226 deals.

In terms of South African M&A activity, there has been a sharp decrease in deal value – down 70.2% - from 2016.

But we are not entirely alone. M&A activity has also been under pressure globally. A recent J.P. Morgan report shows that despite high levels of global uncertainty in 2016, the M&A market remained resilient, posting $3.9 trillion in announced volumes, in line with the third best year on record. However, after a promising start in 2017, there was a significant drop in cross-border M&A over the year across all regions – down 3.2% in value from 2016.

This may be attributed, to some extent, to tensions in the Pacific rim and the EU, Brexit and ongoing conflicts in US politics. The resulting uncertainty impacts on companies’ readiness to pursue complex, long-term deals.

While 2017 South African M&A activity followed this global downward trend, it was still the most active African country with 101 deals worth US$ 6.2bn.

In light of a politically eventful December and subsequent commencement of "house cleaning" that has caused an increase in optimism and positive investor sentiment, we can be hopeful that this should improve M&A activity. When Cyril Ramaphosa replaced Jacob Zuma as ANC president late last year, we saw an immediate strengthening of the Rand as the market received the news positively.

Additionally, over the last few days, we have seen a strong and positive message delivered at Davos. According to financial journalist Alec Hogg: “the private briefing for investors was oversubscribed as was the Brand SA dinner and the media are tripping over each other to get interviews".

The outlook for rising M&A levels on the global front is also positive. More than a decade on from the 2008 financial crisis, there has been a general economic recovery in most Western countries.

Another possible positive indicator for the African M&A industry, is that China’s Sinopec is pursuing Chevron’s South African and Botswana assets. If the deal goes through, this will likely be the biggest foreign investment in a decade, since ICBC purchased 20% of Standard Bank in 2007. Non-western companies have for some time now been displaying a growing appetite for large mergers and acquisitions around the world. Even if Sinopec loses the deal, they have shown great interest and that is good news for Asia and for Africa.

South Africa is already being rapidly repositioned on the international stage to attract foreign investment and while it is likely to take time to filter through to the actual deal table, we should expect to start seeing an uptick in inward investment.

 

J.P. Morgan report