Mergers and acquisitions (M&A) are among the most complex, information-dense and unpredictable processes in the corporate sector. The M&A landscape in South Africa has undergone significant changes in recent years, driven by a range of factors including economic conditions, technological developments and changes in regulatory environments.
According to a report by global M&A consultancy DealRoom, these transactions start with the promise of innovation, impact and value creation by combining the strengths and cultures of two unique corporate entities, but these initial goals are often lost in the process. Successful deals create a space for more collaborative, people-driven and equitable negotiations and outcomes that never lose sight of this original focus.
Top trends in the M&A space
According to a recent report by DealMakers South Africa, in the first quarter of 2022, the value of M&A transactions, including those companies with a secondary listing on a local exchange, was R59.3 billion off 78 deals. According to the report: “Of the top 10 deals by value, six involved real estate transactions valued at c.R22 billion, and real estate was by far the largest component of sector analysis at 30% of transactions.”
One notable trend in the South African M&A landscape has been the increasing focus on cross-border deals. Companies are seeking to expand their global footprint and gain access to new markets, particularly in emerging economies. The report found that the value of cross-border deals in South Africa reached R99.6 billion in 2021, up from R77.6 billion in 2020.
There has also been an increased focus on prioritising digital transformation. Companies are actively looking to acquire new technologies and capabilities, particularly in the areas of digital transformation and Artificial Intelligence. This has led to a rise in deals involving tech startups and smaller companies with innovative products and services.
Private equity firms have also become increasingly active in the South African M&A market. These firms have significant amounts of capital to invest and are often focused on driving operational efficiencies and improving profitability in the companies they acquire.
Regulatory changes, however, have had a significant impact on the South African M&A landscape. Increased scrutiny of foreign investment in certain sectors has led to increased regulation and scrutiny of cross-border deals. The report found that regulatory concerns were a significant factor in several high-profile M&A deals that were abandoned in 2021.
Beyond the bottom line
A company’s environmental, social and governance (ESG) score has become a critical component in determining its value. About 67% of South African companies are already integrating ESG into their business strategies, with an increasing number of corporates investing in larger, longer-term projects.
Issues like ethics, good governance, sustainability and an increased focus on regulatory compliance have ensured that a high ESG rating is extremely valuable to stakeholders, shareholders and individual and institutional investors. ESG is something that takes centre stage on both sides of any deal.
Amid increasing regulations, demands for transparency and the rise of ethical consumerism, more investors are shifting focus to these non-financial factors when it comes to decision-making, recognising ESG ratings as valuable corporate tools to evaluate and drive change in areas like energy efficiency, worker safety, social impact and board independence.
A recent study found that over 90% of millennial investors are interested in sustainable investing, and that holds true across all sectors and industries. A further 95% of South Africans expect company CEOs to publicly speak out on societal challenges, and 80% of Millenials and Gen Z consumers expect brands to take a stand on racism, homophobia and sexism. Seventy percent of Gen Z consumers say they actively try to support companies they consider ethical, and 65% try to learn the origins of anything they buy — where it was made, what it is made from, how it is made and by whom.
For industrial companies, displaying evidence of being ahead of the sustainability curve can be a core differentiator, not only in attracting lucrative supplier relationships or catering to increased customer demands, but also in appealing to acquirers who aim to improve their ESG scorecards. Sound ESG practices therefore create a strong opportunity for value creation in deals. Considering these principles are shaping how buyers and sellers assess strategic fit to capitalise on synergies, ESG is a vital indication of company culture and future growth prospects.
For buyers, this rating is also becoming increasingly useful to identify possible risks and areas for development when looking at prospective targets. Sustainability, infrastructure provision, energy implications and social footprint are increasingly important considerations. A 2022 report by Deloitte showed that of more than 2 000 C-suite executives surveyed across 21 countries, a staggering 97% said that business was feeling the impact of global warming, with about half acknowledging that their operations have already been negatively affected.
Therefore, by considering ESG factors during the due diligence process and incorporating them into their overall strategies, corporate buyers can identify great opportunities for value creation that can be integrated into post-merger integration plans. Leveraging the target company’s ESG rating can also help identify new business opportunities and innovation models for existing processes.
Dodging the risks
A company’s ESG profile is a good indication of the opportunities, but also of the risks, that a merger or acquisition might bring; risk assessment and mitigation are critical in transactions of this size and nature. ESG portfolios are used to help determine value, and in ensuring that company values and corporate cultures align. A target company with solid ESG reporting has less chance of entangling buyers into existing or latent ethical issues or public relations crises.
For this reason, ESG is increasingly at the forefront of M&A due diligence processes, allowing prospective buyers or investors to spot any pitfalls and make an informed decision about the transaction. This also allows for a level of transparency and can save a company from reputational harm, both on the selling side and on the buying front, by providing insight into financial and reputational risks.
Stakeholders, not just shareholders
The corporate world has shifted from being shareholder-focused towards being stakeholder oriented. Being socially responsible, environmentally conscious, and aligned with regulatory principles is extremely important to employees, customers and investors. The social impact of operations is also important for business considerations, so the onus lies on the company to ensure that the deals they make align with these principles.
Recent studies have found that both shareholders and stakeholders, as well as clients, increasingly expect companies and brands to focus on sustainability and contribute to global environmental goals, to act in a socially responsible manner and prioritise inclusivity and diversity across the board. Working conditions and employee wellness, human rights issues, environmental impact, poor governance and other ethical infringements can have a devastating impact on brand reputation, and with ethical consumerism on the rise, this hurts the bottom line.
Experts say due diligence also helps identify which potential target companies have ESG ingrained in their values and culture, and which companies are engaging in reporting purely from a compliance and reputation management perspective. Greenwashing is one example of this, seen when companies attempt to increase their marketability by misinforming stakeholders to present an environmentally responsible public image, while continuing with harmful business practices. This can have widespread and far-reaching legal, ethical, reputational and operational consequences, including plummeting stock prices, angry investors, lawsuits and brand damage.
By taking ESG into consideration during the M&A process, all parties are able to align their visions and values and mitigate any risks that might arise, while also maximising opportunities for innovation, growth, sustainability, good governance and positive social impact.
— Wessel Krige
Rystad Energy reported an increase in M&A activity across Africa’s upstream oil and gas sector in 2022 when compared to previous years. In the first nine months of 2022, M&A deals announced reached $21 billion, which is three times the deal value in 2021 at $7 billion, and four times the deal value in 2020 at $5.5 billion. Industry veterans state that some of the trends which will drive M&A activity in the oil and gas sector in the coming year include, among others, the leveraging of the momentum on energy security and the acceleration of the energy transition. At the centre of this lies the Energy Trilemma, a term first coined by the World Energy Council.
The Energy Trilemma advocates for the achievement of a balanced energy equation and when plotted on a triangle its three constituent points consist of evolving questions about energy security, energy access and energy transition. An understanding of the factors that are expected to drive M&A activity in the upstream oil and gas sector starts with understanding the Energy Trilemma.
Energy diversification remains a key piece of the puzzle when balancing the push and pull factors which exist between energy security, energy access and an energy transition.
A resilient energy sector requires a diverse energy mix; this means utilisation of all available energy resources, including but not limited to oil, gas and renewables. Oil and gas businesses recognise this. Many of the majors have announced portfolio diversification combined with net-zero carbon emissions targets and/or transitions to net-zero business. Some of the strategies in play by traditional oil and gas businesses entail creating new capacity or increasing renewable capacity from renewable energy sources such as solar and wind with short, medium, and long-term goals or reducing emissions from current oil or gas operations through fuels and other energy products sold to customers. This includes capturing and storing any remaining emissions through cutting-edge technology, or balancing them with offsets.
For governments, energy diversification is essential for reducing dependence on any one source of energy, achieving energy security, creating access to energy and addressing energy poverty. According to the International Energy Agency (IEA), Africa accounts for less than 3% of the world’s energy-related CO2 emissions to date and has the lowest emissions per capita of any region. In 2021, 43% of the population of Africa — about 600 million people — still lacked access to electricity, and of this number, 590 million reside in sub-Saharan Africa. This energy deficiency will continue to grow as the population growth outpaces access to energy, and access to electricity specifically. Recently, in South Africa, President Cyril Ramaphosa declared a national state of disaster in his State of the Nation Address in relation to the electricity crisis being experienced in the country.
It is an immediate and absolute priority for Africa to bring modern and affordable energy to all Africans. This can only be achieved through utilisation of all available energy resources. In other words, net-zero does not, and cannot start at zero, at least not for Africa. A balance must be struck, and while the developed nations dis-incentivise investment into fossil fuel exploration and production, Africa should be incentivising such investments while simultaneously incentivising the development of all other energy sources. In order to achieve this, it is necessary to ensure a stable regulatory environment for investors through clear policy directives and legislative certainty.
We anticipate that during 2023, mergers and acquisitions in Africa’s upstream oil and gas sector will continue to be driven by an investment strategy which sees the value in energy diversification and the creation of balanced energy portfolios. At the same time, continued investment in fossil fuel exploration and production remains non-negotiable in order to navigate Africa’s energy sector from future or further disaster. What is clear is that both oil and gas businesses and African governments will have a crucial role to play in navigating the Energy Trilemma. A firm hand and the lens of realism will be required if balance is to be found between energy security, energy transition and the need to address energy poverty on the continent.
— Megan Rodgers, Amore Carstens and Alex van Greuning
South Africa’s mergers and acquisitions (M&A) landscape is driven by a range of factors, and investment banks play a crucial role in facilitating these deals to help companies to achieve their strategic objectives. As companies seek to adapt to changing market conditions and gain a competitive advantage through strategic acquisitions, investment banks have become the go-to partners for M&A advisory and financing services. Their role in the South African M&A space is critical, providing essential services that help companies navigate the complex landscape of M&A deals and bring transactions to successful completion.
These banks do more than finance deals through loans, bonds or credit; they also make deals happen. This is according to Marsha Lewis, Marketing VP of global M&A consultancy DealRoom. These institutions operate on both the sell-side and the buy-side of deals, often acting as intermediary players between the two.
“The merger of two or more companies through M&A is a complex process, with a lot of moving parts,” says Lewis. “In short, investment banking is the industry that oils the wheels of mergers and acquisitions in every industry. ”
According to Chetan Jeeva, a member of Absa’s Investment Banking Division, the role of investment banks is also multifaceted. “Our financing business works closely with our M&A team to not only fund these activities, but also proactively identify buy-side and sell-side opportunities for our clients,” Jeeva explains.
Investment bankers also provide potential buyers with a valuation of their target company and other advice regarding the finer details of the deal, as these transactions are large and complicated, with far-reaching impact for stakeholders and shareholders alike. They advise on company value and how best to structure the deal, whether it be an acquisition, merger or sale.
Financing M&A
Traditionally, banks are the first point of contact when it comes to funding, especially for companies with a high net worth and large income streams. Jeeva says Absa and other banks in South Africa continue to see a high demand for M&A financing — a demand that continues to grow. “This demand has been consistently strong in the South African market, except for 2020, when the uncertainty during the Covid pandemic forced most participants to be inwardly focused to protect their investments.”
According to Jeeva, there has also been a significant uptick of foreign investment into South African entities, notably by Heineken/Distell, Vivo/Engen and IHS/MTN. “This is a testament to the strength of the corporate sector in this market, notwithstanding the macro headwinds we face.”
South African banks also provide invaluable insight to foreign investors with their knowledge of the local market. “South Africa’s M&A financing is different to developed markets due to a significant base interest rate differential, which means that the leverage multiple in the South African market is considerably lower than that of developed markets, “ Jeeva says. “Foreign investors need to adapt to local conditions to ensure excessive leverage does not create distress in the company in a downturn. Our longstanding local market-leading presence enables us to provide solutions appropriately for clients.”
Jeeva says that banks can help their clients secure funding in a number of different ways: “We offer the entire suite of financing solutions for our clients across Equity Capital Markets, Debt Capital Markets and Loan Capital Markets/Leveraged Finance. Our lending solutions include bridge underwrite, senior and mezzanine loans and preference share financing, which provide our clients with a wide variety of options to suit their needs and risk profiles.”
More than money
The responsibilities of banks also extend into deal structuring and other important aspects of the transaction. Lewis says companies often have a list of companies that have piqued their interest, but to facilitate those interactions and ease negotiations, they approach investment banks that boast a specific set of technical skills suitable for deal-making. “This enables them to extract the maximum value from the tasks they conduct as part of their mandate from the company.”
They also assist with issues like acquisition planning and exit-strategy management, valuation assessments and due diligence. “During diligence, investment bankers continue to dive deeply into the financials and often will serve as one of the major sources of communication between the buy-side and the sell-side.”
On the sell-side of the deal, pitching to prospective clients and executing client deals are two important functions. The banker on this side has the objective of selling the target company for the highest possible valuation, earning a commission based on the sale value.
On the buying-side, however, the investment banker will prioritise the goals of the acquiring company, conduct valuations of the target companies and ensure that due diligence is conducted.
As the M&A landscape continues to evolve, with companies seeking to adapt to changing market conditions and gain a competitive advantage through strategic acquisitions, so too will the role of investment banks. As the economy recovers from the impact of the Covid-19 pandemic, M&A activity in South Africa is expected to continue to grow, with an increasing demand for funding and the processes surrounding it.
— Wessel Krige
Top 40 mining corporations urged to think carefully in the developing M&A landscape
The increasing demand for critical minerals has seen mergers and acquisition (M&A) deals in the mining sector soar. How these deals are conducted, however, are under closer scrutiny than ever before. A report from PricewaterhouseCoopers (PWC) urges the “Top 40” global mining corporations to consider — and perhaps even reconsider — how they structure M&A deals going forward, in order to avoid repeating the mistakes of the past, while benefiting from the opportunities and innovations that the future holds.
“As deal activity heats up, the Top 40 are well placed to position themselves to take advantage of the rising demand for critical minerals,” the PWC 2022 mining report states. “But with competition coming from multiple angles, they’ll need to think carefully about their next big moves.”
Much of this activity has been driven by gold mining, a sector that is uniquely positioned to benefit from M&A deals and transactions. This according to a report by Mining Review Africa: “Gold was the key driver of deal activity, representing about 70% of the total value, with gold miners well-positioned in this space given relatively low levels of debt, coupled with high income opportunity because of rising gold prices. We expect gold deals to continue as larger companies look to expand their portfolios, and the middle tier looks to consolidate.”
The PWC report recommends that the Top 40 big players in global mining revisit how they approach M&A deals and cautions them to be aware of changes in the landscape, and how competitors might leverage those shifts to their advantage: “Think carefully about your M&A strategy in the context of the fundamental changes affecting mining, the market for mining products and your long-term strategic position. Consider the impact of high volatility in the short to medium term, increased geopolitical risks and competition from new players.”
— Wessel Krige
