Local companies are likely to continue to attract foreign buyers who are taking advantage of the weak rand and low valuations to expand into one of Africa’s most lucrative markets.
According to analysts, valuations for local companies are attractive and raising capital is cheaper given the low interest rate environment globally.
A number of JSE-listed companies have tempted international buyers — an indication of confidence in local brands and the South African market — with attention likely to focus on logistics, distribution, food, telecommunications, IT and professional services.
Among pending deals announced in 2021 are Distell’s offer from Heineken, and Dubai logistics company DP World’s plan to buy Imperial Logistics. Unlisted glass packaging firm Consol will be sold to Luxembourg-based Ardagh Group, while Canadian-based Volaris has made an offer for Adapt IT.
John Blake, CEO of Translink Corporate Finance SA, says local companies are increasingly aware they are on the radar of international investors.
Multinational investment banks such as Translink, which operates in more than 30 countries, are positioning local targets for potential international buyers with strategic reasons to establish a local presence, he said.
“We are seeing a global surge of M&A [mergers & acquisitions] activity as well-positioned and -resourced companies are taking advantage of historic low interest rates and cash on balance sheet. In addition, a Covid-19-related shake-up is seeing companies acquire key competitors or expand into new markets and regions opened up due to market disruptions.
“The same opportunities exist in South Africa, and although we have fewer local players to press their advantage in a disrupted marketplace, we are seeing an upward trend in local M&A that is set to continue.”
Blake says local companies are valued at about 30%-40% less than their offshore peers thanks to higher local-risk premiums and “present exceptionally good value for money”.
Local companies also compete in a less-congested market and are often more profitable as a result; several have an established footprint elsewhere in Africa and they are well positioned to capture African growth.
“As corporate finance advisers we are seeing an increasing interest by international investors to capture platforms for growth into Africa. Foreign buyers with their cheaper cost of capital cannot only outbid local bidders, but also bring the required scale and investment to local targets to enable growth and expansion,” says Blake.
As corporate finance advisers we are seeing increasing interest from international investors to capture platforms for growth into Africa
— John Blake, CEO of Translink Corporate Finance SA
David Shapiro, chief global equity strategist at Sasfin Securities, says M&A trends will continue as businesses look to establish a foothold in Africa.
“It’s not a new concept, but this time around businesses are not going in blind. They’re doing their homework.”
Shapiro says South African businesses with established operations, sound balance sheets, proven management and experience of trading elsewhere in Africa “provide a neat foothold for companies that want to expand on the continent”.
Local companies are faring reasonably well, mainly because they are relatively cheap, says Chris Gilmour, independent investment analyst with Salmour Research. The weak rand also makes them attractive, he says.
“South African companies tend to be extremely well managed in global terms, which confers another significant advantage upon them,” Gilmour says. If global interest rates remain low, “I would expect to see the momentum of private equity and other types of buyouts ... remaining high into next year.”
Farai Mapfinya, CEO and chief investment officer at Aequalis Asset Managers, says although M&A momentum slowed somewhat in the second half of 2021 compared with the first half, he expects some consolidation — especially in sectors that were most affected by the pandemic.
He says South African companies present lower risk for international investors as they are “generally well run and the governance framework is up there with the best in the world”.
“Another less-talked-about aspect has been the level of emigration by high-level decision-makers over the past two decades. These players still hold South Africa close to their hearts and inevitably have brought greater visibility to South Africa,” he says.
Blake says companies operating in sectors that provide goods and services to a growing urban and consumer population will attract increasing interest from international investors.
SA and Africa are still relatively “unexposed to some major international brands who are seeking distribution platforms to access local markets; the acquisition of Distell by Heineken is a case in point”.
There is also likely to be further domestic M&A activity.
“I think a lot of domestic businesses are going to look inward as to how they can create value for shareholders. They’ve been too comfortable and investors are going to start prodding them to use their assets and balance sheets more productively,” says Shapiro.
In 2021 there were a number of deals in retail, mining and financial services. These include Mr Price’s purchase of kitchenware company Yuppiechef, and TFG buying online shopping group Quench, linen brand Granny Goose and manufacturer Cotton Traders.
Sanlam and Absa merged their investment management businesses, Alexander Forbes sold its life business to Sanlam, and Standard Bank took full control of Liberty.
In the mining sector, Royal Bafokeng Platinum has attracted interest from rivals Impala Platinum and Northam.
Gilmour cautions that further consolidation in the local market may be limited by competition considerations.
“There is already a high concentration of power in many industries and so allowing local firms to buy each other up may prove to be difficult in many instances,” he says.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.