Renewed appetite for M&A activity

Renewed appetite for M&A activity in 2024 after strong finish to last year

 This article first appeared in DealMakers, SA’s quarterly M&A publication

By Krishna Nagar, Co-head of Corporate Finance at RMB

Last year ended with a flurry of M&A activity in South Africa and the first quarter of 2024 has continued to show evidence of renewed M&A appetite, nudged on by an emerging tailwind of optimism in the country and a relatively more positive global backdrop.

Despite a lot of noise around the South African election, the base case is that we don't expect it to be a deeply negative event from an economic impact perspective or lead to subdued investor appetite. We think it will have a neutral to positive outcome, once it is over.

We also expect an improvement in GDP growth, as some of the major recent challenges facing our economy start to ease. Logistics and ports problems have been so detrimental to South Africa’s recent economic growth, that even the smallest of green shoots of improvements - such as recent executive appointments or momentum on the privatisation of rail and ports - should create greater economic confidence.

We also expect the benefits of greater supply of renewable energy to feed into the economy. If the energy challenges have indeed reached a turning point, it would prove a massive boost in confidence to what people and businesses would be prepared to commit to from an economic perspective.

And as M&A is driven by confidence, we think it could translate into better M&A activity over the next 18 months. 

Globally, M&A activity has picked up after a slow period. This trend, fueled by factors like improved financial markets, pent-up demand for deals as well as an expected easing of inflation and anticipated rate cuts, could translate to increased activity in South Africa too. The first quarter of 2024 has been marked by good levels of M&A by volume and value.

As such, the factors that drove activity at the end of 2023 are expected to remain and possibly gain momentum during 2024.

International interest in South African businesses – Despite a mixed economic backdrop in South Africa, there remains appetite for SA opportunities from global buyers who are maintaining a close watching brief at opportunities in various sectors.

A recent example of this is VBL’s acquisition of South Africa’s The Beverage Company (“Bevco”). VBL is an Indian listed company that manufactures, bottles and distributes beverages across a number of markets. It is also the second largest bottler of PepsiCo's beverages in the world outside the United States. Another example is Canal+, the French media company that has made a formal offer to acquire Multichoice. These deals highlight that certain global investors are more capable of taking a decades-long view, looking past current difficulties, to acquire strategically important businesses in the region.

Domestic consolidation in certain sectors – In recent years, South African corporates have de-levered, focused on efficiency and re-focused their efforts on domestic consolidation opportunities. Indeed, there is limited appetite from institutional shareholders to support corporates expanding offshore in a meaningful way; they are therefore looking closer to home for complementary and value-accretive deals. A good example is Sun International's proposed acquisition of Peermont Group to expand its portfolio.

Private equity (PE) activity and new emerging players in South Africa & Africa - While many of the PE incumbents in South Africa (and Africa) have struggled with generating returns over the last decade, impacting their future capital raising ambitions, there is still a healthy level of capital in many PE funds that need to be deployed into targets across industries where growth (on a relative basis). Market leadership feature high on the list of criteria. A case in point is the acquisition by Adenia of The Courier Guy, which showcases that certain niche sectors still see significant growth and expansion opportunities. In addition, fund managers continue to seek realisations and return capital to investors, which continues to drive deal flow in this segment. More deals are expected.

SA corporates focusing on their core businesses and more actively managing their portfolios - The last two themes have paved the way for PE buyers with capital to acquire assets that have received renewed focus and attention as standalone businesses. Telkom Actis / RBH potentially acquiring Swiftnet and Capitalworks’ proposed acquisition of The Building Company are key examples.

This is aligned to corporates focusing on their balance sheets and capital structure optimisation. Together with a renewed focus on their core operations, as mentioned, this could lead to further spin-offs, conceptually similar to RCL's proposed separation of its chicken business.

Looking ahead to the next 18 months

The outlook for M&A activity in South Africa for the rest of this year and into 2025 appears cautiously optimistic, with a potential rise in deals compared to recent years.

Sectors to watch

Some sectors are particularly well positioned for M&A activity.

Consumer & Retail – Aligned with the themes highlighted above, a combination of continued international interest, SA corporates refocusing on their core businesses, consolidation in sub-sectors that have faced pressure from consumer weakness and greater PE activity is expected to drive deal flow in the coming 12-18 months.

Industrials - The South African industrial sector remains unloved by the market, at least for the moment, notwithstanding many businesses showing value when applying a ‘through the cycle’ view. This may lead to M&A activity in the form of strategic acquirers with strong balance sheets looking for opportunities to consolidate.

Resources - While the global economic climate is affecting certain commodity prices negatively, consolidation within the South African mining industry remains a focus for specific commodities. South African mining companies continue to look at broader Africa and international expansion and sustained downward pressure on certain commodity prices are likely to result in the sale of non-core assets, the rebalancing of portfolios and capital raising.

Renewables and energy infrastructure - South Africa's ongoing focus on renewable energy and infrastructure development could present attractive M&A opportunities for investors. We expect more deal flow in this segment to come to market during H2 2024.

Overall, the outlook for M&A activity in South Africa for the next year suggests a potential increase in deals compared to recent years. However, this optimism is tempered by continuing global and domestic challenges.

ENDS