South African mergers and acquisitions deals have halved in 2017
The easing of key economic and political risks and the emergence of positive macroeconomic deal drivers will accelerate global deal activity in 2018, according to the third edition of the Global Transactions Forecast issued by Baker McKenzie.
Conditions in South Africa are also predicted to improve, but this will depend on political and economic conditions in the country in the next two years, the legal advisory firm said.
Globally, 2017 has been a period of apprehension for dealmakers and while economic growth has certainly slowed, the cliff-edge some were predicting has failed to materialize.
Following on the momentum created in the second half of 2017, The Global Transactions Forecast, developed in association with Oxford Economics, predicts a cyclical peak in 2018 for several macroeconomic and financial deal drivers, with 2018 marking the high point of the deal cycle for the world’s largest transaction centres.
“After a few soft patches in 2017 we have a more optimistic outlook for the global economy and dealmaking in 2018, as long as the brakes are not put any further on global free trade. We see an uplift in both M&A and IPO activity as dealmakers and investors gain greater confidence in the business prospects of acquisition targets and newly-listed businesses,” said Paul Rawlinson, Baker McKenzie’s global chair.
“However, it’s not a done deal, with the threat of a Hard Brexit and a NAFTA collapse both still very real. Business will need to continue to make the case for liberal trade and investment frameworks.”
In South Africa, the forecast shows that growing political risk and a sluggish economy contributed to a halving in total M&A in 2017 versus 2016. However, the forecast predicts that economy should improve in 2018 thanks to the impact of monetary policy easing and stronger commodity prices.
But at around $9 billion in 2019, the forecast for the peak in M&A activity in this region will be less than a third of the level seen in 2015.
Wildu du Plessis, head of Africa at Baker McKenzie in Johannesburg noted, however, that there is no guarantee that the predicted upswing will come to pass.
“There is just too much political uncertainty. If the ANC National Conference in December does not deliver the solution that markets are hoping for, then deal flow and IPO activity will be affected and depressed. If on the other hand there is some hope of a change to the political situation, things may well indeed change for the better.”
Morne van der Merwe, managing partner of Baker McKenzie in Johannesburg said: “Current conditions have slowed M&A growth in that international investors are reluctant to invest in South Africa due to the political and economic uncertainty. This uncertainty has caused a reduction in Foreign Direct Investment, which, in turn, hindered deal-making.
“Due to the downgrades and potential for further downgrades, the cost of raising capital for acquisitions has also become more expensive.”
He said that on the positive side, a number of commentators believe that the rand is currently undervalued.
“This provides entities with greater appetite for risk with opportunities to acquire South African assets cheaply. Current conditions are also enhancing deal-making in the context of divestment deals, but while this may be a good thing in the short term, there are adverse long-term consequences.”
Baker McKenzie said that the requirement to meet BEE ownership targets is also stimulating the deal-making environment.
“Further, there is also currently a lot of opportunity in respect of South African assets as they are comparatively cheap. However, there is a tendency for locals holding local assets to hold on to such assets. At present, locals will be less inclined to sell their local assets than foreigners,” it said.
“There are a number of assets in the mining sector that offer great value. If there is an upswing in the South African economy, as predicted, these assets may offer significant upside,” noted van der Merwe.
In South Africa, M&A transactions were valued at $10.7 billion in 2016, this is predicted to drop to $4.5 billion in 2017. In 2018, this is predicted to rise to $ 8.5 billion and to $ 9.2 billion in 2019.
It is forecast that this amount will decrease to $4.1 billion in 2020. In terms of deal volume, there were 115 M&A transactions in South Africa in 2016, this is predicted to rise to 172 transactions in 2017, 273 deals are expected in 2018, rising again to 295 in 2019 before decreasing to 186 in 2020.
In South Africa, the value of IPO transactions was $718.6 million in 2016. This amount is predicted to drop to $539.1 million in 2017, before increasing to $672 million in 2018 and $806.9 million in 2019. In 2020, the value of IPOs in South Africa is predicted to drop to $179.5 million.
Read: Political and economic uncertainty the new norm for dealmakers
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