Big companies closing down in South Africa – but some buyers see a bargain

As South African companies navigate the turbulent waters of financial distress, a fascinating trend is gaining momentum: the rise of buyouts and acquisitions during business rescue processes.

This is outlined by Eric Levenstein, Head of Insolvency & Business Rescue at Werksmans Attorneys.

In September 2024, the landscape of corporate restructuring and business rescue in South Africa continues to evolve, particularly as financial distress permeates the small and medium-sized enterprise (SME) sector in South Africa.

Levenstein outlined that directors of distressed companies are increasingly exploring various options to realign their businesses with ongoing economic challenges – whether considering an informal turnaround, a formal restructuring through a business rescue process, or, in dire situations, a default into liquidation.

Many find themselves in a “rabbit in the headlights” scenario, grappling with increased pressure from creditors, particularly trade suppliers, that often pushes them towards business rescue or even liquidation if their companies are deemed too far gone.

Levenstein emphasises that, in numerous cases, business rescue becomes an unavoidable route for struggling firms.

The lingering effects of last year’s power outages continue to resonate as many South African companies grapple with the repercussions on their profitability and operational capabilities. However, he notes a shift: “The pressure of load shedding seems to be in the past.”

Statistics South Africa recently reported that the total number of liquidations year-to-date also breached 1,000, with 1,020 businesses shut down in 2024 so far.

Levenstein points out that many of these companies defaulted into liquidation because their directors were unaware of the business rescue option and the potential benefits of involving a restructuring professional who could assist in turning their fortunes around.

“In the last few weeks/months, we have seen an uptick in business rescue filings, and it is likely that we will see more,” said Levenstein.

This trend includes notable casualties in the retail sector, with companies like West Pack Lifestyle, Autozone, and Cross Trainer seeking business rescue due to a variety of challenges.

These include a depressed South African economy, debts owed to suppliers, inventory issues, cash flow difficulties, and the lingering impacts of civil unrest from 2021, which reportedly cost the South African economy approximately R50 billion.

Levenstein highlights that firms like the South African Post Office, Wescoal, Ellies, and Tongaat Hulett remain in active business rescue phases with no immediate resolution in sight.

Additionally, Hohm Energy, a solar company, has entered business rescue due to a decline in demand in the South African solar energy market, illustrating how broader market shifts can impact specific sectors.

“What is clear, is that business rescue affects a wide and diverse spectrum of industries and sectors.. so, financial distress remains an issue out there and where the option of business rescue is a very real  prospect,” added Levenstein.

However, Levenstein notes an interesting trend: the opportunity for buyouts or acquisitions of distressed companies during their business rescue processes.

“Acquirers often come in cash-flush, looking to seize good assets at discounted prices,” he explains.

As business rescue practitioners initiate formal processes, data rooms are established for prospective buyers, facilitating the evaluation of distressed assets.

However, he emphasised that timing is crucial; if a company enters business rescue too late in its distress curve, the potential for recovery diminishes significantly.

Recently, distressed funds—both local and international—have shown increased interest in South African assets. Family offices and investors are actively seeking distressed acquisitions, reflecting a growing appetite for opportunities within the sector.

Levenstein observes, “South Africa presents a compelling case for distressed investors, especially those backed by USD or UK Pound capital.”

These funds recognise the importance of post-commencement finance during business rescue, using it to stabilise companies while negotiations for potential acquisitions unfold.

This influx of capital into the distressed environment enhances the likelihood of successful buyouts across various sectors.

Levenstein concludes that business rescue remains a dynamic and critical tool within the corporate restructuring landscape.

It plays a vital role in preserving jobs, ensuring the survival of viable companies, and preventing defaults into liquidation.

Whether we like it or not, business rescue is very much part and parcel of corporate South Africa, and where it remains an important contributor to job preservation, to the survival of viable companies and to ensure that these companies do not default into liquidation,” he concluded.

Read: Over 1,000 businesses shut their doors in South Africa in 2024