The post-pandemic world of mergers and acquisitions (M&A) is seeing smaller deals rather than ‘eye-catching megadeals’, which have ebbed since hitting their peak in 2021, according to PwC Global. Overall, this year’s deals are mostly in the mid-market range, which the advisory firm says is less affected by market volatility and generally considered to be the staple of dealmaking activity.

The year got off to a slow start, with a global M&A slowdown of about 10% in the first half of 2023 compared to 2022. On the local front, DealMakers Africa – which tracks M&A and corporate finance activity across the continent – notes that the total value of deals reported in Africa in Q1/2023 (US$3.63 billion) was almost one-third below the value for the same period in 2022. These stats exclude South Africa, which accounts for more than 50% of all transactions recorded on the continent.

On a positive note, the subdued activity is projected to turn around in the latter end of 2023 as key M&A drivers catalyse deals activity in South Africa, according to Rob Beighton, PwC South Africa deals strategy leader. ‘Much of the change is attributed to investors looking for increased value and greater returns for unused capital,’ he says. ‘Operational challenges stemming from economic pressures curtail investor confidence, thereby creating opportunities for buyers as management teams look to preserve and grow enterprise values. The African M&A market is also projected to see increased appetite for market consolidation as economic difficulties, coupled with pressured margins, catalyse large and well-capitalised market players to acquire smaller enterprises in efforts to bolster growth ambitions while growing market share.’

Law firm Webber Wentzel comments that these ‘certainly are not boom times’ for M&A, but also senses some optimism for the second half of 2023, based on enquiries it is receiving.

‘I can definitely see more light between the shadows,’ agrees Andrew Bahlmann, CEO of M&A advisory Deal Leaders International. ‘Statistics can be misleading when it comes to M&As. Being more focused on the private business market, these stats aren’t as easy to come by and there’s a great deal less information available. We are seeing an increase in international interest in our client businesses. I do believe that the global challenges are opening up avenues again into acquiring South African businesses that can demonstrate global efficiency and material growth opportunities.’

From a statistics perspective, he expects the numbers to be a little behind last year’s but says his advisory is seeing ‘much better-quality businesses’ going to market. ‘One would think the uncertainty, power crisis and stagnant GDP growth would result in a flurry of exits. In reality, it’s quite the opposite.’

PwC’s Beighton explains that South African M&A activity is currently dominated by public-to-private deals as high levels of delistings from the JSE have been noted –companies listed down to 274 at the end of the first half of 2023 in comparison to 312 listed companies at the end of 2019. ‘This trend is driven by large corporations taking advantage of low trading multiples and/or existing shareholders deciding to delist businesses to make necessary structural and operational changes to unlock and create value over time – enabled by less stringent compliance requirement for delisted companies,’ he says.

South Africa is Deal Leaders’ primary hunting ground but, says Bahlmann, ‘there’s a lot of excitement in the tech space, with countries like Rwanda becoming extremely investor friendly and stimulating entrepreneurship. East Africa remains attractive in the technology and fintech spaces as these solutions are scalable and leveraging very cost-effective cost bases. North Africa is also an extremely attractive investment landscape primarily for middle-eastern investors’.

Kenya has done well in marketing itself as the gateway into East Africa, although the Tanzanian economy may soon overtake it in size, according to Webber Wentzel. ‘In West Africa, Nigeria has been through a difficult period, despite positive oil prices, and there hasn’t been a lot of activity for legal firms, but this may be changing. Mauritius is another country that has marketed itself well – in this case, as a financial gateway into Africa. Its achievement in moving off the Financial Action Task Force greylist in record time counts in its favour. A number of global corporations doing business in Africa are looking to set up offices in Mauritius.’

The law firm has been involved in a number of transactions with Chinese entities investing in critical minerals, particularly lithium, including in Zimbabwe and Namibia. ‘Sub-Saharan Africa’s youthful population offers different attractions from Europe and the US, where an ageing population will spend money on pharmaceutical products, healthcare and a post-retirement lifestyle,’ it says. ‘Younger populations will spend money on technology, financial services and FMCG. That’s likely to inform the direction of capital flows.’ The firm is also working on a major intra-African transaction – the merger of Sanlam’s assets in Africa (excluding South Africa) with the African assets of the Europe-based Allianz insurance group.

‘An interesting trend emanating from Europe is that some significant family-owned companies are diversifying out of their core businesses,’ adds Webber Wentzel.

‘For example, the founding family of the Mediterranean Shipping Company group is taking a joint controlling interest in South Africa’s Mediclinic group. Clearly, they have a new appetite for risk, where assets in their traditional sector may be considered overpriced or unavailable.’

In Q1/2023, DealMakers tracked M&A activity in Africa’s energy; technology, media, telecoms; agriculture; and transport/logistics sectors. PwC SA notes a strong focus on sustainability across its client base and predicts that investing into renewable energy solutions will remain another key focus, due to the turmoil surrounding South Africa’s electricity grid. ‘Ranging from solar solutions to battery production plants, the investment opportunities are endless,’ says Beighton.

Unfortunately, the timeline of approval of large mergers in South Africa is ‘very open-ended’, according to Webber Wentzel. ‘It can take a year to get a transaction approved, especially if there is ministerial involvement. In many other African jurisdictions, there are fixed timelines, which vary.’

The outcomes of approvals, and the conditions imposed, depend on each country’s assessment criteria. ‘We’ve seen an increased focus on using merger approvals to drive public-interest considerations; in other words, they’re a tool that various countries use to drive their own industrialisation strategies and socio-economic priorities,’ says the legal team. ‘In South Africa, the focus has shifted from employment to ownership by black people and workers, and the imposition of conditions relating to procurement from SMMEs and historically disadvantaged individuals. This is being copied by other jurisdictions – Botswana, Namibia, Zimbabwe and Zambia are, for instance, pushing this agenda hard, including the interrogation of employment effects, indigenisation – local ownership, employment, service and supply – as well as in-country beneficiation.’

The law firm also notes a trend towards protectionism in approvals of M&A transactions. Assessments now include vetting inbound investment through the lens of ‘security considerations’, which may embrace protection of local industry. ‘Countries whose regulatory frameworks are attractive to foreign investors, particularly into services sectors like IT, are likely to grow faster than those that continue to protect their ever-deepening extractive resources,’ says Webber Wentzel.

While all this red tape is onerous, Bahlmann points out that international investors often value African business owners and entrepreneurs for their exceptional resilience. ‘We find ways to grow and trade profitably while dealing with failing infrastructure, zero assistance from government, greylisting, electricity challenges and so on,’ he says.

‘There are definitely a great many positives about M&A in Africa. Our firm’s biggest competitor now is actually our clients doing so well and not wanting to sell. Growth is double digit and, in some cases triple digit, off the back of strategic partners investing in the right businesses. I definitely remain bullish and remind myself that there are challenges everywhere. I think Africa is just ahead of the curve.’

By Silke Colquhoun
Images: Gallo/Getty Images, Freepik