Mergers and Acquisition
activity in South Africa
and across Sub-Saharan
Africa on the rise!

Absa predicts increased Mergers and Acquisition activity in South Africa and across Sub-Saharan Africa.

The paradox of the current crisis is that at the beginning of the year, Absa expected the year to be challenging for mergers and acquisitions, mainly because of projected tougher economic conditions across many markets, including the continent’s two largest economies, Nigeria and South Africa.

The emerging trend then was less foreign direct investment coming through other than interest in sectors such as renewable energy, metals and oil and gas. But COVID-19 has changed the landscape completely from a mergers and acquisition perspective, which I must admit is not probably what we would have expected.

Because the lockdowns came in different stages across the region, we have also seen different strains on balance sheets. There are companies who went into the crisis with real liquidity challenges and others who had strong balance sheets and would be able to sustain themselves during the lockdowns.

Those companies with relatively stronger balance sheets and capital buffers will continue to look at how they can further grow, either through organic or acquisitive expansion. They would be therefore looking at buying out weaker competitors, or parts of their businesses. There are also mid-range companies whose balance sheets have been weakened by the COVID-19 crisis who will be considering survival options before engaging with shareholders for support.

These are companies who could be saying let us focus on self-help first before asking shareholders for funding. This means selling assets or large parts of the business, which is what is feeding into the mergers and acquisition appetite. Companies facing solvent challenges could be considering distressed rights issues and we are expecting a few coming, particularly in the South African market.

Some of these companies could also be forced into debt-to-equity swaps with their bankers, which would create opportunities for mergers and acquisitions as banks are not long-term holders of equity.

At Absa we are far busier on mergers and acquisition transactions than we were in January and this time of the year. The caveat however is it is difficult to agree on the best-case financial models and valuations and there is often a gap between buyers and sellers which can be very wide.

But increased mergers and acquisition activity comes with heightened execution risk, particularly for both funders and buyers. Sometimes when potential buyers drill into the financials during due diligence and conclude that a lot of damage has happened than they originally thought, some may walk away from the deal.

Absa is keen to help clients fund mergers and acquisitions. Our appetite to fund is split into three aspects: one; we are going to preserve capital and liquidity for key clients; second we want to protect value for clients because some of these transactions are creating efficiencies and longevity which needs capital and we are keen to protect our clients especially in critical sectors, where a client is critical to the economy; and the third which more challenging is possibly taking on a new client whom we have never dealt before. This may be a little harder to assist because with our existing client, we know them, trust them, and how thorough in what they do; a new client it is different and has yet to be tried and tested.