Absa predicts increased Mergers and Acquisition activity in South Africa and across Sub-Saharan Africa.
David Renwick, head of investment banking, Absa Corporate and Investment Banking (CIB)
Increased merger and acquisition activity is expected in South Africa and across parts of Sub-Sahara Africa as companies react to the economic impact of COVID-19. We expect more opportunities in South Africa than other markets because the economy seems to have been hit harder and shut down quicker than other countries like Ghana and Kenya, who had some degree of lockdown and started to ease restrictions a lot quicker than South Africa.
On the other extreme, Mauritius shut down completely and remains tightly shut and there is a bit of distress in some of the sectors reliant on international business, such as aviation and tourism. Aviation and tourism and leisure seems to be the last to open up; people are very worried about behavioural trends that many change over extended period of time and the days of people travelling from one capital to the next, or one country to the next for business meetings and even leisure are going to be a thing of the past. This therefore has an impact on the future of the travel and leisure sector.
n addition to large corporates seeking to buy assets, there is increased acquisitive appetite from offshore and domestic hedge funds who are looking at debt or equity positions in distressed assets, particularly in South Africa.
Private equity investors are also active even though some are already owning a significant number of good assets which some have had to mark down from a valuation from a both local and foreign currency perspective. This is because the earnings of the assets could be in local currency, but they are reporting to foreign partners in hard currency. So, you find that the private equity investors could be nursing a lot of distressed assets and they are therefore more selective in doing more acquisitions.
There are three scenarios playing out in the mergers and acquisition space:
- Companies who entered the national lockdowns with strong balance sheets who will be looking at both acquisitive and organic growth
- Companies who had weak balance sheets before the lockdowns and who are now considering various options such as asset disposals or seeking additional liquidity support from shareholders
- Companies which went into the crisis with real liquidity challenges and solvency issues who now must consider asset disposals as one survival option
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.