Analysis by law firm Baker McKenzie of Thomson Reuters’ data finds that merger and acquisition activity in South Africa declined, in terms of the volume and value of domestic and cross-border deals, in the first half of this year.
Transactions fell by 44% and volume and value fell by 52%, compared with the first half of last year, which saw 243 deals totalling $6.6-billion in South Africa.
The first half of this year saw 135 deals valued at $3.2-billion.
Baker McKenzie managing partner Morne van der Merwe says there are a number of elements causing the market contraction in South Africa.
The decrease in investment activity shows, firstly, that the impact of corruption and suboptimal governance in South Africa on investor mood should not be underestimated.
“Issues around State capture and bribery and corruption have made international investors cautious and it has proved all too easy for business to get caught up in these issues.
“There are various examples of multinationals in South Africa and further afield in Africa who have become embroiled in corrupted environments and there are serious consequences attached to this,” he adds.
The Steinhoff narrative has also put South Africa in the spotlight and raised concerns about governance in the private sector in addition to the public sector.
Van der Merwe suggests that all investors doing business in Africa should consider conducting practical, risk-based compliance assessments of all their operations, including investigating all reports of illegal or improper activities and promptly remediating all issues that are identified.
Further, economic concerns, negative gross domestic product growth, the devaluing rand, high unemployment, the threat of another credit rating downgrade, issues around service delivery, as well as the fact that South Africa is close to its next national election means that investors are also holding back, adopting a "wait-and-see" approach.
There are also two major political issues contributing to uncertainty and affecting investment confidence and appetite: land reform and national health insurance.
With regard to land reform, President Cyril Ramaphosa suggested expropriation without compensation may be justified for a number of reasons.
“These include unused land, derelict buildings, purely speculative land holdings, or circumstances where occupiers have strong historical rights and title holders do not occupy or use their land, such as labour tenancy, informal settlements and abandoned inner-city buildings. This is no land grab. Nor is it an assault on the private ownership of property.”
Van der Merwe notes that while there was a lot positive sentiment around the appointment of Ramaphosa as South Africa’s new President, reality has now set in and investors are realising that Ramaphosa has to deliver on a very tall order after years of maladministration.
However, most analysts feel he has already begun to turn things around and is heading in the right direction, although it will take time to correct the issues.
Van der Merwe highlights that there are other positive developments in South Africa that bode well for its future and that look set to help the country overcome its current challenges.
A number of commentators believe the rand is currently undervalued. This provides entities, who have a 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. The requirement to meet black economic empowerment ownership targets is also stimulating the deal-making environment.
While there has been a notable reduction in deals in relation to the mining sector in recent months, there are a number of assets that still offer great value. According to ETM Analytics, in June 2018, the only key industry in South Africa to post any growth was mining, which increased 2.8% year-on-year in June, after declining by 1.8% in May.
Further legislative clarity and certainty on how this will be done is needed to move the sector, and the country, forward. In this regard, the draft Mining Charter was published for public comment and is expected to be finalised soon.
In August, Mineral Resources Minister Gwede Mantashe said he would propose the scrapping of the Bill drafted to amend the Mineral and Petroleum Resources Development Act, ending the years-long delay in finalising the Bill.
As one of South Africa’s largest trading partners, China plays an important role in infrastructure investment in the country. At the Brazil, Russia, India, China and South Africa, or Brics, Summit event, which took place in Johannesburg in July, China pledged to invest $14.7-billion in South Africa and to grant loans to State-owned enterprises Eskom and Transnet.
British Prime Minister Theresa May announced during her visit to South Africa in August that the UK would invest an additional £4-billion in African economies, with the hope that the private sector would match that investment.
The recent announcement that the struggling State-owned enterprise South Africa Airways will look at partial privatisation could hint at changing government policy on the issue of privatisation. This could stimulate investment and be positive news for investors depending on how successful government is in managing stakeholder engagement, says Van der Merwe.
Baker McKenzie has seen an increase in enquiries around listings and initial public offerings on the JSE, coupled with listings in other jurisdictions in Africa.
“We have predicted that cross border capital raising will increase as this is seen as a good way for companies to raise money in Africa,” the firm states.
“South Africa is currently facing numerous challenges relating to economic and political uncertainty and there is no easy fix. However, for those with an appetite for risk and a willingness to be part of the solution, there are still many excellent opportunities for investors the country,” concludes Van der Merwe.