By Angela Simpson and Lydia Shadrach-Razzino
Merger and acquisition (M&A) activity levels have been slower in South Africa and sub-Saharan Africa (SSA) over the past year, mostly due to the unreliable supply of electricity (which has been particularly challenging in South Africa), geopolitical uncertainty, supply chain blockages and challenging global economic conditions. However, many private investors are sitting on investments they need to exit in the near term, and we therefore expect to see an increase in M&A activity going forward, although, due to the challenging local and global conditions, it is currently unclear exactly when this will be.
In sub-Saharan Africa, the value of announced mergers and acquisitions in the first quarter of 2023 was $2.9 billion, according to Refinitiv. This was 80% less than the value of deals announced in the first quarter of last year and the lowest value for a first quarter in twenty years. The volume of deals in in this year’s first quarter also declined by 30% compared to 2022, registering a nine-year low.
In South Africa, deal activity and volume were also down when comparing the first quarter of 2022 with Quarter 1 of 2023. According to DealMakers, the first quarter of 2023 saw M&A deals in South Africa valued at R31,72 billion with a deal volume of 59 deals, down from 94 deals valued at R81,82 billion in first quarter 2022. The largest deal by value for the quarter, and the only BEE deal, was the disposal by Barclays of a 7.4% stake in Absa, valued at ZAR 11,6 billion.
Current macro and microeconomic challenges have required resilience and adaptability from investors, leading to changes in the structure, pricing and length of deals, the implementation of new financing methods, effective risk management and an increasing focus on environmental, social and governance (ESG) issues. But while global geopolitical uncertainty will continue to impact M&A transactions in Africa in 2023, we believe there will be growth in investment activity, mainly due to private capital investors.
Private markets in sub-Saharan Africa have seen a continuous rise in activity since the pandemic. The AVCA Private Capital Activity Report 2022 revealed that $7.6 billion in private capital was invested in 2022, resulting in a 3% growth in deal value across the continent, after a similarly upbeat 2021. According to the report, 37% of the deal volume came from multi-regional investments across the continent.
The recent Deal Leaders International report was also optimistic about the M&A market in the region, noting that foreign direct investment would increase in the next few years. There is rising interest in cross-border transactions, with foreign investors looking to capitalise on the continent's opportunities, especially the looming positive effects of free trade across Africa (expected to take full effect by 2030), the demand for critical minerals needed for the energy transition (which Africa has in abundance), the growing need for access to renewable energy, and the rapidly expanding middle class and young, increasingly digital population.
The demand for fintech, the rise of mobile money and the lack of legacy infrastructure, for example, are all key issues that investors are considering. Developments across the continent and the rapid innovation across sectors, in addition to the growing demand for services in key sectors, have resulted in investors having an important role to play in financing the continent's exciting transformation.
There is also a growing investor focus on green, low-carbon and sustainable initiatives in Africa. ESG elements have been incorporated into general investment considerations for some time, but it's fair to say that these are no longer nice-to-haves. Energy efficiency, community healthcare, staff training and qualifications, greenhouse gas emissions, the highest standards of governance and best business practices, inclusion and diversity, social impact, and litigation risks are some factors they have been considering. Alongside the increased focus of investors on ESG, some lenders are also prescribing particular ESG principles that a company must meet to receive funding.
Global businesses are also increasingly investing in the resources needed to take action on diversity, equity, inclusion, and belonging, both in the workplace and in the ownership of business assets. Equal representation and a focus on real diversity and inclusion have become essential for the implementation of sustainable business practices. Black Economic Empowerment is a particularly South African ESG factor that continues to require sustainable forms of implementation to have an effect and, in turn, to assist businesses in increasing their turnover and ensuring they are sustainable. These developments are expected to lead to a growing number of sustainability-focused investments in the region in future.
Simpson and Shadrach-Razzino are Partners and Co-heads of the Corporate/M&A Practice at Baker McKenzie in Johannesburg
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