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M&A activity – treads quietly but active

Ethos Private Equity, PIC and RTT in private equity deal.

If there is one aspect of the mergers and acquisitions industry in the first half of 2014 on which practitioners are in unusual agreement, it’s that conditions remain tough.

Hugo Steyn, head of Corporate Finance at Investec, says much of the M&A activity seen this year has involved unlisted companies and in particular transactions in the private equity space. A recent example is the acquisition by a private equity consortium led by South Africa’s Ethos Private Equity, including the Public Investment Corporation (PIC) as co-investors, which acquired 80% of Africa’s largest privately-owned parcel distribution company RTT. Steyn says that private equity activity is particularly strong in the R0.5bn to R2bn range.

ENSafrica director: Corporate Commercial Lydia Shadrach-Razzino says the local industry is still feeling the effects of the 2008 financial crisis. In the past, major deals have been in the resources and mining sector. Cost inflation and the upheaval associated with the wildcat strikes accompanied by violence and intimidation in the mining industry has impacted on the manner in which SA is viewed by international investors. And, given this investment landscape what is of concern, says Steyn, is that investors tend to take a short term view on South Africa.

However, he says, foreign interest has increased as investors look to set up a strategic foot print in Africa and this is encouraging. But with relatively low interest rates (even taking into consideration Thursday’s 25 basis points repo rate hike) and a stock market that is overvalued, the conclusion for many is that other places may offer better returns.

Craig Forbes RMB’s co-head of Corporate Finance says people are busy but the environment remains challenging and the execution time in concluding transactions is extended. Interest in equity capital markets (ECM) has been very favourable with RMB executing two successful capital raise exercises in a difficult sector for Royal Bafokeng Platinum and Aquarius Platinum. Though M&A continues to lag activity in ECMs and disposals, Forbes believes that there are signs of an improvement. There is no trend, he says, rather deals are asset specific.

The numbers reflecting activity in the industry for 2014 compiled by DealMakers suggest otherwise. The total value of successful M&A deals in which JSE listed companies were involved in the June quarter was approximately R142 billion achieved from119 deals. The same number of transaction in Q2 2013 were valued at only R56 billion. Looking more closely, the numbers are skewed by four big transactions, two of which were acquisitions by foreign based Glencore Xstrata; the Las Bambas copper mine project (R61.3 billion) and the acquisition of Caracal Energy (R8.45 billion). Woolworths’ R21.4bn acquisition of Australian retail group David Jones makes up the third and Vodacom’s R7 billion take out of Neotel shareholders is the fourth. Reduce the total by R98 billion, the value of these four deals, and the playing fields are levelled.

Taking a broader view and looking at activity for the first half of 2014, the value of transactions totalled R195 billion (230 deals) and this compares with R122.8 billion (228 deals) in H1 2013(see table).

In H1 2008 the value of M&A transactions totalled R133 billion (258 deals) and for the same period in 2009 R114 billion (204 deals). Add to the pot a weakening local currency (as many of the larger transactions are conducted in foreign currencies) and that alters things quiet substantially – the rand has weakened 16% against the pound and 37% against the US$ when compared with the average H1 2008 exchange rates. The effect is to push up the Rand value of transactions. Another factor distorting the numbers is the increase in activity by the property sector. No fewer than 65 of the 230 transaction concluded this year, have involved property companies and this in itself is down on the 78 property related deals executed over the same period in the previous year.

So what’s in store for the second half of 2014? Much of the same says Shadrach-Razzino and Steyn agrees. There are a number of private equity deals in the pipeline and these should be announced before year end. The weak exchange rate will continue to dampen local firms’ appetite for assets outside SA’s borders while the deteriorating growth outlook will keep local activity in check.

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