In the near-term, we expect an improvement in GDP, as some of the major challenges facing our economy start to ease. Logistic and port problems have been so detrimental to South Africa’s economic growth recently that even the smallest green shoots of improvement – such as recent executive appointments at parastatals, or improved momentum on public-private partnerships in respect of rail and ports – should create greater economic confidence.

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We also expect the benefits of a greater supply of renewable energy to feed into the economy. If the energy challenges have indeed reached a turning point, it would prove a massive boost in confidence, from an economic perspective, influencing what people and businesses are prepared to commit.

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And as M&A is driven by confidence, this could mean increased M&A activity over the next 18 months.

Globally, M&A activity has picked up after a slow period. This trend – fueled by factors such as improved financial markets; pent-up demand for deals; an expected easing of inflation; and anticipated rate cuts – could also translate to increased activity in South Africa. The first quarter of 2024 has seen good levels of M&A by volume and value. As such, the factors that drove activity at the end of 2023 are expected to remain, and possibly gain momentum during 2024.

 

International interest in South African businesses

Despite a mixed economic backdrop in South Africa, there is still an appetite for South African opportunities from global buyers, who are keeping a close eye across various sectors.

 

Recent examples of this include Varun Beverage Limited’s (VBL) acquisition of South Africa’s The Beverage Company. VBL is an Indian listed company that manufactures, bottles and distributes beverages across a number of markets, and is the largest bottler of PepsiCo’s beverages globally, outside the United States and China. Furthermore, French media company Canal+ has made a formal offer to acquire Multichoice. These deals highlight that certain global investors are taking a decades-long view, looking past current difficulties to acquire strategically important businesses in the region.

 

Domestic consolidation in certain sectors

In recent years, South African corporates have de-levered, sought out efficiencies, and re-focused their efforts on domestic consolidation opportunities. Indeed, there is limited appetite from institutional shareholders to support corporates expanding offshore in a meaningful way; rather, they are looking closer to home for complementary and value-accretive deals. A good example is Sun International’s proposed acquisition of Peermont Holdings to expand its South African portfolio.

 

Private equity (PE) activity and new emerging players in South Africa and Africa

While many of the PE incumbents in South Africa (and Africa) have struggled to generate returns over the last decade, impacting their future capital raising ambitions, there is still a healthy level of capital in many PE funds. These funds need to be deployed into targets in the region, across industries where growth (on a relative basis) can be delivered. Market leadership features high on the list of criteria. A case in point is the acquisition by Adenia of The Courier Guy, which showcases that certain niche sectors still see significant growth and expansion opportunities. In addition, fund managers continue to seek realisations and return capital to investors, which continues to drive deal flow in this segment. More deals are expected.

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SA corporates focusing on their core businesses and more actively managing their portfolios

The last two themes have paved the way for PE buyers with capital to acquire assets that have received renewed focus and attention as standalone businesses. Actis / RBH potentially acquiring Swiftnet from Telkom, and Capitalworks’ proposed acquisition of The Building Company are good examples.

 

This underlines the ongoing focus by corporates on balance sheet and capital structure optimisation. Together with a renewed focus on their core operations, this could lead to further spin-offs, conceptually similar to RCL Foods’ proposed unbundling of its chicken business.

 

Sectors to watch

Some sectors are particularly well positioned for M&A activity.

 

Consumer & Retail – Aligned with the themes highlighted above – a combination of continued international interest, South African corporates refocusing on their core businesses, and consolidation in sub-sectors that have faced pressure from consumer weakness – greater PE activity is expected to drive deal flow in the coming 12-18 months.

 

Industrials – South Africa’s industrial sector remains unloved by the market, at least for the moment; notwithstanding many businesses showing value when applying a ‘through the cycle’ view. This may lead to M&A activity in the form of strategic acquirers with strong balance sheets looking for opportunities to consolidate.

 

Resources - While the global economic climate is negatively affecting certain commodity prices, consolidation within the South African mining industry remains a focus for specific commodities. South African mining companies continue to look at broader Africa and international expansion; and sustained downward pressure on certain commodity prices is likely to result in the sale of non-core assets, the rebalancing of portfolios, and capital raising.

 

Renewables and energy infrastructure – South Africa’s ongoing focus on renewable energy and infrastructure development could present attractive M&A opportunities for investors. We expect more deal flow in this segment to come to market during H2 2024.

 

Looking ahead to the next 18 months, the outlook for M&A activity in South Africa for the rest of this year and into 2025 appears cautiously optimistic, with a potential rise in deal volume compared with recent years

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Nagar is Co-head of  Corporate Finance | Rand Merchant Bank