posted 13 Nov 2007 in Volume 10 Issue 6

The mergers and acquisitions market in South Africa

By Ezra Davids and David Yuill, Bowman Gilfillian

THE MERGERS and acquisition (‘M&A’) market in South Africa is currently extremely buoyant and some of the largest deals in the country’s corporate history have been announced and completed over the last two years.
The booming M&A market has been facilitated by an economy that has been growing at a rate of approximately 5.6 per cent per annum. A number of factors have contributed to this growth, including the global commodity boom and a massive infrastructure development initiative by the South African government with an eye on the upcoming Soccer World Cup to be hosted in South Africa in 2010. The economy faces a number of challenges, however and one of the primary areas of concern is a critical shortage of key skills. Other areas of concern include the high prevalence of HIV/Aids, the exorbitant cost of telecommunications and chronic poverty.

Key drivers of M&A activity
Black economic empowerment transactions
One of the main drivers of local M&A activity in recent years has been a type of transaction which is fairly unique to the South African environment – the so-called black economic empowerment (‘BEE’) transaction.
Over the past ten years or so, the South African government has put in a place a regulatory framework aimed at ensuring the economic empowerment of previously disadvantaged black South Africans. This framework is described in greater detail elsewhere in this publication, but it is suffice to say that it has become a key commercial imperative for companies aiming to do business in South Africa to ensure that they have sufficient empowerment credentials.
From an M&A perspective one of the key elements of the government’s BEE policies has been the targets prescribed in respect of black equity ownership, and most of the major companies in South Africa have concluded transactions in terms of which they have disposed of a significant equity stake (generally up to 25 per cent) to black shareholders.
Such transactions have created their own challenges, particularly as BEE investors often do not have access to sufficient funds to pay for the stake which they are acquiring, and the prohibition in South African on a company providing financial assistance for the purchase of its shares has made vendor financing of such transactions more difficult. As such, creative structures often need to be put in place to assist with the funding of such transactions, although the imminent amendments to South Africa’s financial assistance rules should make this easier.
The BEE equity ownership requirements have also proved challenging for multinational entities doing business in South Africa. In recognition of this, exceptions have been made for multinationals in this regard in terms of which, in lieu of disposing of an equity interest in their local operation, they can invest in equity equivalent programmes or dispose of a stake in the offshore parent company.

Private equity
South Africa has seen an increase in large private equity deals in recent years. Examples of large deals that have taken place include the acquisition by Bain Capital of Edcon Limited, a major South African retailer for R25bn (approximately $3.6bn) and the acquisition by Actis of Alexander Forbes, a major player in the South African insurance and financial-services industry.

Corporate restructuring
Another key driver of M&A activity in South Africa of late has been corporate restructurings in the form of de-mergers (unbundling) of non-core assets by major South African conglomerates. Recent examples of this include the unbundling by Anglo-American, one of South Africa’s largest multinationals, of its sugar (Tongaat-Hulett), aluminium (Hulamin) and paper (Mondi) assets.

Inward investment
Inward investment in South Africa has significantly increased in recent years, particularly from Europe, India, the Middle East, and to a lesser extent, the United States. Examples of recent large inward investments includes the acquisition by a Dubai company of the Victoria and Alfred Waterfront in Cape Town and the acquisition by Barclays Bank of Absa, one of South Africa’s largest banks.

Outward investment
South African companies have also increased the scale and incident of their offshore investments. One example is the acquisition by Standard Bank, the largest bank in South Africa, of IBTC Chartered Bank in Nigeria.

Other considerations
Exchange control
For many years, South Africa has had a system of exchange controls in place aimed at regulating the flow of currency in and out of the country. These controls have often played a significant role in the manner in which M&A transactions in South Africa, particularly cross-border transactions, are structured.
Recently, these exchange controls have been gradually relaxed, with the intention that they will ultimately be abolished. Examples of changes that have been made to the system include the reduction of size of the minimum equity stake South African corporates are required to hold in their foreign investments, and allowances being made for foreign companies to use their non-South African shares as acquisition capital for M&A transactions by means of a secondary listing on the JSE.

Hostile/unsolicited bids
Unsolicited or hostile bids are not very common in the South African environment. There have only been two of any real significance in recent years being:

The attempted acquisition by Nedbank, one of the major South African banks, of Standard Bank; and
The attempted hostile takeover by one of South Africa’s largest gold producers, Harmony, of another major gold-producer, Gold Fields.

Neither of these was successful. Only time will tell if there will be any change in this.

The future
It is expected that the current factors driving the South African M&A market, will continue to play a significant role in coming years.
Other factors that may have an impact include the proposed overhaul of the South African company legislation, the continued relaxation of exchange controls and buoyancy of the South African economy.