South African M&A conditions set to improve

Conditions for deal activity in South Africa are predicted to improve in 2018, but this will depend on political and economic conditions in the country in the next two years, according to the latest report from Baker McKenzie. In its third edition of the Global Transactions Forecast, the law firm states that the easing of key economic and political risks and the emergence of positive macroeconomic deal drivers will accelerate global deal activity in 2018. However, Paul Rawlinson, Baker McKenzie's global chair, warns: “It's not a done deal, with the threat of a hard Brexit and a NAFTA collapse both still very real. Business will need to continue to make the case for liberal trade and investment frameworks." In South Africa, the forecast shows that growing political risk and a sluggish economy contributed to a halving in total M&A in 2017 versus 2016. However, the forecast predicts that economy should improve in 2018 thanks to the impact of monetary policy easing and stronger commodity prices. But at about $9bn in 2019, the forecast for peak M&A activity in this region will be less than a third of the level seen in 2015. Wildu du Plessis, head of Africa at Baker McKenzie in Johannesburg, warns: "For South Africa, there is no guarantee that the predicted upswing will come to pass. There is just too much political uncertainty. If the ANC National Conference in December does not deliver the solution that markets are hoping for, then dealflow and IPO activity will be affected and depressed. If on the other hand there is some hope of a change to the political situation, things may well indeed change for the better." Morne van der Merwe, managing partner of Baker McKenzie in Johannesburg, adds: “Current conditions have slowed M&A growth, in that international investors are reluctant to invest in South Africa due to the political and economic uncertainty. “This uncertainty has caused a reduction in foreign direct investment, which, in turn, hindered deal-making. Due to the downgrades and potential for further downgrades, the cost of raising capital for acquisitions has also become more expensive.” He continues: “On the positive side, a number of commentators believe that the rand is currently undervalued. This provides entities with greater appetite for risk with opportunities to acquire South African assets cheaply. “Current conditions are also enhancing dealmaking 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 BEE ownership targets is also stimulating the dealmaking environment. “Further, there is also currently a lot of opportunity in respect of South African assets, as they are comparatively cheap. However, there is a tendency for locals holding local assets to hold onto such assets. At present, locals will be less inclined to sell their local assets than foreigners.” Mr van der Merwe further suggests: “There are a number of assets in the mining sector that offer great value. If there is an upswing in the South African economy, as predicted, these assets may offer significant upside.”

South African M&A conditions set to improve

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