SA corporates to accelerate investment and M&A

8 FEBRUARY 2022

This article first appeared in Business Day on 8 February 2022

Foreign investor interest in undervalued SA businesses could spur local corporates to accelerate investment and M&A 

By Krishna Nagar, Marisane Thobejane and Dipeel Parbhoo 

In the recent past several well-known South African companies were acquired by foreign investors, which may prove the catalyst for local firms to tap their large and growing cash piles to invest in attractive local opportunities or risk missing out in 2022.

Many great South African businesses were and still are trading at attractive valuations - not just when compared to developed markets but also relative to their history and emerging market peers, hence the sharp rise in foreign direct investment (FDI) in South Africa across various sectors.

Despite attractive investment cases, these businesses’ share prices have in many instances stagnated, trading at relatively large discounts to intrinsic value, enhancing their appeal to foreign investors.

Buyout premiums during 2021 were on average in the 45 to 50% range, underlining just how attractive valuations had become.

According to our analysis of the 12-month period ended December 2021, over 430 merger and acquisition transactions were recorded. And just over 70 of which, valued at approximately R750bn, involved foreign buyers. The number of announced and concluded deals involving foreign buyers increased by nearly 10% compared to the same period in 2020.

Last year, Heineken offered to acquire Distell and thereby became a beverage leader in Africa, Ardagh Group, a major international metal and glass packaging provider agreed to acquire Consol Holdings, JSE-listed logistics giant Imperial was acquired by Dubai-based DP World, the delisting of Afrox by Linde plc was completed, and in 2020, PepsiCo established a greater African foothold by acquiring Pioneer Foods.

There were many others.

This year, foreign and local investors will remain interested in South African companies because they are, in many cases, still undervalued relative to comparable peers globally, particularly in the context of the quality of businesses and their upside potential in terms of future earnings.

We expect to see South African corporates use their strong balance sheets to accelerate investment back into the economy, both for organic growth and M&A as the economy recovers. Valuations will look more attractive as investor confidence grows. South African corporates will, however, need to be bolder in pursuing strategic opportunities or risk missing out on them.

The general wait and see approach from South African corporates and investors, in the face of uncertainty in South Africa, has made sitting on cash sensible - particularly in the face of managing the effects of the COVID-19 lockdown measures.

Last year, several South African companies and investors did make some strategic investments. Mr. Price acquired Power Fashion and Yuppie Chef thereby extending into both the value and premium segments. Vodacom bought a strategic stake in Community Investment Ventures Holdings' (CIVH) fibre assets. TFG bought digital shopping and delivery group Quench allowing the group to further capitalise on strong growth experienced in the online retail channel over the past 2 years. Old Mutual Private Equity put forward a proposal to acquire and delist Long4Life.

Most recently, after conducting due diligence for more than two years, Pepkor announced the acquisition of a controlling stake in Grupo Avenida, providing Pepkor a strategic entry point into the Brazilian value retail market.

While the delisting of several companies from the JSE is unfortunate in some respects, it may prove to be a positive catalyst for companies looking to access the equity capital markets through new listings on the JSE as institutional investors look to support the listings to capture alpha and increase portfolio diversity. The delistings in recent years have created demand, particularly from institutional investors, who are chasing fewer opportunities resulting in a fertile ground for new listings.

The macro backdrop also looks reasonably supportive. The South African economy has rebounded strongly in 2021 with real GDP estimated to have grown by 4.7% after contracting by 6.5% in 2020. RMB Global Markets Research expects the economy to continue recovering from the COVID-19 shock, albeit at a slower pace, with real GDP expected to reach pre-covid levels before the end of 2022.

Accordingly, we expect increased activity in terms of potential new JSE listings later this year.

Buying South African companies will continue to require meaningful focus on empowerment ownership and public interest considerations. Much has been written regarding the acquisition of Burger King South Africa by Emerging Capital Partners which was only approved by regulators after improvements were made to the proposed public interest package. We expect the enhanced level of focus on this element by regulators to continue into 2022, especially where transactions involve foreign buyers.

With the benefit of hindsight, recent deals may be looked at as bargains but we believe 2022 will be a year in which dealmaking activity will remain strong.

For foreign investors, interest in South African assets is likely to remain strong given meaningful current levels of liquidity in global markets, South African opportunities of scale being available at attractive valuations, and local businesses continuing to provide a gateway to higher-growth markets on the African continent.

As such, we hope that South African corporates and investors will skew their capital allocation frameworks towards attractive local investment opportunities.

Nagar, Thobejane and Parbhoo are from RMB's Corporate Finance team