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Publication

BUSINESS DAY

Page

15

Date

Fri 12 May 2017

AVE (ZAR)

183656.85

Listed company activitieskeep things t® Political instability, regulatoryuncertainty and rating downgradeshave all contributed to a slowdownin deals in SA, writes Marylou Greig

orecasting economicgrowth andtheknock-on effectsonthe merger andacquisition(M&A)

industr y in SA has its challengesat the best of times- but whenpolitical instability andsubsequent sovereign ratingdowngrades are added to themix it becomes near impossible.

Fewindustries will be sparedthe effectsof higher borrowingcosts and none more so thanthe local M&A industr y.

Merger and acquisitionactivity by JSE-listed companiesduring the first three months of2017was, unsurprisingly andoffa low base, up on 2016 levelswith 110transactions announcedcompared with 92 for Q12016as a pipeline of deals spilled

overinto 2017.The dip intransactions announcedin thecomparable 2016 period waslargely due to the upheavalcaused by Nenegate. Theresultant political instability ,regulatory uncer tainty and thesubsequent investment statusdowngrades have allcontributedto the currentslowdown in deals in SA.

SOLID UNDERPINGeneral Corporate Financeactivities of the JSE-listedcompanies continue to providea solid underpin for the advisor yfirms. In Q1 capital raised bycompanies via the issue ofshares totalled R22bn ofwhichrights issues accounted forRl3bn, the largest ofwhich wasthe R9bn raised by Life

David Gewer ... nervousness.

Healthcar e. Seven initial publicofferings (IPOs) were launchedpriorto listings on the JSE,accounting for R4bn; Long4L ifeaccounted for half this value.

Investec Corporate Finance'sEldad Friedman says the latestcabinet reshuffle has had amaterial impact on investorconfidence and, as a result, ondeal flow. He says the effect canbe broken down into thefollowing: there has been anoticeable shift by investorstowards companies with

offshore investmentcomponents; institutions haveshifted into stocks with a heavyweighting in internationalexposure. Institutions, saysFreidman, while being sensitiveto those corporates new inoffshore diversification, will tendto favourthose alreadyoffshore;and those companies that havesat on the fence and hesitated inthe past are nowactivelypursuing offshore strategies.

Freidman says theslowdown in the acquisition oflocal assetsby foreigners is inpart due to a difficulty inunderstanding the politicallandscape, economicenvironment and howto make

THOSE COMPANIESTHAT HAVE SAT ONTHE FENCE ANDHESITATED ARE NOWACTIVELY PURSUINGOFFSHORESTRATEGIES

icking over

al 7

Eldad Friedman ... confidence.

investment decisions in such amarket. The upshot, he says, isthat many deals have beenrelegated to the back burner orfocus has movedin favour ofotherjurisdictions in AfricaSA has lost its preference as thelaunch pad into Africa.

Foreign investors have notonly become fewer but moreselective in assets, avoidingheavy regulated sectors such asmining, focusing rather onattractive assets in, for example,the food sector which could beleveragedinto Africa.

OTHER FACTORSOtherfactors driving local M&Ain the short termare the needtomeet black economicempowerment (BEE) ownership

targets and multinationals whohold a portfolio of global assetsand who are nowreconsideringtheir South African investmentswhich, given the investmentconditions here, are negativelyaffecting their performancescore cards.

The acquisition of propertyportfolios bylisted propertyfunds continues to be a majordriver of activity on the JSE astheyare forced offshore in thesearch forbetter yields.

These challenges, saysFriedman, are further overlaidwith currencyrisk. Concerns byrating agencies remain due topoor medium-term growthprospects owing to structuralweaknesses, including risinginterest rates, a furtherdeterioration in the investorclimate and a less suppor tivecapital market environment,which is a concern given thatSA is highly dependent onexternal capital.

Ninety percent of debt islocal currencydenominated. Inaddition the prospect of furtherrises in the government debtto-GDP ratio is implied by thelow-growth environment.

UNLISTED SPACEDavid Gewer, director atWerksmans Attorneys, saysinvestor nervousness hasaffected local and foreigninvestors in the unlisted space(companies not listed on theJSE). He says while there havebeen disposals by somemultinationals in privatecompanies there has also beenacquisitions by multinationals.

In the unlisted space M&Aactivity was up on thecomparable periodin 2016 with60 deals recorded (50 deals in2016)valued at Ofthese deals 11were privateequity deals and four wereBEE transactions.

The biggest unlisted dealduring the first quarter of theyear was the $900m (RIL7bn)acquisition by Sinopecof a 75%stake in Chevron SA assetsand100%of the Botswana assets.

A noticeable trend overthepast year has been the increasein distressedtransactions,particularly in mining.Companies in business rescueand undergoing restructuringoffer oppor tunities to buyersseeking to acquire assets atfavourable nrices. Foreign

MERGERS& ACQUISITIONSRANKINGTHESOUTHAFRICANTOMBSTONEPARTIES- January to March2017

No|Company Deal Market No|Company Noof Market Dealvalues Rm share Deals share| values Rm

1| Investec Bank 4 753 51.19% 1| InvestecBank 7 21.21% 4753

2| Coast2CoastCapital 959 10.33% 2| MerchantecCapital 4 12.12% 1843| Nedbank CIB 826 8.89% 3| Coast2CoastCapital 3 9.09% 9594| Java Capital 817 8.80% Java Capital 3 9.09% 817

5| Taurum 526 5.66% RandMerchantBank 3 9.09% 188

No|Company Deal Market No|Company Noof Market Dealvalues Rm share Deals share values Rm

1| Barclays Africa 23 187 27.19% 1| PSGCapital 14 16.09% 5 695

2| Merrill Lynch 13 655 16.37% 2| Java Capital 13 14.94% 12 799

3| JavaCapital 12 799 15.34% 3| InvestecBank 11 12.64% 6 2384| NedbankCIB 6 838 8.20% 4| MerchantecCapital 9 10.34% 231

5| Rand MerchantBank 6 429 7.71% 5| Nedbank CIB 7 8.05% 6 838

NolCompany Deal Market No|Company Noof Market Dealvalues Rm share Deals share| values Rm

1| Werksmans 8 746 34.33% 1| CliffeDekkerHofmeyr 15 35.71% 1899

2| Webber Wentzel 8 360 32.82% 2| Webber Wentzel 7 16.67% 8 3603| ENSafrica 3 921 15.39% 3| Werksmans 6 14.29% 8 746

4| CliffeDekker Hofmeyr 1 899 7.45% ENSafrica 6 14.29% 3 9215| Hogan Lovells (SA) 750 2.94% 5| HoganLovells(SA) 2 4.16% 750

No|Company Deal Market No|Company Noof Market Dealvalues Rm share Deals share| values Rm

1 [EY 928 29.69% 1 |EY 4 36.36% 928

2| KPMG 751 24.01% 2| KPMG 2 18.18% 751

3| Grant Thornton 750 23.99% Grant Thornton 2 18.18% 750

4| PWC 526 16.81% 4| PwC 1 9.09% 526

[5| BDO 142 4.55%_| |__| BDO 1 9.09% 142Graphic:RUBY-GAYMARTINSource:DEALMAKERS

GENERALCORPORATEFINANCERANKINGTHESOUTHAFRICANTOMBSTONEPARTIES- January to March2017

NolCompany Transaction Market No}Company No of Market |Transactionvalues Rm share Transactions share| values Rm

1| RandMerchantBank 12 122 22.37% 1| PSGCapital 8 18.18% 4 1652| Investec Bank 10 824 19.97% 2| Investec Bank 7 15.91% 10 824

3| BarclaysAfrica 9 000 16.61% Java Capital 7 15.91% 54154| StandardBank 6 577 12.14% 4| RandMerchantBank § 11.36% 12 1225| Java Capital 5415 9.99% 5| Nedbank CIB 4 9.09% 1 808

No|Company Transaction Market No|Company No of Market |Transactionvalues Rm share Transactions share| values Rm

1| Investec Bank 11 610 24.59% 1| PSGCapital 12 16.90% 8 4432| Rand MerchantBank 9 360 19.83% 2| Investec Bank 11 15.49% 11 610

3| PSGCapital 8 443 17.89% 3| Java Capital 10 14.08% 6 7094| Java Capital 6 709 14.21% 4| RandMerchantBank 7 9.86% 9 3605| StandardBank 6 577 13.93% 5| Questco 5 7.04% 863

No|Company Transaction Market No|Company No of Market |Transactionvalues Rm share Transactions share| values Rm

1| Webber Wentzel 15 879 32.69% 1| Webber Wentzel 6 23.08% 15 879

2| Allen & Overy (SA) 10 329 21.26% ENSafrica 6 23.08% 9 874

3| ENSafrica 9 874 20.33% 3| CliffeDekkerHofmeyr 4 15.38% 6 414[4| Cliffe Dekker Hofmeyr 6 414 13.20% 4| Allen & Overy (SA) 2 1.69% 10 329

5| Lapin 3 017 6.21% Paul Barnard 2 7.69% 475

No! Company Transaction Market No| Company No of Market |Transactionvalues Rm share Transactions share| values Rm

1| PwC 9 000 42.71% 1| Deloitte 3 27.27% 6 577

2| Deloitte 6 577 31.21% EY 3 27.27% 3 183

3 |EY 3 183 15.10% 3| Grant Thornton 2 18.18% 1 837

4| Grant Thornton 1 837 8.72% MooreStephensFRRS 2 18.18% 4755| Moore Stephens FRRS 475 2.26% 5| PWC 1 9.09% 9 000

Graphic:RUBY-GAYMARTINSource:DEALMAKERS

Chris Staines ... lower values.

investors, Gewersays, needtochase yields so there willalways be interest, and therewill be ebbs and flowsdenending on the evele.

Interestingly M&A activity atthe lower value level (betweenR20m and R200m) has overthe past fewyears beenunaffected by the politicalvolatility, says Chris Staines,head of corporate finance atGrant Thornton in Cape Town.These transactions, he says, arecharacterised mainly by smallfamily-owned businesses.

Looking ahead, Freidmansays that deal activity willcontinue, albeit at a slowpace,with institutions having todeploy cash; the key themewill be to invest in companieswith international connectionsratherthan those dependentsolely on South Africangenerated revenue.

In the long term, investmentinterest in SA from China, Indiaand Europe will furtherstimulate the deal makingenvironment as the search forstrategic assets at a discountwill serve as a stimulus forinbound and outbound dealflowin the country overthenext few years.

INTERESTINGLYMSAACTIVITYATTHELOWERVALUELEVEL(BETWEENR20MANDR200M) HASBEENUNAFFECTEDBY THEPOLITICALVOLATILITY