SILVER LINING - JSE MAGAZINE

SILVER LINING

With challenges comes opportunity, particularly in the M&A space

SILVER LINING

No sooner had we eased into 2021 and put the trauma of 2020 behind us than it became clear that the coming year would be equally unpredictable and possibly more traumatic. COVID-19 will continue wreaking havoc on the global economy, from which it will take years to recover. Yes, growth is picking up – how can it not after 2020’s contractions? But it will be unevenly distributed as nations take time to vaccinate their populations. This is essential – a healthy populace is central to investor confidence, trade and investment.

You can bet that SA’s durable and resilient business community has already invested considerable resources to protect cash flows and ensure companies survive and thrive in this climate. The reality, however, is that after years of low growth, many were already in a fragile position. Some had already spent the past few years cutting and pruning themselves into shape and focusing on being more efficient. Others had looked to buy growth via acquisitions, both locally and abroad, with often dire implications for their balance sheets. Whichever camp a company falls into, lockdown restrictions, in their various forms, will continue to have a significant impact on profitability. This makes for interesting, albeit difficult, times and, as a result, we can expect more M&A activity in the coming months.

Companies may be under pressure from shareholders to sell assets to pay down debt. MTN’s disposal of its stakes in Ghana Tower and Uganda Interco comes to mind, as does Redefine Properties’ sale of its Australian student accommodation portfolio. Aspen sold its global thrombosis business to US pharmaceuticals firm Mylan for $759 million in what was the largest deal of the year. Deals such as this, involving international parties, were striking in that they required all negotiations to be concluded via Zoom. In other cases, such deals have been deferred until travel opens up and people can meet in person. The other reason driving M&A activity, which is especially prevalent in tough times, is sheer opportunism. For instance, Investec Property Fund took advantage of the property slump to acquire a further stake in the Pan European Logistics platform, and TFG acquired Jet from within the Edcon portfolio. TFG tapped shareholders for R3.95 billion to shore up its balance sheet and fund the deal.

On this note, there was plenty of equity capital market activity in 2020 as companies raised funds by way of stock issuance, accelerated bookbuilds and rights offers to strengthen their balance sheets to cope with the uncertain times. Companies also took advantage of the fall in share prices and repurchased their own shares – which perhaps compensated shareholders for the absence of dividends. One of the bigger capital raises was by Harmony Gold, which turned to its investors to fund the $200 million purchase of mining assets from AngloGold. The intention had been to fund this deal off its balance sheet, given the strength of the gold price. However, with net debt sitting at about R5 billion and the uncertainty caused by COVID, management elected to preserve cash and raise capital to fund the acquisition.

The COVID crisis has reminded companies that the core purpose of a public listing is to gain access to equity finance from long-term shareholders – handy when you need cash fast. The value of M&A transactions involving sub-Saharan companies reached just $16 billion during the first nine months of 2020, according to Refinitiv. This was 74% less than the value recorded during the same period in 2019 when Naspers’ $35.9 billion internet assets spin-off boosted merger activity to an all-time high. The value of deals recorded in the first nine months of 2020, adds Refinitiv, is the lowest since 2004. Alarming, but also unsurprising, is that inbound investment also fell precipitously, reaching just $5.2 billion, the lowest in five years. However, life doesn’t stand still, and as visibility and certainty return there is little doubt that M&A activity will recover. As usual, first movers will have the advantage in the pursuit of good-quality assets.

By Sasha Planting