M&A Deals in Africa Hit by Political Uncertainty

It is surprising that Australia was the highest inbound investor country by deal volume as one would expect it to be China or India.

South Africa’s political uncertainty is slowing down mergers & acquisitions activity in the rest of the continent after inbound deal volumes in the first quarter of 2017 dropped 45%.

This is no surprise because almost half the continent’s M&A activity flows through South Africa.

South Africa has entered recession for the first time in eight years, piling pressure on a government facing corruption allegations and credit downgrades. For more read: South Africa slips into recession, heaping pressure on Zuma

Political instability, high unemployment and credit ratings downgrades have dented business and consumer confidence in South Africa.

“Further, almost half the continent’s M&A activity flows through South Africa, so recent South African developments have had a negative knock-on effect in Africa,” said Morne van der Merwe, Managing Partner of Baker McKenzie in Johannesburg.

“Political uncertainty in other jurisdictions on the continent, such as the current election in Kenya, has also made investors wary of African deal making in the short term, although we expect this to change once stability returns to the region.”

The Baker McKenzie’s latest quarterly Cross-border M&A Index shows that there were 17 inbound M&A deals in Africa in the second quarter of 2017. The 17 inbound deals reflect a 48% drop from 33 deals in quarter two 2016.

The total deal value for inbound deals amounted to $780 million, decreasing by 83% year-on-year and 88% on a quarter-by-quarter basis. The second quarter of 2016 saw $4.54 billion worth of deals.

In the first quarter of 2017, 6.38 billion worth of inbound deals were concluded in Africa.

“Foreign Direct Investment (FDI) in South Africa has decreased and this will continue until the local investment climate stabilises. Due to the credit rating downgrades, the cost of raising capital for acquisitions has become more expensive, making deals more difficult,” said van der Merwe.

“In addition, the Rand has been one of the most volatile currencies in 2017 and this volatility has suppressed deal appetite. These factors, combined with recent political instability and uncertainty, have resulted in a perception in the market of increased risks of doing business in South Africa. Global players are finding more attractive investment destinations elsewhere.”

Africa tech sector

Fintech Investment Financial Internet Technology Concept. Text with mobile phone and world money , blue tone , flare light
Fintech Investment Financial Internet Technology Concept. Text with mobile phone and world money , blue tone , flare light (Photo Credit: www.shutterstock.com)

Looking at the technology sector, the M&A Index showed no inbound technology deals in Africa in the second quarter of 2017. This is in comparison to the global results, which noted a high volume of technology deals in the first half of 2017.

Globally, besides first quarter 2016, the number of cross-border technology deals was higher in first quarter 2017 than in any post-crisis half-year period.

“Africa has several technology hubs, including one in Cape Town, South Africa and the development of technology in the banking and finance sector, for mass usage on the continent, is well advanced,” said van der Merwe.

“A positive explanation for there being no inbound deals in this sector in quarter two 2017, is that this is not due to lack of IT development in Africa, to the contrary, but because IT companies are structuring their operations in a way that allows them to enter into partnerships offshore and bring their operations into Africa through licencing arrangements.”

The Index shows that South Africa was the top target country for inbound deals by volume and value, accounting for 29% of total deal count and USD 422 million or 54% of total value in Africa. The top investing country by volume was Australia with three deals or 18% of total count. China deals had the highest overall value at USD 324 million or 42% of total.

“It is surprising that Australia was the highest inbound investor country by deal volume as one would expect it to be China or India. Australia is a resource-based economy, with the knowledge, know-how and asset base to attach to opportunities in Africa, so it does make sense that they would be investing heavily in African businesses,” added van der Merwe.

Asia Pacific and the European Union were tied as top investing regions by volume, each accounting for 35% of total deal count. By value, Asia Pacific outpaced the rest with $487 million or 62% of total.

Technology tied with Business Services was a top target industry for Africa’s outbound deals by volume with a total of three deals for the quarter (20% of total). In terms of deal value, the Financial Services sector led slightly with $535 million or 35% of total deals. Technology deals came in close second, accounting for $510 million or 33% of total outbound deals from Africa.

“An increase in development in African telecoms industries, as well as the opportunities presented by a rapidly developing financial services sector, remain key drivers of outbound investment activity in Africa. The growing financial services sector has also seen domestic banks make significant investments in technology, including in offshore companies. As discussed, the increase in outbound deals in the technology sector also points to African technology companies looking to base their local operations offshore,” said van der Merwe.

The Index also shows that South Africa outperformed other African bidders by volume and value for outbound deals, with eight deals (53% of total) amounting to $821 million (54% of total).  Top target regions for outbound deals were EU and Asia Pacific by volume, each with 40% share of total. The top target country from Africa by volume was India, with three deals accounting for 20% of total deal count.

Top target regions for outbound deals were EU and Asia Pacific by volume, each with 40% share of the total. The top target country from Africa by volume was India, with three deals accounting for 20% of the total deal count.

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