South Africa losing out on international M&A front

As the world grows wary of China’s ability to remain the factory of the world, South Africa – and the rest of the continent – has a limited time to enjoy the spoils.

By Jaco Visser

South Africa’s attractiveness as a foreign investment destination is declining even as the country, as part of the Africa Continental Free Trade Agreement (AfCFTA), offers physical access to markets in the rest of Africa. Not to mention supplying manufactured goods into the European and US markets.

As the most industrialised nation on the continent, even as manufacturing is buckling under poor government decisions and amid a global health pandemic, SA should be a lucrative market for mergers and acquisitions from abroad. That is, however, not the case.

The value of mergers and acquisitions more than halved in the first six months of 2020 compared with the same period a year ago – from $8.2bn to $3.3bn, according to Statista data supplied by Andrew Bahlmann, managing director of Deal Leaders Africa. The number of transactions slid from 160 to 132 between the comparable periods.

Andrew Bahlmann Managing director of Deal Leaders Africa

SA’s GDP, the 38th-largest in the world in current US dollars, was recorded as $351.4bn in 2019, according to World Bank data. Hong Kong, with almost eight times fewer people than SA, had a GDP of $366bn. The whole of sub-Saharan Africa had a GDP of $1.75tr – bringing SA’s contribution to this region to a fifth of all goods and services produced. Manufacturing contributed about 12% of SA’s GDP in 2020 and has been on a net decline trajectory since the first quarter of last year, according to Stats SA data. This is the sector where steady jobs are created, and exports could be realised on a large scale.

“One obstacle to mergers and acquisitions in SA is the size of potential targets.”

Why are these figures important in a discussion around mergers and acquisitions (M&A)? A billion-dollar M&A target in SA will be equal to about 0.3% of GDP. In the US, with its $21.4tr economy, the same transaction will be equal to 0.004% of GDP.

“One obstacle to mergers and acquisitions in SA is the size of potential targets,” explains Bahlmann, adding that a number of potential acquirers have set minimum (many in excess of R1bn) values for transactions in order to realise an acceptable return on assets. It often takes the same time and effort to undertake a R1bn transaction as it would a R100m one, he says.

“There are several acquirers and investors who are still looking into Africa, especially fintech and software companies,” says Bahlmann. In addition, China’s competitiveness as a manufacturing base and reliable supply chain partner is on the decline, he explains. “We still have a robust skills base in several industries in SA.”

The problem, however, with fintech is that it relies on customers’ discretionary disposable income. Taking current-dollar GDP per capita as a measure, sub-Saharan Africa compares unfavourably with other emerging markets. Manufacturing remains an opportunity for a region with a young population moving up the income ladder.

Outside of strong growth opportunities in SA itself, international acquirers are attracted to companies with established markets in the rest of Africa that would enable diversification in revenue and currency streams, according to Bahlmann.

It stands to reason then, as one of the big drivers behind the AfCFTA, for SA to ensure that local companies’ access to the rest of the continent is smooth once the agreement kicks in on 1 January 2021 (it was delayed from 1 July this year due to the Covid-19 pandemic).

The window of opportunity to cash in on the slide in China’s competitiveness, and global supply chains’ wariness of the country’s dependability following the pandemic, is but a short one.

Africa is physically closer to the markets of Europe and the US. Lest Africa’s leaders – judging by their actions over the past six decades – act in cohort and get the free trade agreement implemented as soon as possible, with minimal red tape at border posts, countries such as Vietnam, Indonesia and Cambodia may gather and divide the spoils of manufacturing. ■

editorial@finweek.co.za