New Normal: Key Insights and Strategies for M&A Success in South and Sub-Saharan Africa 2024/25

The insights from these seasoned dealmakers underscore the importance of adaptability, innovation, and thorough preparation in navigating the complexities of dealmaking in South and Sub-Saharan Africa. By leveraging creative deal structures, conducting rigorous due diligence, understanding macroeconomic and regulatory dynamics, and focusing on resilient sectors, dealmakers can successfully navigate challenges and seize opportunities in this dynamic market.

Johan, given your extensive experience with numerous listings and navigating market cycles, what are the most significant changes you’ve observed in the listing and delisting landscape over the years?

I started in corporate finance investment banking, and over the years, we’ve listed more than 50 companies. Some notable ones include PSG Group and Capitec. It’s a variety of companies. The landscape has changed significantly over time. Everything goes in cycles, whether it’s listings or private equity, etc. We are now in a delisting cycle that’s hopefully picking up into a listing cycle. This year on the Johannesburg Stock Exchange (JSE), for example, I think they marked 10 new listings of which we’ve seen 2 or 3 already. Some of such companies list as subsidiary of the investment holding company and are then unbundled.

Private equity cannot always be invested. They have to exit. And how do you exit? You can sell to another entity, but one of the ways to exit is listing. So, if you have a lot of private equity transactions, it bodes well for listings going forward.

Where does South Africa find itself from a capital markets perspective? The JSE intends to split the mainboard into two, it’s going to have a prime segment and then a general segment, and it’s really conscious of removing red tape or streamlining regulations by making it easier and better suited to the needs of smaller firms. Do you think that goes far enough, or could we be doing more from the regulatory side from the JSE’s perspective to encourage more listings?
I think over the last couple of years a lot has been done by the JSE from a simplification of rules and regulations perspective. So, I think they have done a lot. But you can only simplify to a certain degree because you work in a global environment.

When we zoom out and we look at the current macroeconomic environment, how do you see interest rates and inflation trending over the course of this year? Do you think we’re going to see rate cuts in the second half, or is this a conversation that’s now going to shift out to 2025?
I hope to see some rate cuts because both consumers and companies with high debt burdens are under a lot of pressure. I estimate that rates should come down in the second half of the year. If they do decrease, it would be a positive development. Lower rates reduce the cost of capital, improve confidence, and create opportunities.

Where do you see the opportunity in an environment where we do start to see a moderation in inflation, a soft landing in the US, a Goldilocks scenario and interest rates coming down?
I always remain positive. While people have many questions about Africa, we view hurdles as opportunities. Specifically, in South Africa, the opportunity set is heavily skewed towards infrastructure. The traditional on-balance sheet model for state-owned enterprises like Eskom, various water boards, and Transnet has become unsustainable. These entities are now over-leveraged and indebted, necessitating private sector involvement, especially in energy.
There is skepticism around load shedding being starved off ahead of the elections, but it’s important to look at the underlying numbers. It appears pretty positive.

What do you see as likely to drive M&A activity the most in 2024? Will it be consolidation, will it be looking at these attractive sectors for the private sector to now go and play a meaningful role in South Africa?
I think it will be all the ones that you’ve mentioned. Consolidation: sectors like energy and water.
I think there’s a lot of lean and mean companies, but there are also pockets where the debt is too high, but the majority, is definitely lean and mean and can take advantage of opportunities. The other problem is now with consolidation and takeovers, obviously regulation from a Competition Commission perspective and what is required there and that all of these regulations brings uncertainty. It’s better to have a clear line of what you propose there because it influences price, it influences timing of a transaction and it creates deal fatigue by foreign entities that don’t always understand the Competition Commission compliance, for example, around the public benefit, etc.
I think there’s now a couple of examples that one is aware of that definitely guides you more from a practical experience perspective if you’ve already been through it but it differs from company to company, there isn’t one size that fits all of these. So, there are all kinds of practical obstacles.
For example, when we did the PepsiCo Pioneer transaction, we put a unique structure in place that actually directly goes to get benefit from the holding company and the South African company is held simplistically 100% if I can put it that way. So, it forces you to come up with innovative structures, for example if you have sufficient cash flow in the business, then you can do it. If you don’t have sufficient cash flow, it makes the transaction sometimes impossible to do, and then parties will walk away.

When it comes to getting creative with deal structure to close valuation gaps, firstly there’s always going to be a valuation gap in the market. Just how big is it in this market given the macroeconomic conditions and the cost of capital and how are you innovating, how are you seeing your clients innovate to bring buyers and sellers closer together and get a deal over the line?
The approach you take depends on your perspective. From a private equity standpoint, you can be innovative with debt, provided the cash flow and the company’s fundamentals support it. This approach can be advantageous if the market has undervalued the business.
In a listed environment, issuing scrip to achieve the same goal isn’t feasible. Therefore, one alternative is to seek funding from shareholders, though this is generally a last resort. Going to shareholders can be highly dilutive, especially if shareholders do not follow their rights.
We aim to explore various innovative strategies, but the best approach will ultimately depend on the specifics of each deal.

Earnouts, are you seeing those being used more frequently to potentially bridge gaps?​
Earnouts? Yes, you will use earnouts if you believe your business is undervalued, and the growth drivers that you have built in (i.e. factories built, marketing spend etc.), will only flow through in the next year or when the economy improves.

When we look at the due diligence process, given what we’ve just discussed and clearly the regulatory risk has increased through the competition authorities, how is this feeding through into the due diligence process? Are you now planning earlier in the process for those eventualities and is there anything else that you see is dynamic in the way you’re approaching your due diligence in this market?
Due diligence in this market is critical and you need to start earlier. I’ve seen due diligence not decrease. We try to execute a proper due diligence with speed, efficiency, and accuracy. Otherwise, it will cause enormous delays because you have to be more vigilant (if I can put it that way) about how you go about who you pull in. It is not just attorneys and auditors involved but maybe commercial experts, specialist and the like. And they all need to work together and you can carve out sections so that one party doesn’t overlap with the other party. For example, Ansarada plays a fantastic role in that. A number of our clients use the platform because it’s efficient.

How are we seeing AI potentially being deployed in a due diligence environment where maybe there’s lots of documents and you need to look for concurrent clauses, for example. Is it finding application?​
I think it will find application eventually. But at the moment, where it’s very technical, AI struggles because you need to verify everything. So, I think it’s 80% there, but it’s not 100%. So, the application at the moment from a due diligence perspective is more market, industry and people related. But in time, as it improves, it may be applied further, but you won’t just let AI loose on legal documents or financial information.

Lastly, Johan, what excites you about the second half of the year, a sector, a theme or something that really you think other people are potentially missing when it comes to the outlook for M&A in 2024/25?​
I don’t think my peers or competitors will miss any specific trends. In the consumer foods and energy sectors, I see definite opportunities for us in Africa moving forward.