M&A Mastery: Strategies and Insights for South and Sub-Saharan Africa

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.

Tell us a bit about yourself and your career in M&A so far.
I’ve been at RMB Corporate Finance for almost 18 years, focusing on M&A activity in South Africa and other regions where RMB operates, particularly Sub- Saharan Africa. I spend a lot of time with financial sponsor clients, including private equity and related companies. Much of my time has been spent selling South African businesses, which essentially means selling South Africa itself.

Given the times we’re living through, that’s quite a task. We’re chatting a day after the general election for the 7th administration in South Africa, which brings about many questions regarding policy shifts. Let’s start at a macroeconomic level. With the current global inflation scenario, how do you anticipate interest rates moving, and what is your base case?
Our base case is that we’re in a period of “higher for longer” in terms of inflation. This likely means that rate cuts will be delayed compared to earlier expectations. This prolonged high inflation impacts investor and corporate confidence, which drives a lot of M&A and capital markets activity. This dampens the timing of activity, but other factors are showing positive signs for M&A activity.

Can you elaborate on those factors outside of interest rates that are encouraging the M&A outlook?
In South Africa, several themes are emerging. Post-COVID, many South African corporates have refocused on their core businesses and strengthened their balance sheets. This has made them more proactive in pursuing M&A. We’ve seen examples of international interest, like the potential reacquisition of Peermont. Corporates are now focusing more on domestic activity rather than offshore, improving the local M&A landscape. Private equity continues to play a significant role, buying and selling assets. Interestingly, South Africa remains attractive to international acquirers due to its relative stability and regulatory environment.

What makes South Africa attractive for inbound acquirers within the emerging markets bucket?
Several factors make South Africa appealing. The valuations of listed firms, particularly in the mid-market space, are relatively low compared to international peers. Despite challenging conditions, South African businesses continue to perform well. The strong legal and regulatory frameworks, and highly regarded management teams, make South African businesses attractive. Additionally, on a relative basis, South Africa’s challenges are less severe compared to other emerging markets, making it a preferred choice for international acquirers looking at Africa.

How do you see private equity activity playing out through the end of the year, given the dry powder available?
The private equity market in South Africa has shifted towards mid-market opportunities over the last decade. The big blockbuster deals have been few due to global private equity firms stepping back from Africa. However, there are many Africa-focused and domestic private equity players who are active. The competition for quality assets has driven prices up, especially for businesses with strong growth profiles. I expect this trend to continue, with quality assets commanding higher prices.

Which sectors do you see as ripe for M&A activity over the next 6 to 12 months?
The resources sector is certainly one, driven by the need for mining companies to replace ounces and scale into new green minerals. The consumer space is also active, as well as the telecoms and TMT sectors, with interest in fiber and data centers.
The energy sector in Sub-Saharan Africa, particularly in South Africa, is another area with significant activity. These sectors are likely to see continued M&A activity.

Beyond South Africa, are there particular regions in Sub-Saharan Africa that stand out for M&A opportunities?
Nigeria and the broader West African market are significant for us. We expect considerable activity in the consumer space, banking sector, and TMT and Fintech spaces. New directives in banking might require recapitalization, driving M&A. In East Africa, although our presence is more limited, we see smaller transactions likely to take place, indicating active markets.

What major risks or challenges do you see for deal makers in 2024?
The main risks are inflation and its impact on interest rates, political climates, and regulatory changes. Half the world is going through elections this year, which can impact confidence. Regulatory changes, as we’ve seen in South Africa, can create risks. It’s up to deal makers to navigate these creatively, helping clients manage these challenges effectively.

Are you seeing any innovative deal structures to navigate the current environment?
Yes, creativity in deal making is essential, especially with regulatory aspects of transactions. Structuring deals to meet regulatory requirements and considering the composition of consortiums to appease regulators is crucial. This differentiation helps in getting deals over the line. The Anglo-BHP deal, for instance, had elements of structure that could sway the outcome. Deal structuring and optics are critical for stakeholder approval, including regulators.

How is the due diligence process evolving in light of these regulatory aspects?
Due diligence is becoming more about transaction preparation. Preparing for regulatory scrutiny, especially from competition authorities and public interest elements, is vital. This includes considering factors like black ownership and spread of ownership, which impact deal structuring. Companies need to be well-prepared upfront to handle any issues that arise later in the transaction.

Are there specific areas of deal preparation that are becoming more focused in deal making?
General company preparedness is key. Ensuring access to quality information, positioning the business correctly, and managing the sensitivity of information are crucial. Efficiency in processes, especially with the ease of access to information, is also important. Platforms that facilitate this are critical in improving deal preparation.

Are you seeing AI being applied in deal making, particularly in virtual data rooms?
AI is starting to make its way into data room platforms, providing useful insights and improving efficiency. It’s less about initial efficiency and more about quick access to insights and information to aid decision-making. AI tools are becoming essential for deal makers to be more efficient and gain better insights.

Finally, what is the key to getting a deal over the line in the current market?
Preparedness for various scenarios is critical. Being dynamic in thinking and deal structuring can sway deals. Strong relationships with counterparts are also vital. Despite the numbers and technical aspects, deal making is fundamentally about people and relationships.