18 April 2007
US group Bain Capital successfully clinched the biggest ever private equity deal in South Africa this week, with shareholders in South African retailer Edcon voting overwhelmingly in favour of Bain’s US$3.5-billion (R25-billion) takeover bid.
The vote must still be sanctioned by the high court, after which the bid will go before South Africa’s central bank and competition authority for final approval.
According to Business Day, the Bain buyout is expected to give impetus to a number of other private equity deals in the pipeline in South Africa.
Private equity investors, both foreign and local, have been sizing up a number of South Africa’s prize listed assets, including retailer Shoprite, financial services group Alexander Forbes and media player Primedia. Earlier this year, local buyout firm Brait bought glass maker Consol for R6.2-billion.
Edcon (Edgars Consolidated Stores), South Africa’s biggest retailer, owns local brands such as Edgars, CNA, Boardmans and Jet. According to Business Report, the company’s gross profit increased by 14% to R3.2-billion in the half-year to September on the back of strong consumer spending and credit growth.
Rich pickings for private equity players
According to Ernst & Young’s annual review of mergers and acquisitions (M&A) activity in South Africa, a rise in private equity activity played a significant role in the level of M&A activity in South Africa in 2006, and was set to do so again in 2007.
Local mergers and acquisitions increased for the fourth year running in 2006, from R269-billion worth of deals in 2005 to R284-billion in 2006, Ernst & Young reports.
And according to Merrill Lynch, South African companies – with lower debt levels and higher returns than their US and European counterparts – offered rich pickings for private equity investors.
Bloomberg picked up this week on a Merrill Lynch note to clients which stated that the private equity theme would “remain a very important one for South African investors this year.”
South African companies, according to the note, displayed strong earnings growth, improving exit values, and high dividend ratios when compared with other emerging markets. And their net debt-to-equity ratios of 7% – against 32% in the US and 45% in Europe – gave buyout investors the opportunity to introduce more debt into the businesses.
“Almost half the 21 South African companies screened by Merrill Lynch had an internal rate of return of more than 15%,” Bloomberg reports. “That compared with less than a third of companies in Europe.”