Merger and acquisition (M&A) activity rose sharply in South Africa in 2007, with total deal volumes up 81% over the previous year and the top 10 deals coming in at R208.1-billion, a 51.5% increase over the top 10 deals of 2006.
“For M&A in South Africa, 2007 will go down as a phenomenal year,” Ernst & Young transaction advisory services director Dave Thayser said in a statement last week ahead of the 11 March release of the Ernst & Young Review of Mergers & Acquisitions Activity for 2007.
“International trends were reflected in the continued presence of private equity deals, and the tapering off of these transactions by the end of the year,” Thayser said.
“This trend was most evident in the sale of clothing retailer Edcon to a private equity consortium, which was the third-largest overall deal in South Africa last year and the largest private equity deal in emerging markets as a whole.”
International trends were also reflected in the overall increase in the volume of transactions and increased presence of emerging market companies on the local scene, such as the sale of a 20% stake in the Standard Bank group to the Industrial and Commercial Bank of China.
Black economic empowerment
The major drivers of M&A that were evident during 2006 remained powerful forces during 2007. “Black economic empowerment (BEE) remained top of mind for corporate South Africa, and the effort to forge a new and inclusive society remains a work in progress,” Thayser said.
“As we predicted last year, the finalisation of the codes of good practice for broad-based BEE during 2006 has resolved many of the grey areas, and encouraged the completion of many transactions that were waiting in the wings.”
According to Thayser, South Africa’s largest deals were typically transnational, agreed deals between companies in the same sector, with the motivation for the deals being an attempt by firms to achieve a larger physical presence and achieve efficiencies through economies of scale.
Though the increase in M&A activity in South Africa from 2006 to 2007 was impressive, Goldman Sachs’ SA head Colin Coleman pointed out that the South African market was “lumpy”, and that the tally of total deal flow could be affected by coincidence rather than a clear trend.
According to Ernst & Young, research house Dealogic found that the volume of global M&A deals in 2007 rose to a historic level of US$4.83-trillion, some 23% more than in 2006 – which was itself considered to be a boom year.
The year featured major deals such as a successful $95-billion bid for Dutch bank ABN Amro by a consortium led by the Royal Bank of Scotland, and a “mammoth” $152-billion bid by the world’s largest miner, BHP Billiton, for rival Rio Tinto in November.
Yet Dealogic noted that there was a marked slowdown late in the third quarter which continued into the fourth quarter of 2007, with second-half volume dropping by 21% and the $216.2-billion transaction volume for September being the lowest monthly figure since November 2005.
“Mega-deals are set to continue in the medium term, say a cross-section of M&A participants, but there may be a lull in the short term,” Thayser said.
“Certainly, the contracting credit markets in the second half of 2007 put the kibosh on private equity transactions, since cheap and available credit is the lifeblood of private equity business. Yet local private equity companies remain cash-flush and hungry for targets.”