M&A in Africa - window of opportunity for South Africa is open—but for how long?

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Mergers & Acquisitions (M&A) activity in Africa is on the increase, much of it is being driven by investors from other emerging markets. As one of the African countries with an experienced and credible domestic private equity sector, South Africa has the opportunity to establish itself as the M&A hub for the continent.

“There is a distinct opportunity for South African private equity firms to take a lead role in the growing African M&A market, but only if they apply an effective growing beyond borders strategy ,that addresses the four key growing beyond borders pillars” says Sandile Hlophe, Head of Transaction Advisory Services for Ernst & Young, Africa. “The four key growing beyond borders pillars are a focus on key markets, addressing operational agility, maintaining stakeholder confidence and addressing cost competitiveness.”

Hlophe’s comments follow on from the release of the Ernst & Young M&A Tracker, which shows that global M&A activity in the first quarter decreased by 24% as compared with the last quarter of 2011, and by 26% as compared with the same period in 2011. The Middle East and Africa were the only regions in which both the number of deals and their total value showed a quarter-on-quarter increase. Deal volumes in these regions increased marginally by 3%, while deal value increased by 85%, driven by a number of transactions above $500 million in value.

This buoyancy in the African M&A market is yet another indicator of growing global interest in Africa as an investment destination and source of future growth. In the latest Ernst & Young 2012 Africa attractiveness survey titled “Building Bridges”, this interest is demonstrated by increased foreign direct investment (up 27% y-o-y in 2011). However, the survey also shows that negative perceptions about Africa linger amongst those who are not yet doing business in the continent, and some investors still view Africa as a more challenging place to do business than other emerging markets.

“What’s interesting is that a large number of the M&A deals in Africa are being driven by investors from other emerging markets rather than those from the developed world. This is obviously mainly due to the current financial turmoil in those markets, but perhaps also because investors from other emerging markets are less worried by the perceived risks in Africa,” Hlophe notes. “However all these investors need people on the ground who understand local markets and who also understand how private equity deals work in that particular market. That is what the integrated Ernest & Young Africa firm offers to clients, by delivering seamless transaction advisory services across multiple borders on the continent, through a single transaction advisory point of contact for each transaction and led by one Transactions Service Line Leader. That is the power and value add of one firm”

Hlophe argues that South Africa’s black economic empowerment policies have borne significant fruit by fast-tracking the development of South African private equity firms. “These firms have a demonstrable track record and have earned their spurs by putting together successful empowerment deals in the local market over the past eight years. Now they are looking for (and are making) new deals across Africa,” he says.

South African private equity firms have the track record necessary to gain investor confidence and put together the M&A deals that Africa needs, Hlophe believes. Even more crucial, they are well placed to support and participate in the development of the private equity industry in other African countries, which will provide the local footprint and market knowledge that is vital to investors seeking investments in high growth countries across the continent.

“This presents an ideal opportunity for South African Private Equity firms to position themselves as the logical fulcrum for many African M&A deals, both for investors from other emerging markets and those from the developed markets as they pursue deals in high growth countries across Africa,” he says. “This is a real window of opportunity; but it won’t stay open forever!”

Notes to editors

About the Ernst & Young M&A Tracker

The Ernst & Young M&A Tracker was compiled for Ernst & Young by MARC, the M&A Research Centre at Cass Business School from six different transaction data sources. Quarterly M&A activity levels recorded in Bloomberg, Capital, Dealogic, Mergermarket, Thomson and Zephyr are consolidated and compared to quarter-on-quarter activity levels using a proprietary weighted-average methodology.

The Ernst & Young M&A Tracker, weights each database according to the total value of deals in their datasets from the start of the M&A Tracker in Q1 2010. This results in a broad picture of transaction activity. Transaction activity levels are rebased (indexed) to 100 at the base period - Q1 2010, hence a figure of 115 shows a 15% increase compared to base period, and a figure of 85 shows a 15% decrease compared to the base period.
The Ernst & Young M&A Tracker only considers “change-of-control” deals and excludes privatizations, self-tenders, share buybacks, spin-offs, split-offs and recapitalizations. Transaction deal value has been set to a minimum of US$10m. Deal activity is measured from the date of announcement and rumored deals are excluded. Transactions are credited in the country and sector of the target only.

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Following on from Ernst & Young’s successful integration in 2008 of 87 countries into one area from across Europe, Middle East, India and Africa (EMEIA), the firm has launched its Africa Business Center™ (ABC), which aims to enhance the effective and efficient links between its geographic reach and areas of expertise. The firm enjoys representation in 32 countries across Africa.

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