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Doing Business In The Time of COVID-19

21 September 2020 Cliffe Dekker Hofmeyr (CDH)

Have any South African sectors gone unaffected?

Certain sectors of business in South Africa have been affected more than others by the pandemic and ensuing lockdown. However, pockets of investment opportunities still exist for those sectors that were and continue to be more resistive to the impact of COVID-19. So, while there is no denying the difficult position the country is in, there are deals to be done and we are likely to see a recovery in terms of deal activity.

This is according to Gasant Orrie, Cape Managing Partner and Director of the Corporate and Commercial Practice at Cliffe Dekker Hofmeyr (CDH), who says that while it’s not all doom and gloom from a deal-making perspective, the real threats to deal activity are those that were already here before the onset of COVID-19.

Orrie was speaking in relation to CDH’s latest edition of Doing Business in South Africa (DBSA) – an annual publication that explores the country’s commercial legal landscape. Regarding the impact of COVID-19 on investments and deal activity in South Africa over the short term, he explained that where certain deals in the pipeline completely collapsed, some went through as planned, while others just needed to be renegotiated on different terms.

From a legal perspective, Orrie notes that any deal modification generally still requires further work, which prevented a complete standstill in deal flow from occurring. “Particularly in the case of deals that required restructuring – while not representing new deals per se, the restructure process itself still tends to entail merger and acquisition (M&A) and other corporate activity to some degree.

“But even in the case of insolvencies, potential liquidations, and business rescue processes, there is always a spinoff that ultimately creates additional work for legal practitioners, including commercial lawyers,” he notes. “The flip side of this, however, is that clients are now under increasing financial pressure, which creates an opportunity for legal firms to innovate and offer better value for money in order to assist clients in weathering the COVID-19 storm,” he adds.

To show how deals were impacted by COVID-19 on a case-by-case basis, Orrie refers to two specific deals that CDH was busy facilitating when the pandemic first hit South Africa in March. “In the case of the first deal, which was in the hard-hit hospitality industry, the purchaser ultimately decided that it could no longer fund the transaction, resulting in a total deal collapse.

“Whereas for the second deal – which was in the quick-service restaurant (QSR) industry – both parties were still interested and able to fulfill their ends of the transaction, but the terms of the deal needed to be substantially renegotiated, given the changing operating environment under lockdown.”

While commercial legislation has yet to see any significant COVID-related changes, Orrie expects a renewed national effort to promote foreign investment over the coming months.

Aside from the COVID-related financial support packages, he notes that there have been no major changes made to any significant pieces of legislation aimed at promoting foreign direct investment. “This means that whatever existed before the lockdown came into effect, still currently stands today. However, I would imagine that – as part of ongoing efforts to support the local business community – Government is going to revisit and possibly fast track certain legislative programmes and initiatives to encourage foreign direct investment and stimulate economic activity locally.”

With this renewed effort, Orrie is confident that there will be a recovery in deal activity. “We have already started seeing signs of this recovery in the kind of deal flow that we’ve been exposed to, but there is also other deal activity happening in sectors that have proven to be much more resistive to the impact of COVID.

“For example, the fishing rights allocation process is currently on the go, so all the major fishing companies are in the midst of doing BEE deals to enhance their BEE credentials in order to ensure that they at least maintain their fishing rights,” he explains.

Similarly, as part of the country’s expected renewed focus on economic stimulus, Orrie says that developments happening in the public sector should also begin to gain momentum again. “While Government may have focused its attention on COVID-related issues over the past five or six months, we expect to see public infrastructure projects be put back on the fast track in the near future. These would include the Renewable Energy Independent Power Procurement Programme projects, for example.”

That said, he cautions that some of the same barriers to doing business in South Africa that existed prior to the pandemic such as power constraints, concerns about corruption, and land restitution issues will not have simply disappeared and will therefore need to be addressed afresh.

With the expected renewed effort to improve the ease of doing business in South Africa, Orrie believes that there are significant opportunities currently available in South Africa for investors. “COVID-19, and specifically the aftermath of COVID-19, presents a great opportunity because so many people are looking to exit or offload assets or businesses for a variety of reasons.

“While times may be tough for many, this usually means that there are good deals – commercially, financially, and strategically – to be done by investors who have the capital required to do business in South Africa,” he concludes.

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