Rand Merchant Bank tops Ernst & Young (M&A) review for the second year running

31 March 2009 Ernst & Young

M&A activity in South Africa has plunged, but BEE transactions could be the worst hit

Rand Merchant Bank (RMB) has topped the list of Investment Advisors in Ernst & Young’s annual Mergers and Acquisitions (M&A) survey, after taking second position in the 2007 survey. RMB’s achievement was underpinned by the bank’s participation in the outstanding deal of the year - the unbundling of Remgro's holding in British American Tobacco (BAT).

RMB also topped the Sponsor list in a year in which M&A transactions in SA dropped 39% in value compared to 2007 (or 28% if only domestic deals are considered), in line with a declining economy and plummeting world-wide M&A activity.

Other achievers on the Investment Advisor list included Morgan Stanley South Africa, which rocketed from 22nd place in the 2007 rankings to second in 2008. Goldman Sachs International increased its position by one place to third. Nedbank Capital, which shared top spot with Investec in terms of number of deals in which it was involved, came in fourth. JPMorgan also made notable strides up the table, jumping from 16th place in 2007 to 5th in the 2008 review.

The top five places among legal firms in M&A advisory work remained fairly constant. The list was led in the current review by Werksmans, who were third last year. Edward Nathan Sonnenbergs improved two places to second, while DLA Cliffe Dekker Hofmeyr made the biggest gains among the top five, coming in third (against 7th in 2007). Webber Wentzel and Deneys Reitz came in fourth and fifth respectively.

For M&A work, the year was predictably difficult given the gloomy global economic environment, but the 28% decline in local activity by deal value came off a record year in 2007 and was very much in line with international trends. 2008 may well be remembered for the dramatic economic turnaround mid-year, which was mirrored in declining deal value and a large number of unconsummated deals in the second half of the year.

Total deal value came down from R514bnbn to R312bn, with the mega-deals of 2007 notably falling off the list. Deals over R5bn announced in 2008 dropped by over half, from 23 in 2007 to only 10 in 2008. The largest transaction of the year was the unbundling of 90% of Remgro's holding in British American Tobacco (BAT) to Remgro shareholders, valued at R58,8bn. The deal ranks as the fifth largest in the history of South African M&A.

The top ten deals in 2008 came in at R154bn compared to R208bn in 2007, a 26% drop, in strong contrast to the dramatic 51.5% increase recorded between 2007 and 2006.

The second largest deal of 2008 was the unwinding of MTN's Alpine Trust, resulting in distribution of shares to MTN employees and acquisition of an 11.5% stake in MTN by the Public Investment Corporation.

Vodafone Group plc's acquisition from Telkom of a further 15% stake in the
Vodacom Group in order to gain outright control, came in third.

The 2008 year was notable for several large BEE deals. Apart from the MTN deal which fell into this category, there was also the R7,5 bn broad-based BEE transaction announced by Vodacom.

But M&A practitioners have expressed concern about the future of BEE, and there were several predictions that going forward, BEE could be badly hit. BEE has been a significant driver of M&A over the years, and 2008 was no exception. Even in a sharply waning year, BEE transactions in 2008 constituted roughly 20% of total activity – the same proportion as in 2007.

Dave Thayser, director for Ernst & Young Transaction Advisory Services, said the review contained an interesting snapshot of the cost of BEE deals. The review also analyses the structures used, and discovers that contrary to popular perception, the majority of BEE deals in 2007 and 2008 were still executed using Special Purpose Vehicles (SPVs), an approach that has existed since the first wave of BEE deals in 1994.

For a representative selection of transactions announced in 2007 and 2008, the review contains a comparative analysis of the proportion of the company acquired, the value of the transaction, the cost of the transaction to the company (as announced by the company), and the announced cost as a proportion of the company’s market capitalisation.

The analysis reveals that the cost of the BEE deals over the period has varied widely, ranging from between 12% to 37% of the transaction value, with 20% being commonly encountered. This economic cost equates to between 1% and 3% of the companies' market caps for the BEE partners to acquire stakes of between 10% and 15%.

However, the figures and proportions could easily change during this year. “The cost of funding is also high, but appears to be trending downwards, and capital available for funding is restricted as banks continue to be risk-averse. This combination of factors suggests that it will be difficult to put major BEE deals together in the short term,” the review finds.

In general, M&A in 2009 seems likely to be characterised by caution with perhaps corporate rescue appearing as a new, significant deal driver. Private equity, which was a notable absentee in 2008, could reassert itself as markets stabilise. All eyes will be on early signs of an economic turnaround, which could encourage buyers to come out of their shells, said Thayser.

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