Foreigners pour billions into South Africa

In the last three years foreign companies have poured billions of rand into South Africa. The rise in merger and acquisition (M&A) activity is driven by international companies desire to extend their global reach and by their requirement to maximise retur

Current stock market volatility aside, 2007 M&A activity looks set to post an even higher number. In the year to June 2007 a total of USD 93 billion has already been committed through 73 deals.

Local market analysts are probably wondering what company will 'fall' next. Will it be another of our retail giants, a resource company or perhaps one of our paper and packaging giants?

The Barclays ABSA transaction fails to trigger a landslide

South Africa provides the perfect platform for international companies keen to sell product and services to Africa's nearly 1 billion people. This desire is probably behind many of the transactions that have been completed in South Africa thus far.  And all it takes is for one global giant to test the waters before the rest follow.

At least that is what many investment analysts believed when Barclays completed a USD 5.3 billion transaction to purchase a 60% stake in ABSA bank. As it turns out the expected deluge of foreign capital did not materialise. Even though the Barclays transaction is now nicely bedded down many international firms still appear to be nervous about investing on the African continent.

For the time being local investors will have to satisfy themselves with the occasional acquisition rumour which inevitably drives share prices up for a short period before simply fizzling out. An example is the recent speculation around the possible purchase of Nedbank Limited by a giant foreign bank.

Private equity calls the shots

In recent times we have witnessed a shift from corporate M&A activity to private equity transactions. Cash flush private equity groups have been eying the top listed companies in South Africa with the aim of buying out minority shareholders and subsequently de-listing the companies. This allows private equity management teams to take over the operations of the company and maximise the return from their investment.

An example of such a transaction is that of Bain Capital purchasing the entire listed capital of Edgars Consolidated Holdings for a massive USD 3.48 billion earlier this year. The result is that one of South Africas top listed shares is no longer a public company. Although shareholders were well compensated one cannot escape the fact that Bain Capital will generate significant returns from this transaction in the longer term. Despite the premium paid for their shares, local investors have probably lost out.

Fortunately for local investors not all private equity transactions have been successful. Recent attempts by Brait to acquire Shoprite for R14.2 billion were thwarted by shareholders who stood by their view that the takeover offer was too low. Brait eventually withdrew their offer and Shoprite remains listed on the JSE. Recent attempts by Evraz to add to their holdings of Hiveld Steel were met by similar shareholder resistance.

More foreign transaction to come

The global and local economic environments continually change. At the time of writing global markets were in the grip of a credit squeeze caused by a sub-prime lending dilemma in the US. South Africa was unable to avoid the backlash from this market fallout. Although locally listed shares have bounced bank in recent days, South Africa has problems of its own. Rising interest rates and high domestic inflation mean that our consumption driven industries might run into trouble later this year. The outlook for retail and services stocks have been curtailed by no less than five interest rate hikes since June 2006.

Our salvation lies in the resources and construction sectors. As long as global resource prices remain strong and government remains committed to its construction expenditure the local economy should weather most international storms.

And this means that M&A activity will probably follow the established trend and continues to increase in South Africa. We can expect more of our top listed companies to fall to private equity offers and will probably witness another of our familiar retail, mining or construction firms falling into foreign hands before the year is out.

Editor's thoughts:
Local investors have been watching with concern as the number of quality shares listed on the JSE steadily dwindles. The Alt-X board has offered some relief, although the companies listing on this board have some way to go before they become the corporate giants of the future. This problem is exacerbated by foreign private equity firms with billions of dollars at their disposal who simply purchase top listed companies and de-list them. Does the local investor have anything to fear from private equity transaction of this nature? Send your comments to gareth@fanews.co.za.