Risk & restructuring

M&A activity on the up in SA

Notwithstanding economic uncertainty, a surprising number of South African businesses are pursuing corporate deals that run counter to business confidence having fallen to new depths.

This is borne out in data produced by auditing and accounting firm Grant Thornton which shows that 49% of local companies surveyed had explored opportunities during the past year, higher than the proportion of global companies, at 39%. The study, Grant Thornton’s 2014-15 International Business Report (IBR) on M&A, surveyed more than 5400 business leaders in 35 economies at the end of December 2014. 

“Backing up this data is the high volume of corporate transactions that our member firm has been involved in so far this year,” comments Andrew Hannington, CEO of Grant Thornton Johannesburg. “We have never been this busy and in the year to date we have already concluded ten M&A transactions and are busy with a number of due diligences as well as IPOs planned for late this year or early 2016.” 

Hannington says that South Africa remains an attractive market in the context of the turmoil in global markets, which - combined with the stuttering local economy - have led companies to sit on their cash. 

“This has created opportunities, particularly in the mid-tier space, for deals that offer greater value,” he continues. 

The IBR report indicates that retained earnings (80%) are still expected to be the largest source of finance to fund growth, with only 53% of respondents planning to use bank debt to finance deals. This compares favourably with the global picture in which 57% of businesses worldwide are looking to debt finance, which is up from 48% in 2013. 

The opportunity for deals in South Africa is reflected in 28.5% of businesses anticipating a change in ownership in the next three years, up from 21% in 2013 and 15% in 2012. This is higher than the global average of 14% of business leaders worldwide planning to sell over the next three years. 

“It is clear that companies are starting to take advantage of opportunities to consolidate and grow their operations at a time that the economy is under increased pressure. For some, this is also a precursor to expanding their footprint outside of the country. The scale from such consolidation helps to ease geographic expansion, which is supported in the M&A IBR results,” Hannington says. 

Those results show that the key drivers behind local plans to grow through acquisition are to build scale (76%), gain access to new geographic markets (74%) and acquire new talent or skills (61%). 

Grant Thornton has benefited from this increased activity, recording 24% growth last year following the merger of the Johannesburg and Cape Town member firms of Grant Thornton and PKF in 2013. The firm was recently ranked first overall for Transaction flow and second for Transaction Value for the period from January to June 2015 in the quarterly Dealmakers survey. 

“We have little doubt that there are rich pickings for companies with the resources and desire to grow through consolidation,” Hannington says. “Africa is undoubtedly a growth market and local companies are well positioned to leverage their systems and processes to take advantage of this opportunity.”

Hannington concluded by adding that Grant Thornton’s Asia Business Services desk based at the Johannesburg firm is also “run off its feet” with a number of large deals in the pipeline. Working hand-in-hand with Grant Thornton member firms in Asia the business services desk is able to offer a range of services to help Asian companies expand beyond their borders, specifically into southern Africa and the rest of the continent. 

 

Notes to editors

The Grant Thornton International Business Report (IBR) provides insight into the views and expectations of more than 10,000 businesses per year across 35 economies. This unique survey draws upon 22 years of trend data for most European participants and 11 years for many non-European economies. More information: www.grantthornton.global/en/insights/

Questionnaires are translated into local languages with each participating country having the option to ask a small number of country specific questions in addition to the core questionnaire. Fieldwork is undertaken on a quarterly basis, primarily by telephone. IBR is a survey of both listed and privately held businesses.

Data collection

Data collection is managed by Grant Thornton International's core research partner -Experian. Questionnaires are translated into local languages with each participating country having the option to ask a small number of country specific questions in addition to the core questionnaire. Fieldwork is undertaken on a quarterly basis. The research is carried out primarily by telephone.                                                       

Sample

The data for this M&A release are drawn from interviews with more than 5,404 chief executive officers, managing directors, chairmen or other senior executives from all industry sectors conducted between September and December 2014.