In Africa, M&A activity has dropped since the last quarter results, but there are still massive opportunities for M&A investment on the continent, according to Baker McKenzie.
Africa saw 14 outbound cross-border transactions worth $704m and 29 inbound cross-border deals totalling $6.2bn, according to Baker McKenzie’s Cross-Border M&A Index.
The deal values have dropped in comparison to the last quarter of 2016, where there were 11 outbound cross-border deals in Africa, worth $4.6bn and 22 inbound M&A transactions, worth $11.4bn.
According to Morne van der Merwe, Co-Managing Partner of Baker McKenzie in South Africa, South Africa plays a major role as an investment hub for Africa (and in particular in the Southern African region), but it shares this role with other strong African economies, including Nigeria.
“Both South Africa and Nigeria are currently facing currency woes and the trickle-down effects of the Chinese slowdown,” he said.
“In addition, the recent S&P Global and Fitch agency downgrades in South Africa’s credit status are expected to have a negative impact on the perception of South Africa being an entry-point into the continent and as a destination for medium-to-low risk developing market investment. As almost half the continent’s M&A activity flows through South Africa, the downgrades will no doubt have a negative knock-on effect in Africa as well, unless South Africa’s standing as a stable economy can be maintained,” he said.
“On the plus side, the South African Rand, has shown to be far more resilient than most expected, and after a period of sell-offs and volatility, there is hope for a normalisation of the economic environment and a rally of business to restore investor confidence. This may create massive opportunities for acquisitions, and a shift in deal financing and buying patterns, to take advantage of the volatility,” he added.
According to the index, North America contributed the bulk of inbound investment into Africa in the first quarter of 2017, with investments valued at $4.1bn.
Van der Merwe said: “North American investment in Africa has traditionally been directed towards the exportation and establishment of global brands to satisfy the demand of a growing consumer market, as well as in the energy, oil & gas, healthcare and pharmaceutical sectors. Due to the opportunities the African economy presents in these sectors, this trend is likely to continue. Whether President Donald Trump’s policies will directly influence this is difficult to predict at this juncture.”
He noted that the interest displayed by bidders targeting African investments should and could be higher than the amount reflected in the Index – $6.1bn per quarter.
“There are many untapped opportunities for attracting foreign direct investment, which the South African government has acknowledged. In the 2017 budget speech by the Minister of Finance, it was indicated that the relaxation of several foreign exchange controls and tax penalties may be implemented to allow for South Africa to be more agile regarding inflows and outflows of capital, whilst still protecting its currency reserves,” he said.
“The Middle East and the EU are specific areas where Africa could substantively increase its attractiveness as an investment destination. According to the report, bidders in the Middle East invested only $7m in Africa in the first quarter of 2017 and investors from the EU spent $481m in Africa in the same time frame,” van der Merwe added.
The report shows that African outbound investment is mostly concentrated in EU countries with $625m flowing from Africa to the EU in the first quarter of 2017.
“South Africa, and Africa generally suffer the consequences of currencies with weaker buying power for outbound investment. However, due to historic ties/involvement, as well as synergies in certain sectors, and a certain sense of familiarity, Europe has in general been favoured by local-grown businesses looking to go global. If anything, Brexit may have a positive impact on the trade relationship between Britain and South Africa as Britain may become more focused on finding trade relationships outside of Europe,” van der Merwe said.