M&A activity in South Africa declined sharply in 2023 relative to the two preceding years, in line with global trends. The factors driving this included, amongst others, global economic headwinds particularly high inflation and high interest rates, the well-documented geopolitical uncertainty in Europe and the Middle East, ongoing structural constraints in South Africa which most notably are load-shedding and logistics infrastructure failings and, in certain sectors, regulatory and policy uncertainty.
This trend is expected to continue into 2024, with significant M&A activity in South Africa likely to be more muted than that experienced immediately following the COVID-19 pandemic. The factors mentioned above continue to affect activity and show no signs of abating in the short term. Further, South Africa and several other global economies are heading into an uncertain election cycle. For the first time since the first democratic elections in 1994, the results of the coming election are by no means certain. This alone will result in investors exercising caution, at least in the first half of the year.
Despite these challenges, we can expect South African corporates to pursue smaller add-on acquisitions to bolster growth and diversification. These are likely to take the form of both domestic acquisitions and foreign acquisitions, with corporates pursuing opportunities to expand in higher-growth markets across the African continent and to hedge their risk in more developed markets in Europe and the United States.
Regulatory Landscape and Investor Confidence
From a regulatory perspective, and in an effort to increase investor confidence, South Africa has taken a number of positive steps over the last two years. These have included changes to anti-money laundering legislation which are intended to facilitate South Africa’s removal from the Financial Action Task Force grey list. Amendments to the South African Companies Act have also been tabled with the intention of eliminating several uncertainties and structuring challenges that have arisen in company law since that Act was introduced and providing greater transaction certainty. The Johannesburg Stock Exchange has also taken steps to ease the regulatory and compliance burden placed on companies which intend to list, or are listed, on the exchange.
Let’s consider some sector-specific trends:
- Energy Sector: The energy sector, with key focus on renewable energy, has seen sustained regulatory simplification in recent years, and the effects of this have been immediate and tangible, with this sector being one of the leading lights in foreign and domestic investment over the last 24 months. We expect activity in this sector to continue and intensify as businesses and individuals alike continue their pursuit of energy security.
- Mining Sector: The South African mining sector which remains one of the key contributors to the South African economy has not enjoyed the level of investment that it should have in recent years, particularly when consideration is given to the country’s vast mineral resources and the global energy transition. This inertia has been caused, in part, by a lower commodity price cycle and infrastructure constraints, but regulatory and policy uncertainty has continued to be a major impediment to investment in this sector too. It has been well-documented that South Africa is behind global standards when it comes to the ease of doing business in our mining sector, particularly when considering our archaic cadastral system, which has resulted in extremely slow and, at times, no processing of mining right and other applications. The Government recently announced that it has selected a preferred bidder to provide and implement a world-class cadastral system. Assuming that this is done and results in a functioning and transparent mining title system, it is expected to lead to greater activity in this key sector of our economy.
- Logistics Infrastructure: Beyond energy and natural resources, we can expect significant deal activity in relation to logistics infrastructure. South Africa’s Road, rail and port infrastructure has decayed to the point where capacity is at its lowest since 1994, demonstrated by the record-low coal export volumes through the Richards Bay Coal Terminal last year. This is a significant impediment to economic growth, and the Government has recently announced steps to reverse this decline. Amongst other things, the Minister of Finance announced in this year’s budget speech that a private sector partner has already been selected to participate in the upgrade of Pier 2 at the Durban Container Terminal and that third party access to the freight rail network will be implemented by May of this year.
- Digital Infrastructure: Finally, we expect to see sustained activity and investment in digital infrastructure and other technology enabled developments.
In this respect, South Africa remains an attractive investment destination by virtue of its relatively sound financial markets and stable investor protection guardrails and, in this respect, is a logical destination for investment in data centres and other digital infrastructure on the continent.
