20 April 2007
Ernst & Young has released its annual review of merger and acquisition activity (M&A) in South Africa, which indicates that black economic empowerment (BEE) deals remain a dominant feature of the country’s economy.
According to the survey, values of BEE deals done during 2006 reached R56-billion, much similar to the R56.2-bllion worth of BEE deals carried out during the previous year.
“However, the number of transactions dropped from 238 in 2005 to 221 in the year under review,” says Ernst and Young in a press release issued last week.
The survey reveals that the largest BEE transaction in 2006 was by the Royal Bafokeng tribe, which converted its Impala Lease Royalty stream into 13.4% of the shares in Impala, in a deal worth R12.1-billion.
The second largest deal was the acquisition of a 46% interest in Holcim South Africa by the AfriSam Consortium, worth R6.8-billion. However, it remains to be seen if Aveng, which has a pre-emptive on the shareholding, will exercise those rights or sell to the AfriSam Consortium.
Further more, Ashraf Dada, Ernst & Young’s transaction advisory services associate director specialising in BEE points out that should the deal go through, “it will put a large, very technical, and capital expenditure-heavy asset in the hands of new shareholders who have little experience of this industry”.
Third on the list is as offer by a Mineworkers Investment Company-led consortium to fully buyout Peermont Global for almost R5.2-billion.
Dada also looked into BEE trends that emerged during 2006, stating that the Codes of Good Practice for Broad-based Black Economic Empowerment, which were gazetted in February, gave businesses more flexibility in carrying out deals.
“The codes will give companies more room to manoeuvre thanks to the conditional provision for mainstream companies to retain their BEE points if their empowerment partners sell out or their shares are ceded to funders,” he said.
“This also makes it likely that we’ll see BEE companies increasingly trading with each other to repay their debt and reduce their capital requirements.”
M&A deals to increase in 2007
The survey shows that there were a total of 729 transactions in 2006, representing a small decline from the 744 deals concluded the previous year, though combined values had increased slightly from R269-billion in 2005 to R284-billion in 2006.
Business Report stated last week that that local companies were involved in 67 M&A deals during the first quarter of 2007, with a combined value of R68-billion.
According to the paper, the largest deal in the first quarter was the $3.5-billion buyout of Edgars Consolidated Stores by US-based private equity firm Bain Capital, followed by the $2.9-billion takeover of Kazakhstan uranium producer UrAsia Energy by JSE- and Toronto- listed SXR Uranium One.
According to Ernst & Young director Dave Thayser, a better reflection of M&A activity in 2006 was the number of transactions exceeding R5-billion – 14 “mega deals” were done in 2006, almost double the 2005 figure of 8.
“The year was unusual in other ways, with private equity dominating the M&A debate, rather than BEE, which has been a central theme for several years,” he said.
The largest transaction in 2006 was the acquisition of telecoms group Investcom LLC by the MTN Group for R33.5-billion, followed by Gold Fields’ acquisition of half of the South Deep mine from Barrick Gold for R18-billion.
The third largest transaction for the year was an offer of R14.2-billion for Shoprite Holdings by a consortium led by private equity firm Brait.
Looking to prospects for M&A activity in the current year, Thayser said South Africa would take its lead from global markets.
“As a result, it is unlikely that our M&A wave will peak before that in global markets. In addition, our domestic and economic fundamentals are in place to encourage a further increase in M&A activity,” he said.
Globally, Ernst & Young’s survey shows that there were almost 28 000 M&A transactions, with a combined value of $3.7-trillion, bettering the previous record of R3.4-trillion set in 2000. The number of deals exceeding $10-billion also rose to 51, from 37 the previous year.