The political uncertainty roiling South Africa has had an adverse effect on inbound M&A volumes to the whole continent, according to Baker McKenzie’s latest cross-border M&A index. The data, which covers the second quarter of this year reveals that there were 17 inbound deals for the period, a decline of 48% on the volume reported in the same period last year as well as a 45% drop from the 31 inbound deals reported in the first quarter of this year.
The drop in the overall value of deals was even more dramatic, falling 83% on a year-on-year basis and 88% on a quarter-on-quarter basis. While the second quarter of 2016 saw $4.54 billion in transactions and the first quarter of 2017 reported $6.38 billion, this year’s second quarter saw only $780 million of inbound deals. According to Morne van der Merwe, Baker McKenzie’s Managing Partner in Johannesburg, the trend seems unlikely to reverse until South Africa’s investment climate stabilizes. Credit ratings downgrades, the increasing cost of raising capital for acquisitions and the volatility of the Rand have all suppressed deal appetite.
“Further, almost half the continent’s M&A activity flows through South Africa, so recent South African developments have had a negative knock-on effect in Africa,” he continued. “Political uncertainty in other jurisdictions on the continent, such as the current election in Kenya, has also made investors wary of African deal making in the short term, although we expect this to change once stability returns to the region.”
Outbound cross-border deal trends were more positive, with the 15 deals representing a 12% drop in volume year-on-year, but an increase of 67% from the previous quarter. At $1.52 billion in value, the second quarter’s deal volume was down 28% on the same period last year,bu almost double the value of the deals reported in the first quarter of this year. Technology and Business Services were the sectors topping the volume rankings for the quarter, whilst the Financial Services sector led the value ranking for the quarter. Technology deals came in close second, accounting for $510 million or 33% of total outbound deals from Africa.
“An increase in development in African telecoms industries, as well as the opportunities presented by a rapidly developing financial services sector, remain key drivers of outbound investment activity in Africa;” noted van der Merwe. “The growing financial services sector has also seen domestic banks make significant investments in technology, including in offshore companies.”