By Ndima Marutha, Associate: Agile Capital
South Africa is grappling with a host of well-documented challenges (i.e. high interest rates, elevated inflation levels, high unemployment rates, etc.). However, times are seemingly changing, and businesses need to reconsider their strategies, reinvent themselves and focus on core parts of their operations to potentially take advantage of possible available opportunities yet to come. Mergers and Acquisitions (M&A), mainly spearheaded by Private Equity firms, is a key instrument, mainly through divestitures and management buyouts, that companies can use to position themselves for growth, focus on core operations and ultimately navigate South Africa’s competitive and challenging economic landscape.
Central to the divestiture trend among prominent South African corporates is the rise in interest rates. The South African Reserve Bank (“SARB”) raised the repurchase rate (repo rate) over the course of 2023 to levels not seen for over 20 years in an effort to combat increasing inflation. However, the recent decision by the SARB to keep the repo rate unchanged has been viewed positively, with expectations of continued cooling inflation and potential rate cuts in the near future. The repo rate cuts could create a more favorable environment for increased M&A activity and enable South African businesses to operate more effectively.
Higher interest rates are driving up shareholder required returns and in response larger diversified corporations are slowly sloughing off businesses that do not form part of core operations. While motives for divestiture vary, selling non-core assets sharpens a business’s focus by returning emphasis to core operations, improving the company’s capital structure, and ultimately increasing shareholder value and returns.
Private Equity firms can play a pivotal role in these transactions. While challenges remain, a reputable Private Equity firm can be a valuable resource that a divested company’s management team can leverage to assist the company in growing and possibly entering other verticals in its market.
Despite the current uncertainty at home and abroad, the appetite for mergers and acquisitions in South Africa remains positive. We are currently seeing a healthy appetite for M&A activity in the logistics, insurance, consumer goods and services, and renewable energy sectors. In addition, there has also been interest from international organisations who see South Africa as a ‘jumping off point’ for the rest of Africa, witnessed through recent transactions between Pioneer and Pepsi and the sale of BevCo to Varun Beverages.
Many Private Equity firms like ourselves at Agile Capital, participate in M&A transactions through traditional buyouts and buy-ins, buy-and-build platforms, and black economic empowerment transactions, through partnering with other Private Equity firms in the market or solely through Agile Capital Fund four.
In conclusion, despite South Africa’s economic challenges, the current environment presents significant opportunities for businesses to realign their strategies and focus on core operations. The stabilisation of interest rates and the resulting potential for lower rates create a favourable climate for increased M&A activity, primarily through divestitures. Private Equity firms, with their resources and expertise, are well-positioned to facilitate these transactions, thereby supporting businesses in achieving growth and enhancing shareholder value.
