Investors favour Egypt

The value of South Africa's cross border mergers and acquisitions (M&A) during the six month period to June 2000, fell to around $2bn, some 44% or $1.6m lower than the same period last year, according to the KPMG Corporate Finance M&A worldwide analysis.

The drop in South African cross-border deal-making closely tracks the international trend. The analysis estimates that world-wide deal activity is down 58% on the same period last year. Internationally, the first half of 2000 proved to be the five-year peak in M&A activity, with deal values at $1908bn. This has since dropped to $808bn so far this year.

With South Africa accounting for 65% of the total cross border deal-making for Africa, the trend for Africa closely parallels that of South Africa. South Africa is by far the top spender in the region accounting for 92% of outward investment, although the total amount spent was halved over the same half-year period last year.

Egypt takes Investment honours However, South Africa is not the top African target for inward investment in Africa - Egypt took that honour with $800m of inward investment from only six deals. South Africa attracted the most bids, with 22 so far this year but at a relatively low total of $604m.

South Africa accounted for only a third of inward investment to Africa. Overall, investment in Africa is down by 38% at the halfway mark, to $1.9bn this year from $3bn last year.

Outward investment by South African companies, especially into Africa, received a substantial boost in the 2001\2 Budget, which increased the amount available to local companies for offshore investment, from the previous R50m to R500m, and from R250m to R750m for investments into the Southern African Development Community (SADC).

For larger deals, a company can take offshore 10% of the total deal consideration (if it is more than the R500m or R750m respectively) and use its domestic balance sheet to raise offshore finance for the balance. For most deals, foreign exchange restrictions are no longer a factor.

The increased amounts have already made an impact in the larger number of deals by South Africa-bound companies into other African markets, and will continue to do so in the future. It will be particularly beneficial to capital-intensive mining and construction deals and could contribute to renewed economic growth in the SADC-region.

Sasol the bigest spender

Outward investment by South Africa dropped 48% to $1.4bn for the first half of this year from $2.9bn last year. Of the $1.4bn total, the bulk was accounted for by the $1.15bn purchase by Sasol of German petrochemical company Condea.

In comparison, in the full 12 months of 1999, there were 18 outward investments valued at $1.9bn and 37 in 1998 valued at $4.9 billion.

The Condea deal apart, of the remaining 13 outward investments, the most popular destination was Australia, with four investments. A feature is the growing number of investments into SADC: Zimbabwe (2) and Zambia (2); followed by one investment each into the United Kingdom, Canada, Malaysia, Namibia and Indonesia.

The range of sectors in which deals have taken place reflects a move away from acquisitions of pure primary producers into more service-orientated businesses such as retail, manufacturing, processed food and fisheries.

But in Africa, South African corporates are still more concentrated on acquiring primary resource businesses in sectors such as agriculture and mining. The growth of deals with Africa should not be surprising as South Africans arguably have the edge in African countries, where their experience of operating in this environment should be an advantage.

The biggest outward investments of the first six months of 2001 were: (1) By far the largest deal is Sasol's acquisition of German chemicals group Condea for $1.15 bn. The deal would increase Sasol's foreign income from 10% to 35% of total income. Condea is active in Germany, Italy, Holland and North America; (2) Pick 'n Pay Holdings acquired the 80-store Australian supermarket chain Franklins for $66m; (3) Barloworld's PPC Cement division purchased Zimbabwean cement manufacturer Portland Holdings for $54m (4) Financial services group Alexander Forbes increased the proportion of its offshore business when it acquired the UK's Alfred Blackmore Group insurance agency for $37m; (5) Bidvest acquired Australian food company John Lewis Foodservice for $36m; (6) Impala Platinum took advantage of sustained high platinum group metal prices to take control of Zimbabwe Platinum Mines in two deals, acquiring a 30% stake from the Zimbabwe owners in a $30m deal, followed by a further stake from the Australian owners for $16m.

Cautious Inward Investment

The value of inward investment, which was as recently as four years ago in relative balance with outward investment is now about a third of the value of outward investment. The general trend of declining inward investment is at least partly attributable to the perceived higher risk profile of South Africa as an emerging market.

Once again, the total of inward investment during the first six months of 2001 was low, due in part to the effect on the entire region of the ongoing uncertainty in Zimbabwe.

There were 22 inward investments, valued at $604m in the first six months of this year compared to $1,8bn in the comparative period in 2000, a dramatic fall of 67%.

By comparison, there were 26 deals in the full 12 months of 1999 totalling $650m and 41 in 1998 totalling $1.9bn.

The general trend is for lower valued investments, possibly reflecting cautiousness by investors wanting to establish a base in South Africa and gear their business locally.

Of a total 22 inward investments, six were by UK companies; four each by Australian and West European companies; four by international consortia; two by US companies, and one each from China and Malaysia.

African countries rarely invest into South Africa, or anywhere. Mauritius was the only African country, apart from South Africa, to have made an outward investment during the period under review.

The growing maturity of South Africa's economy is indicated by the high proportion of acquisitions by offshore companies of businesses in our manufacturing and services sectors. At one time, only producers of primary products were considered targets.

The biggest inward investments into South Africa in the first six months of 2001 include: (1) Italian-based Cirio SpA acquired control of local food company Del Monte Royal Holdings for $246m; (2) an international consortium acquired a 5.5% stake in Sappi for $99m; (3) Agribusiness Astral Foods, created by the unbundling of Tiger Brands poultry division, distributed shares to an international consortium of existing Tiger Brands shareholders in a deal valued at $59m; (4) In three deals, Australian-based mining company Aquarius Platinum took the following stakes in Kroondal Platinum Mines: a 27.39% stake for $46m, a 5% stake for $10.Sm and a 7.3% stake for $10.5m; (5) UK's Private Liquor Brands bought a 10% stake in Winecorp for $27 million.

Positive overall M&A performance

Although cross-border M&A is substantially lower so far this year compared to last, the same is not true when domestic MegA is added in. During the first six months of 2001 total domestic and cross-border M&A in South Africa amounted to 124 deals valued at $14.6bn compared to 183 deals valued at $7.9bn last year - an increase of 85%. It is the highest six month total since the first half of 1999. The $10.6bn acquisition of De Beers Consolidated, by Anglo American subsidiary DB Investments, ensured this increase. Of the $18.7bn total, $11bn was in the mining sector and $1.2bn in petrochemicals. Total M&A activity for Africa at $16bn likewise dramatically increased by 68% from $9.5bn in the same period last year - on the back of higher South African volumes.

The KPMG Corporate Finance M&A world-wide analysis is based on information supplied by Computasoft Research (CommScan). It claims to be the most comprehensive survey of its kind representing data on domestic and cross-border mergers, acquisitions and strategic investments completed during the year.