DOWNGRADED: After SA’s credit rating downgrades by rating agencies S&P Global and Fitch, many business owners are wondering how this will impact on mergers and acquisitions. Picture: AFP
What does South Africa’s future hold for mergers and acquisitions activity? That’s the question many business owners are asking themselves after the credit rating downgrades by rating agencies S&P Global and Fitch.

It’s not surprising that the outlook depends on how certain events play out in the economy.

Rating agency Moody’s placed the country’s credit rating on review for a downgrade, citing the abrupt change in leadership of the major government institutions.

As a result, many executives are wondering whether 2017 will be a good year for making deals.

The logic is simple: the business of mergers and acquisitions (M&A) requires confidence in the corporate and political landscape.

But recent events have upended that wisdom. The amount of regulatory uncertainty, the barrage of policy shocks and the looming risk of an investment status downgrade seem capable of stopping the boom in takeovers.

“There’s always a disconnect between the micro and macro strategy. However, in this case, M&A can be seen a proxy for investor confidence," said Dr Martyn Davies, managing director of emerging markets and Africa at Deloitte Africa.

The first confirmed corporate casualty of the credit-ratings downgrade was consumer goods company Pioneer Foods, after the company axed a potential deal that would have created the continent's largest consumer goods company.

“Due to the sovereign debt rating downgrades in South Africa and the potential for additional downgrades, the parties have decided to discontinue negotiations at this time,” said the company.

“Immediately after the announcement of the downgrade everything stalled,” said Pioneer Foods chief executive Phil Roux.

Davies says South Africa has always been an excellent opportunity for multinationals as many investors see the country as the gateway to the rest of Africa, but right now there is a negative perception among investors.

“I think the market is depressed and the activity is relatively low because there isn’t too much certainty in the system and this is a result of political decisions,” he says.

Morne van der Merwe, managing partner at Baker McKenzie’s Johannesburg office, says almost half the continent’s M&A activity flows through the country, and unless South Africa can maintain its standing as a stable economy, the downgrades will no doubt have an adverse knock-on effect in Africa too.

“South Africa plays a significant role as an investment hub for the continent (most importantly in southern Africa), but it shares that role with other strong African economies, including Nigeria,” he says.

Mergermarket, the leading provider of M&A data, reports that in 2015, South Africa finalised 211M&A deals, but last year this figure dropped to 115. The most targeted countries by deal count were South Africa (125 deals, $20.6billion), Nigeria (19 deals, $1.6bn), Egypt (18 deals, $2bn) and Kenya (16 deals, $409m).

The highest valued deal of the year in Africa, at 5.7bn, was food service company Bid Corp being sold by its parent company Bidvest Group to Bidvest’s shareholders.

Although it’s difficult to predict what this year might hold, Baker McKenzie predicts that about 190M&A deals will be concluded by the end of the year, growing to 274 next year, and a further 295finalised deals by 2019.

Van der Merwe says the rand has proven to be far more resilient than most expected and this may create great opportunities for deal-making, financing and buying patterns to take advantage of the volatility.