Mergers and acquisition (M&A) activity in Africa fell markedly in the second half of last year and was likely to remain subdued this year as the global economy remains in a perma-crisis state, a new report has found.
International law firm Herbert Smith Freehills (HSF) yesterday released its Global M&A 2022 Insights and 2023 Outlook, which studied whether the M&A market can fully absorb the current perma-crisis state, with once-in-a-generation events now erupting with disturbing frequency.
HSF said the ongoing worldwide uncertainty and its economic effects would continue to have an impact on M&A transactions in Africa, though the upward trend of M&A transactions was expected to continue, especially from private capital investors.
This comes after a marked deterioration in M&A conditions in the second half of 2022, with deal values of only $1.4 trillion, a 33% decline compared to the first half of the year, and down from the record deal values of over $4.2 trillion in 2021.
The value of global M&A averaged around $1 trillion for eight consecutive quarters from the third quarter of 2020 to the second quarter of 2022.
The report, titled “Headwinds, Tailwinds and Fog”, focused on greater protectionism and stricter enforcement of foreign direct investment regulations, global politics, portfolio realignment and how environmental, social and governance (ESG) issues had become key considerations in M&A transactions in recent years.
HSF’s head of global M&A, Gavin Davies, said 2022 has been called a tale of two halves for M&A activity, with record levels of global deal-making in the first half of the year.
But that was followed by a considerable slowdown in the second half owing to the impact of the war in Ukraine, inflationary pressures, rising interest rates, and continued political and economic uncertainty finally catching up with the market.
“So the question coming into 2023 is whether the M&A market can move forward in a perma-crisis state we are now living through. There are challenging conditions, and there is clearly a slowdown. But M&A markets aren’t closed,” Davies said.
“We are seeing a rebuilding of experience of transacting M&A within more challenging conditions. Some of the key drivers of resilient deal activity include balance sheet planning, and the continued hunt for transformational deals by strategics, the deployment of more equity by funds, the availability of private credit, and the opportunism on the part of well-positioned buyers, whether through currency arbitrage or distressed situations.
“So, here at the start of 2023, we don’t know whether the current slowdown in M&A will be short-lived or prolonged. Headwinds and tailwinds have been for some while the metaphors used for M&A climate, so we thought we needed to stick with that and add in a third weather condition representing uncertainty – fog.”
HSF’s report comes hot on the heels of Deal Leaders International, which on Monday expressed greater optimism that the M&A market would increase in 2023 and drive up foreign direct investment in the sub-Saharan African region in spite of the looming global economic recession.
According to HSF, deal volumes in Africa were closer to 2021 levels, with overall activity exceeding pre-Covid levels and seemingly on an upward trajectory.
Although there was an increase in private equity investment and activity across the continent, Africa’s share of private equity investment was decreasing and some analysts say it is below 1% of the global private equity market.
In sub-Saharan Africa, M&A transactions reached $21 billion during 2022, substantially less than 2021’s record $87.2bn, though the number of deal announcements in the region remained at similar levels to 2021, and higher than pre-Covid levels.
South Africa and Egypt continue to be the most active target nations. The third most active country in Africa by both volume and value was Nigeria, followed by Kenya.
The US was the most active inbound acquirer by volume, followed by the UK.
Materials, healthcare and financials were the most active sectors by value in 2022, with healthcare making the list because it included the largest deal of the year on the continent, being the Remgro SA Shipping Agencies Services’ acquisition of South African hospital operator Mediclinic for $4.8bn.
Renewable energy and power transactions were also very active, with deals targeting energy and power companies accounting for 12% of 2022 transactions in sub-Saharan Africa.
Other sectors such as technology, media and telecoms (TMT) also continued to be active, with IHS’s acquisition of MTN’s towers an example of a strategic TMT transaction in South Africa.
BUSINESS REPORT