Cape Town - Lack of financial information has remained a key challenge for doing business in Africa in the past two years, with the inability to agree on value having been a leading cause of deal failures. This is according to a study conducted by professional services firm PricewaterhouseCoopers.
Valuation and economics leader for southern Africa at PwC, Jan Groenewald, said due to uncertainty and change in Africa and across the world, the environment for doing deals had become increasingly difficult.
“We already know that deals in emerging markets such as ours can be challenging, with PwC research indicating that 50percent of deals that enter detailed external due diligence in growth markets fail to complete,” Groenewald said.
The biennial Valuation Methodology Survey focused on technical valuation issues and sought data from practitioners to provide investors with investment analysis in African markets.
The survey was the result of the views of 74 financial analysts and corporate financiers polled by the firm.
PwC said 41 of the respondents were based in southern Africa, 15 in West Africa and 18 in East Africa.
The study found that nearly 40 percent of the 200 deals it looked into failed to complete due to a valuation mismatch.
Other factors that contributed to the failure of deals to be clinched were exchange rate fluctuations, increased geopolitical uncertainty and changing macro-economic growth expectations were the most relevant factors identified by respondents.
In southern Africa, the study found that the primary valuation approaches remained the income approach and market approach, with 64 percent of the respondents saying they preferred the income approach and 36 percent saying they opted to the market approach in valuing deals.
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Groenewald said it was not surprising that even South Africa showed more appetite for income approach.
“In the South African market, where there are relatively few listed companies that can be used as a reliable source for market multiples, it is perhaps not surprising that the income approach continues to remain the most favoured methodology,” Groenewald said.
Transactions
Last year, intelligence group Mergermarket said mergers and acquisitions in the consumer goods sector in Africa accounted for $7.7 billion (R106.8 billion) of the $20.4 billion of the total deals completed on the continent in 2015. South African companies led the way - spending $6.2 billion in 25 deals which equated to 87 percent of the region outbound M&As.
European investors led the way in acquiring African businesses, investing a combined $4.2 billion in 57 transactions in the period.