South Africa’s M&A Landscape 2024: Marked Slowdown Amidst Potential Sectoral Growth.

Global economic uncertainty is creating a cautious outlook for M&A activity in South Africa in 2024, with some bright spots in specific sectors, Image credit: Getty Images, Photo by: FangXiaNuo
Published by: Dimpho Pule & Rorisang Masenya

Mergers and Acquisitions (M&A) activity in South Africa experienced a substantial downturn in 2023, a trend likely to continue in 2024. Data from the African Private Capital Activity Report (AVCA) reveals a significant decline in private capital transactions across Africa in 2023. Deal volume dropped by 54.5% and deal value decreased by 56.2% compared to 2022. 

This slowdown aligns with the global M&A landscape and is due largely to ongoing economic headwinds, South Africa’s internal challenges, and a cautious investment climate ahead of elections. While the outlook for large-scale M&A remains muted, select industries offer targeted opportunities for growth.

Factors Affecting the M&A Landscape

Chris Green, Managing Partner at Hogan Lovells SA, identifies the key factors impacting South Africa’s M&A activity:

• Global Economic Headwinds: Inflation, rising interest rates, and geopolitical instability, particularly surrounding the Russia-Ukraine conflict, hinder robust investment.
• South Africa’s Internal Obstacles: Issues like ongoing electricity shortages (load shedding) and deteriorating logistical infrastructure add further uncertainty for investors.
• Regulatory and Political Climate: South Africa’s potential change in government following the 2024 elections and evolving regulations in sectors like mining are influencing investor sentiment.

Challenges and Countertrends

AVCA data shows a marked decline in M&A activity in Africa during 2023, on both the private capital transactions and venture capital deals side, compared to 2021 and 2022. This downturn also impacted private capital fundraising in Africa.

However, while South Africa’s M&A outlook is cautious in the short term, the country remains a strategic investment destination due to its relatively sound financial infrastructure and investor protection.

Despite a cautious short-term outlook, South African firms are poised to engage in smaller-scale acquisitions to drive growth and diversification both domestically and internationally, balancing risks across markets.

Strategic Opportunities and Sectoral Outlook

• Domestic Consolidation: Businesses may engage in smaller-scale M&A within South Africa to reinforce existing operations and market positions.
• Expansion in Africa: South African companies might seek to mitigate domestic risks by diversifying into other African markets with greater growth potential.
• Developed Market Exposure: Acquisitions in Europe and the US could provide stability and balance holdings.
• Energy: Continued regulatory simplification in the renewable energy sector has attracted significant investment in the past 24 months. This trend is likely to intensify in the near term given the ongoing energy crisis.
• Mining: While suffering recently, the sector holds substantial potential. The implementation of a modern cadastral system could revitalize investment given South Africa’s vast resources, although persistent regulatory issues remain an obstacle.
• Logistics Infrastructure: The government’s plans to partner with the private sector on infrastructural upgrades in rail, ports, and roads are a sign of potential improvement, which could positively impact the M&A environment.
• Digital Infrastructure: With its stable financial markets, South Africa remains an appealing investment destination for data centres and technology development on the continent.

Inflation, which is one of the driving factors in economic headwinds, decreased to 5.3% from 5.6% in the first quarter of 2024. The hope is this trend will continue and stabilise. In order to combat inflation SARS increased the repurchase rate (repo rate), the rate at which the private sector can borrow Rands from the South African Reserve Bank(SARS), by 1.25% moving it to 8.25% from 7% during 2023.

South Africa has made strides in regulatory reforms aimed at boosting investor confidence. Proposed amendments to the Companies Act look to address legal uncertainties, providing a more stable environment for transactions.

Though the overall outlook for large-scale M&A in South Africa in 2024 remains cautious, opportunities exist for strategic acquisitions across specific sectors. Positive government initiatives to address issues like energy and infrastructural development could lead to a more favourable investment environment over time. Investors interested in South Africa should stay up to date on the outcome of the 2024 election and assess the impact of potential regulatory changes in their target industries.

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