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— Analysis —
The proof is in the purchases. In June alone, the country's two biggest telecommunications groups admitted to interest from financial and strategic buyers following two high-profile mining and banking deals. Recent agreements are likely to push dealmaking in the country past a record 2007, where the top 10 acquisitions totaled 208.1 billion rand ($25.77 billion), an increase of 51.5% over 2006, according to Ernst & Young.
"There are a lot of quality assets here. Even if the environment is not ideal, the assets are still there. The economic fundamentals remain strong," says Loyiso Jiya, a director with Ernst & Young's Johannesburg office, who says he fields calls daily from potential investors from around the world. "We're not going to fall over tomorrow." Still, the challenges are daunting. The unemployment rate is running about 25%, and inflation this year is expected to climb to as much as 10% due to rising fuel and food prices. The country's once robust economic growth is set to slow to a comparatively weak 2% this year. Power outages sparked a 22% decline in mining output in the first quarter, and energy executives predict they will be unable to meet the country's needs in the midterm. The capital, Johannesburg, is rife with violent crime. In recent months, immigrants from nearby African nations have come under fierce attack from locals angered about the economic conditions. And lame-duck president Thabo Mbeki has drawn global criticism for helping to prop up the reign of Zimbabwean strongman Robert Mugabe. Mbeki's likely successor, African National Congress President Jacob Zuma, is facing trial on charges of corruption tied to arms deals. None of this has kept investors from striking deals. Reliance Communications Ltd., India's No. 2 telecom provider, this spring opened talks to buy South African peer MTN Group Ltd., led by CEO Phuthuma Nhleko, in a cash-and-stock approach worth up to $45 billion. Meanwhile, South African financial investor Mvelaphanda Holdings (Pty.) Ltd. and New York private equity house Och-Ziff Capital Management Group LLC have approached Pretoria-based Telkom SA Ltd. That deal would reportedly be worth R90 billion if the target hands off its Vodacom (Pty.) Ltd. venture to partner Vodafone Group plc. Turkey's Oger Telecom Ltd. earlier this year made a run at Telkom and may yet enter a bid. It's not just South Africa's phone companies that are attracting investors. In January, a group led by private equity firm First Reserve Corp. paid $420 million for 60% of Harmony Gold Mining Co. Ltd.'s uranium and gold subsidiary. Last October, the Industrial and Commercial Bank of China Ltd. shelled out 36.7 billion rand for a 20% stake in Standard Bank of South Africa Ltd., the largest-ever foreign investment in South Africa's financial sector. Boston's Bain Capital LLC last year paid R25 billion for clothing retailer Edgars Consolidated Stores Ltd., better known as Edcon. Some observers also see tentative signs of macroeconomic progress. "There hasn't been any power outages recently," says Standard Bank economist Shireen Darmalingam. "Something has been done about it, [and members of the government] are making sounds about doing something for unemployment." As domestic confidence grows, many deals feature South African buyers and sellers. In May, for example, Standard Bank paid $572 million for a 40.8% stake in life insurer Liberty Holdings Ltd. A growing number of transactions follow the Black Economic Empowerment wealth redistribution guidelines. These require businesses to have black shareholders and mandate that government awards go to businesses with a significant number of black employees. Fuel group Sasol Ltd. in March announced the biggest-ever BEE deal, with a plan to sell 10% of the company, or R26.9 billion worth of shares, to black employees and black South Africans as well as specialist empowerment investors and foundations. Telkom and Vodafone's Vodacom is also planning to sell R7.5 billion to black investors. Computer venture Fujitsu Siemens recently peddled a 25% stake in itself to a consortium of small IT firms. Looking ahead, local financial advisers see real promise from the foreign private equity pack. "If one looks at the buyout funds, they're only now waking up and smelling the coffee," says Ernst & Young's Jiya. |
Double-digit inflation and unemployment. Xenophobic attacks on immigrants. Political leaders facing trials for corruption and a lame-duck president under domestic and foreign siege. It's hardly the best environment for dealmaking, and yet South Africa's rich natural resources and lively equity market are luring investors with deep pockets and strong stomachs.
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