Share

Mergers and acquisitions to feel the impact of the downgrade

Johannesburg- The damage of the credit downgrade extends beyond foreign direct investment inflows and will also impact potential mergers and acquisitions going forward.

Kevin Cron, head of corporate mergers and acquisitions at Norton Rose Fulbright, explained to Fin24 that this may be because foreign investors are likely to be more cautious now that the country is rated  at sub-investment grade.

Ratings agencies Standard & Poor’s (S&P) and Fitch downgraded South Africa’s sovereign rating to junk following the Cabinet reshuffle, which saw President Jacob Zuma replacing former finance minister Pravin Gordhan with former home affairs Minister Malusi Gigaba.

READ: Gordhan axing will drag down economic growth – research

Following the reshuffle BMI Research, part of the Fitch Group Company, looked at the impact on the economic outlook. Among the concerns raised was the consequence for investment.

The research showed that less investor-friendly regulation such as the Mining Charter Amendment and the proposed Expropriation Bill would be negative.

Cron told Fin24 that the downgrade would likely cause fewer transactions than there would have been. “Crossborder M&A as far as investing in South Africa is concerned, is likely to be depressed.”

However, Cron said there are opportunities that could still arise. Investors with a “bigger risk appetite” and who take a medium to long term view might see an opportunity to get assets in South Africa, more cheaply.

“Domestically we may see more activity emanating from South African companies due to domestic factors like new BEE requirements coming out of the revised mining charter.” He added that South African companies are looking to “spread risk” by investing overseas. This is a reverse of inward investment. Overall, Cron said M&A activity would likely slow down and this will be negative.

Over the past few years M&A activity has been “fairly flat” explained Cron. A number of divestments have taken place over a number of reasons and are not necessarily linked to politics. In the mining sector, this was mainly a feature of resource prices and the economic difficulties these resource-focused countries are facing, he explained.

Further these divestments are not being balanced with an equivalent inflow of investment, and figures are not what they should be, he added.

Data from the South African Reserve Bank’s (SARB) quarterly bulletin for the last quarter of 2016 shows the country’s international investment position. The net inflow of capital in the financial account of the Balance of Payments came to R5.6bn.

READ: SA foreign direct investment jumps 38% in 2016 – Unctad

The United Nations Conference on Trade and Development (Unctad) also revealed that foreign direct investment inflows in 2016 were relatively low at $2.4bn.

Policy certainty

Cron explained that policy certainty is something investors consider. “For us to be attractive, we must have a degree of policy certainty,” he said.

Lindi Gillespie, chief executive of investment and brokerage firm, Atlas Africa, explained that a driving factor behind investors’ decision to choose a country is governance.

“Countries of focus include Namibia, Ivory Coast, Malawi. Countries of good governance, that is where the money is going,” she said.

Gillespie added that South African businesses are diversifying into other parts of Africa, like the east and the west.

Read Fin24's top stories trending on Twitter:

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.94
-0.2%
Rand - Pound
23.91
-0.1%
Rand - Euro
20.43
+0.2%
Rand - Aus dollar
12.34
+0.1%
Rand - Yen
0.13
-0.2%
Platinum
910.50
+1.5%
Palladium
1,011.50
+1.0%
Gold
2,221.35
+1.2%
Silver
24.87
+0.9%
Brent-ruolie
86.09
-0.2%
Top 40
68,346
+1.0%
All Share
74,536
+0.8%
Resource 10
57,251
+2.8%
Industrial 25
103,936
+0.6%
Financial 15
16,502
-0.1%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders