Are we a nation of navel-gazers? Have South African economic commentators become so complacent that they no longer care about disinvestment? Or is it a sign of being grown up as a country that we now take in our stride a figure that may hint at foreigners’ lack of interest in the country’s long-term investment prospects?
I have seen little coverage of official figures that show actual direct disinvestment from South Africa for the first time in more than a decade.
Last year, according to the March 2007 Reserve Bank Quarterly Bulletin, foreigners took out around R2,5-billion of direct investment, the kind that is supposed to be longer-term and more stable, from South Africa.
One reason there is no noticeable effect is that South Africa received many times that in portfolio investment, R144-billion in fact. This is investment in stocks and bonds, and is ”hot money”, the kind that flows out as fast as it flows in, managed by people who are paid to panic first and ask questions later.
While the Reserve Bank cannot breach confidentiality to identify companies investing or disinvesting, Ernst & Young puts out a handy little book each year detailing who bought and sold what in South Africa, its Mergers & Acquisitions Activity review.
One big disinvestment deal contributed to this minus figure last year. United States gold company Barrick Gold sold its 50% stake in the rich South Deep gold mine, said to contain one of the richest ore bodies in the world, to Gold Fields for R11,25-billion.
Since this was a business deal that seemed to make sense to all concerned, rather than a flight of capital, it caused no ripples. Likewise the sale of 20% held in Gold Fields by a Russian investor made no waves.
Another big disinvestment is yet to come, disguised as a BEE deal, and possibly prompted by BEE. The Holcim BEE deal, which I have written about, could add another R7-billion of disinvestment this year. Last year the Lafarge BEE deal accounted for R1,1-billion of disinvestment.
BEE deals by foreign entities do not always lead to money flowing out of the country, but when they do, they are likely to be noticed, if not lead to controversy.
In the end, we should be concerned, if not overly so, about outflows — if they continue. Foreign direct investment is notoriously lumpy and can be distorted by a few big deals.
Inflows of capital do persist, especially for acquisitions and are necessary, even if some purchases make us uncomfortable, such as the proposed Bain Capital purchase of Edcon for a hefty R25-billion.
This deal removes the company — and increasingly prickly topics such as executive remuneration — from the public eye, as private equity deals are intended to do. It will also reduce liquidity on the Johannesburg Stock Exchange when Edcon is delisted and private equity deals tend to be done by raising steep debt in the acquired company. But, in the absence of such activity, the corporate scene and South Africa’s business environment would be a dull party indeed.
Equally interesting is the amount that continues to flow out of South Africa as direct investment by South Africans in other countries. Last year, R45-billion flowed out for South Africans to buy foreign assets.
Last year, MTN hit the headlines by buying mobile telecoms company Investcom LLC for R33,5-billion. Investcom operates in Africa, Europe and the Middle East, notably Iran. This was among a number of deals that broadened the global reach of South African companies. Another notable deal was Netcare’s acquisition of the General Healthcare Group in the United Kingdom for R12,5-billion.
By comparison, the total amount of all BEE deals announced last year stood at R56-billion, according to Ernst & Young. The figure for last year is R75-billion, according to the BusinessMap Foundation, which records completed rather than announced BEE deals.
Judging by the amount of space BEE deals command in the columns of our business newspapers you would expect them to be the only game in town. And it is true that BEE deals have become ”a major driver” of mergers and acquisitions. They are also at the centre of an ambitious project to rebalance racial ownership of, and participation in, the South African economy, and so are politically imperative.
But, the Ernst & Young 2006 review shows that, according to its reading, BEE deals accounted for 20% of last year’s overall deal activity and the same percentage the year before. They have never accounted for more than 29% of all deal activity, using the Ernst & Young figures.
BEE deals are not always what they seem, with the BEE partners frequently hard-pressed to come up with the capital to sustain the deal percentages vaunted in headlines and often ending up with less than expected.
So it is not surprising then that 10 years after BEE truly moved up the national agenda, the percentage of the JSE Securities Exchange controlled by African people is still small in relation to their numbers. The latest edition of Who Owns Whom estimates groups with significant African influence control around 5% of the JSE, as opposed to foreign control of around 20%.
Whereas in 1987, Anglo American controlled, according to Who Owns Whom calculations disputed by Anglo at the time, around 60% of the JSE’s market capitalisation. Three quarters of the JSE’s market cap is now controlled by institutions such as pension funds.
To return to the table. The real story for me is in the way some new South African companies, such as MTN and Netcare, have taken the considerable risk of becoming trans-national, and the determination of South Africans to take such risks, in the face of many failed overseas expeditions over the years.
It surely can no longer be seen as mostly motivated by desire of the executives to emigrate along with their companies or have a bolt hole in another land in case South Africa self-destructs. The owner-managers of MTN are mostly African, after all.
South Africa’s companies are increasingly faced with international competition, either in our home market or abroad where they are venturing boldly. So perhaps we should take our eyes off our navels occasionally and look beyond our narrow national concerns to what is happening in the rest of the world.