Despite M&A uptick, many investors still on the fence

While merger and acquisition (M&A) activity targeting African countries increased by 74.1% compared to the US$-3.1billion announced in the second quarter, the current environment poses a threat to South Africa’s attractiveness for investors.

Gasant Orrie, Cape managing partner and director of corporate and commercial practice at Cliffe Dekker Hofmeyr (CDH), says that while there has been an uptick in terms of inward-bound M&A activity in the latter half of the year, South Africa faces several challenges amid its political and economic uncertainties.

“South Africa has several challenges that have the potential to deter investment, such as policy uncertainty in certain key sectors, the current technical recession and continued slow economic growth, concerns about corruption, and the instability of several state-owned enterprises,” says Orrie.

That said, Orrie believes that the country also has several positive factors that still provide a level of comfort for investors. Referring to CDH’s latest Doing Business in South Africa Report — an annual publication that explores the country’s commercial legal landscape — Orrie explains that the attractiveness of a destination is in part determined by the country’s legal framework, political landscape and infrastructure.

“South Africa has a robust infrastructure network including sophisticated financial, legal and telecommunications sectors, good airport transport connectivity, and a corporate governance framework that meets international best practice.

“Further, Africa as a whole is a region of abundant resources and opportunities. It has a growing labour force, increased connectivity and infrastructure, and many African markets and sectors are underdeveloped. South Africa, having one of the most developed economies in Africa, can thus be seen not only as a destination for investment itself, but also a gateway to investment in the rest of Africa.”

Orrie believes that government’s renewed commitment to certain policy regulations has positively contributed to the increase in M&A activity for the second half of the year. “The signing of the R56-billion Renewable Energy Independent Power Procurement Programme highlights government’s positive commitment to policy decisions, which has and should continue to result in an inflow of investment into the country’s energy sector.”

There have also been several positive steps taken by the legislature to encourage foreign investment in the country, he adds. “The new International Arbitration Act (IA Act), for example, came into effect on December 20 2017 and will assist South African businesses and investors in the private sector in resolving their disputes in a cost-effective and timeous manner.

“This makes South Africa an attractive venue for parties around the world to resolve their commercial disputes. The IA Act will encourage investment in South Africa, as investors in the private sector will have a secure mechanism through which their commercial interests are protected by law, which is on par with international best practice.”

However, Orrie points out that there are many investors who have adopted a “let’s wait and see” approach. “Uncertainty regarding the security of property rights and how land reform will be achieved in South Africa continues to limit near-term investment. In addition, it could ultimately lead to a more pronounced fall in investment should the final terms of land reform be particularly onerous for investors. Where South Africa lands on the issue in the upcoming months and years will be a determinative factor regarding investor confidence.

“The outcome of the 2019 National Elections, their effect on the political landscape and potential policy decisions for the next five years will also play an important role for investors who are currently sitting on the fence,” Orrie concludes. 

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