Merger and acquisition (M&A) activity involving foreign investment, parti- cularly in the mining and resources sectors, is expected to dominate in 2011, reports South African law firm Edward Nathan & Sonnenbergs (ENS).

ENS corporate commercial department joint head Doron Joffe says the realisation that resources will become increasingly scarce in the future is driving M&A activity involving the mining and resources sectors in South Africa.

“There is significant interest in South African resources from foreign investors from India and China, as these countries want to ensure the growth of their economies. As a result, the acquisition of resources is expected to be the main driver of M&A activity in South Africa in the years to come,” explains Joffe, who is currently working on three deals involving the acquisition of South African mining companies with operations in Africa.

He adds that South Africa is business friendly in terms of foreign investment, as there are no laws in place allowing government to block M&A deals, such as those in Canada, where the Canadian government blocked diversified miner BHP Billiton’s $39-billion bid for mining company Potash Corporation last year.

However, there are regulatory bodies in place that govern certain concerns surrounding M&A deals, such as competition and employment issues.

Joffe notes that M&A deals involving foreign investment into South African companies were valued at R43,7-billion in 2010, resulting in a 151% increase, compared with M&A activity in 2009.

“Foreign investors find South Africa attractive because the country is seen as a springboard into Africa, which has significant growth opportunities. Another contributing factor is that South Africa’s economy was not as severely affected by the global recession.

“In terms of investment in retail commodities, foreign investors are investigating South African companies that have established operations in other African countries, or present the possibility of migration into Africa,” he explains.

An example of this is US-based public multinational corporation Walmart’s take-over of South African regional management group Massmart, which is currently under review by the Competition Tribunal.

“Walmart sees Africa as an attractive market and Massmart as the vehicle to achieving entry into that market, as it has a strong base in South Africa with the ability to spread into other African countries,” explains Joffe.

Meanwhile, domestic M&A activity is expected to increase towards the second or third quarter of this year.

Domestic M&A activity has declined steadily, accounting for 66,5% of the total South African M&A activity in 2008, 51,4% in 2009 and only 49,5% in 2010.

Generally, when share prices decrease during a recession, companies with cash resources take the opportunity to buy companies affected by the weakened economy. However, Joffe explains that this did not take place during the recession, as share prices did not decrease enough, which affected the confidence of companies able to undertake acquisitions.

ENS also noted a decrease in black economic-empowerment (BEE) M&A deals in 2010.

BEE previously drove M&A activity in South Africa, with deals valued at R73-billion in 2008 steadily decreasing to R27-billion in 2010.

Joffe believes that the lack of BEE deals was influenced by unsuccessful earlier deals, as well as the uncertainty created by the recession.

“Investors, however, are revisiting BEE deals, as the current BEE model is not sustainable and people are waiting to see if a new direction concerning broad-based BEE will be implemented,” he says.

Further, he adds that cross-border investment from South Africa into other African countries will increase, as South African companies are better placed to undertake these investments because they are ideally located.

Cross-border investment is also a strategic tool, as it makes South African companies more attractive to foreign investors.

South African M&A activity, in general, excluding failed deals, increased from about R171-billion in 2009 to about R294-billion in 2010.

DealMaker Award
Meanwhile, ENS has been awarded first place in the M&A Deals category by value at the DealMakers Awards for the second consecutive year, with a total deal value of R154-billion.

Joffe attributes the company’s success to its strong and loyal client base and having the resources to handle multiple large deals at one time. “ENS has a number of transactional lawyers at its disposal in its corporate department, while the company’s competitors, although capable, have limited resources,” says Joffe.

The law firm’s four largest deals were Japanese telecommunications operator Nippon Telegraph’s acquisition of South African information technology services provider Dimension Data, valued at R22-billion, South African casino operator Gold Reef Resort’s merger with gaming company Tsogo Sun, valued at R21-billion, insurance com- pany Metropolitan Life’s R29,2-billion merger with insurance provider Momen-tum, and Walmart’s 51% acquisition of Massmart, valued at R16,8-billion.