Challenging Times for M&A

Activity 

M&A activity in Africa experienced a sharp decline in 2023 when compared to 2022. Key factors which contributed to the slowdown in M&A activity in 2023 included rising inflation, the increased cost of capital and the major geopolitical events and general uncertainty affecting global markets. These factors have impacted M&A globally, with Africa being no exception.

According to AVCA numbers, private capital transactions in Africa decreased by 54.5% from a deal volume perspective when compared to 2022 and by 56.2% from a deal value perspective. The downturn in investment activity in Africa was far reaching as most asset classes were affected by it. One of the key areas of decline was the significant decrease in venture capital activity, which had previously boosted the deal values and volumes across Africa in 2022. In 2023, venture capital deals in Africa decreased by 51.27% in deal volume and by 44.23% in deal value when compared to 2022.

2021 and 2022 were standout years for private capital in Africa and the 2023 decline in activity has brought activity levels closer to pre-Covid levels.

The impacts of the slowdown were also felt in capital raising where the total value of private capital fundraising in Africa declined from US$2 billion in 2022 to US$1.2 billion in 2023.

In South Africa, some highlight transactions for 2023 included:

• Bunge's acquisition of a 50% stake in Viterra from Glencore, with Glencore taking a 15% stake in the merged Bunge entity, with an estimated deal value of US$4.1 billion;
• Tempur Sealy's acquisition of a 45% economic interest in Mattress Firm from Steinhoff International for an estimated deal value of US$4 billion; and
• The ABSA and CSI and Staff Trust black economic empowerment transaction with an estimated deal value of US$11 billion.

Legal Trends 

With the uncertainty in global markets and increased cost of capital, investors have become increasingly cautious when it comes to what deals they do and the terms of such deals. Increased caution and risk aversion have led to deals taking longer to close as due diligence and negotiations have become protracted in most cases.

The meaningful slowdown in capital deployment in African venture capital has also resulted in businesses and founders having to focus efforts on capital preservation and slowing down their burn rates. Globally there was a compression in exit multiples in 2023 and again Africa was no exception to this. Where founders did manage to raise capital, valuation discussions and negotiations were often a sticking point and in many cases businesses had to decrease their valuations in order to secure funding (ie, down rounds).

The decline in activity and increased cost of capital also saw more bridge rounds and convertible instruments being utilised in venture capital as businesses struggled to raise full funding rounds and investors opted for hybrid instruments which would give them greater downside protection in the current market conditions.

The tougher funding environment in 2023 also gave rise to more recapitalisation transactions occurring where all previous funding rounds were converted from preference shares into ordinary shares and usually heavily diluted. Such transactions result in non-funding investors losing their liquidation preference and anti-dilution protections and are usually aimed at penalising non-participating investors who do not participate in the funding round by providing the company with their pro-rata amount (often referred to as a pay-to-play mechanism).

Outlook for 2024

In the second half of 2023 inflation started cooling. The hopes are that in 2024, inflation will continue to ease and stabilise. In South Africa, the South African Reserve bank raised the repurchase rate (repo rate), being the rate at which private sector banks borrow Rands from the South African Reserve Bank, by 1.25% (from 7% to 8.25%) over the course of 2023 in order to combat inflation. This was a continuation of the rate hikes which were experienced in 2022 and in aggregate means the repo rate has increased by 4.5% since the beginning of 2022 (from 3.75% to 8.25%). The repo rate was last increased in May 2023 and the South African Reserve Bank resolved to not increase it and rather hold it steady at 8.25% in September and November of 2023. The holding steady of the repo rate has been positive and the hopes are that there will be cooling inflation and rate cuts in 2024 which would then create a more favourable environment for investment and more market and M&A activity.

The ongoing worldwide uncertainty and its economic effects will continue to have an impact on M&A transactions in Africa. We expect an upward trend of M&A transactions in 2024, especially from private capital investors, but the impact of the global uncertainty remains to be seen.

For more on the Global M&A Outlook 2024 link here