Retail, consumer goods sector bucks M&A trend

"Fifteen M&As were undertaken in the South African retail sector from January 2012 to January 2013, with only one involving a local acquisition by a foreign player coming into the country. This involved Diageo's expansion into emerging markets after it announced that it was considering investing in an South African sorghum beer business (deal value of USD 36 million) to increase its foothold in South Africa and take advantage of the expanding consumer base in Africa," says Nisha Dharamlall, corporate finance leader in the Deloitte Consumer Business & Transportation team.

"During this time, many large FMCG companies continued with cross-border transactions into East and West Africa. Two of the 15 deals were by South African companies expanding their geographic bases.

"One deal was undertaken by the Pembani Remgro Infrastructure Fund, which invested a stake in Export Trading Group, a Tanzanian-based company involved in commercial farming. The second was the Tiger Brands' acquisition of a 63% stake in Dangote Flour Mills in Nigeria, a country that has consumer and food products as an M&A focal point."

Negative sentiment not a factor

However, the overall M&A trend in South Africa reflected that of Europe, according to a Deloitte Global M&A Report, where the economic environment is surrounded by negative sentiment.

"Even in the depressed European environment, M&A activity has been sustained primarily by the consumer business industry, especially the food and beverage sector and been spurred on by distressed sales, market consolidation and international expansion.

"South Africa has been unable to escape the uncertainty of the Eurozone crisis, which has undoubtedly also impacted on consumer confidence in South Africa, where the Consumer Confidence Index is at -3 and consumer spending is low, relying mainly on the provision of credit for growth.

"Although some analysts expect 2013 to continue to be challenging for consumers because of the global economic uncertainty, high local unemployment and increased inflation being driven by fuel and electricity prices, the local economy is forecast to expand by 2.6% during the year.

This compares to the 2.5% experienced during 2012 and indicates that largely, South Africa is not in a recession, nor really suffering from the negative sentiment that prevails in Europe and the US.

"However, despite the projected economic growth, other domestic challenges such as industrial action, the weakening of the rand and rising food prices will continue to create a challenging environment for consumers and businesses.

More M&As

"When these factors are taken into account, it can be expected that M&A activities in the food and beverages and retail sectors will increase. Key motivators will be a drive towards consolidation and local companies with strong balance sheets that continue to undertake transactions in the consumer goods and retail space," says Dharamlall.

"Market consolidation is also epitomised by the recently announced Nestle and Pfizer merger in the infant milk market, which saw the largest and third-largest players in the infant milk business in South Africa merging their operations."

Turning to the availability of private equity funding, Dharamlall says that private equity firms in South Africa have more than R30 billion of undrawn commitments available for deals and have identified the consumer goods and retail sector as key to their investment strategy.

"Despite the sluggish economic recovery, subdued consumer confidence and continued uncertainty regarding the future in the UK, we expect M&A activity in Africa to continue on an upward historic trend, with M&A activities on the continent being underpinned by high economic growth and the mining and energy sectors. This has increased opportunities in retail and FMCG sectors. The African continent offers investors access to one billion consumers and vast natural resource potential," concludes Dharamlall.