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South Africa: Corporate Law Update – July 2023

10 August 2023
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Click here to read our July 2023 Corporate Law Update, which provides an outline of some trending topics in South African M&A together with noteworthy regulatory and case law updates for the first half of 2023. An excerpt follows below.

Market conditions and deal flow

Navigating global disruption has been a key theme across all jurisdictions, macro and localised, resulting in a decrease in deal activity globally. Key challenges in South Africa remain consequences flowing from the Russia/ Ukraine conflict (including a perceived pro-Russian foreign policy); intensified load shedding; ongoing challenges linked to our accounts deficit, interest rates and a volatile Rand; impacts on supply-chains, logistics and pricing; muted investment in emerging markets at a time of risk aversion; and consequences flowing from being placed on the Financial Action Task Force (FATF) grey-list for not having sufficient measures to protect against anti-money laundering and terrorist financing.

We have resultantly started to see the expected spike in formal restructurings and insolvencies and the use of M&A in implementing structural changes to unlock long-term value or implement exit strategies.

Local companies have been demonstrating their resilience by enhancing their capital allocation strategies and using their heightened ability to discern their key investment areas or diversifying their revenue streams with a notable increase in cross-border transactions in Africa, Australia and Europe.

Despite the prevailing uncertainty and volatility, there is a slight change in sentiment internationally with recent developments such as the cooling of economies and interest rates; China picking up momentum post Covid; high cash balances; and indicative data that any recession will likely be shallow and already priced in (with a few exceptions still pending valuation correction).

Locally, South Africa is also showing encouraging improvements in its energy space with the deregulation of the energy sector; forecasted inflation decline (although not at the anticipated rate); the general view that economic policy volatility is unlikely even if the ANC loses its majority in the May 2024 elections; and improved global risk appetite.

The number of pipeline deals still indicates South Africa’s status as a perceived safe haven within emerging markets, particularly for well-positioned corporates actively seeking advantageous business transactions and capitalising on prospects presented by distressed circumstances, currency differentials or public-private partnerships to enhance their market positions.

We are seeing prominent players across industries looking to acquire market share from smaller, less robust competitors, or venturing into complementary sectors. The dynamic private and public sectors, experienced in operating in challenging emerging market conditions, are well-positioned to pursue avenues for growth and implement their expansion strategies.

According to the Financial Times/Statistica 2023 annual ranking, about 40% of the 345 large companies in Africa with annual revenues over ISD 1 billion are headquartered in South Africa, and 33 of Africa’s fastest growing companies are South African. This indicates that South Africa, with its robust regulatory structures, independent judiciary and investor friendly foreign direct investment regime remains a gateway to Africa notwithstanding current challenges.

African opportunities

We are seeing renewed interest in Africa, with Egypt, Nigeria and Kenya garnering significant attention from investors and a steady rise in activity levels. The continent has transformed into a burgeoning market for impact investing, with the aim of fostering social and environmental transformation. According to the Global Impact Investor Network’s annual impact investor survey, about half of all global impact investment capital is being injected into Africa.

This investment flow is being propelled by three key sectors. The healthcare industry is experiencing rapid growth and making a significant societal impact. Fintech companies, which are highly regarded in the African technology sector, are attracting more investment due to their focus on financial inclusion and the potential for higher returns. Renewable energy is also emerging as a burgeoning sector in Africa, as persistent energy shortages hinder development.

Africa’s population is set to experience rapid growth throughout this century, in stark contrast to the stagnation and decline observed in more developed regions. By 2100, the population is predicted to reach 4.3 billion, with most of the growth occurring in younger age groups.

The rapid population growth on the continent arguably makes Africa an attractive market for M&A activities. It provides opportunities for companies to access a larger consumer base, tap into the talent pool, acquire valuable resources, forge strategic partnerships, and consolidate their position in growing industries.

2023 has also seen a renewed focus and increasing momentum relating to the African Continental Free Trade Area (AfCFTA), which is set to be the world’s largest free trade area. There are now 54 countries that are signatories to the Agreement establishing the AfCFTA and 46 countries that have ratified the agreement, making them State Parties.

Protocols covering trade in goods and services, dispute settlement mechanisms, intellectual property, investment, competition policy, ecommerce, and digital trade are either now settled or making good progress. Some imminent benefits include increased trade among African countries; stimulated production through the development of regional value chains; the strengthening of African companies’ capacities to supply world markets; and a strengthened economic and commercial diplomacy.

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