Global deal activity to accelerate in 2018, South African predictions dependent on political and economic environment
The easing of key economic and political risks and the emergence of positive macroeconomic deal drivers will accelerate global deal activity in 2018, reveals the third edition of the Global Transactions Forecast issued by Baker McKenzie.
Conditions in South Africa are also predicted to improve, but this will depend on political and economic conditions in the country in the next two years.
Globally, 2017 has been a period of apprehension for dealmakers and while economic growth has certainly slowed, the cliff-edge some were predicting has failed to materialize.
Following on the momentum created in the second half of 2017, The Global Transactions Forecast, developed in association with Oxford Economics, predicts a cyclical peak in 2018 for several macroeconomic and financial deal drivers, with 2018 marking the high point of the deal cycle for the world's largest transaction centres.
The forecast highlights why investors around the world are feeling increasingly confident as 2018 approaches, with appetites strengthened by positive trends such as more-buoyant world trade and economic growth, elevated equity valuations, and the prospect of cheaper financing in emerging markets.
"After a few soft patches in 2017 we have a more optimistic outlook for the global economy and dealmaking in 2018, as long as the brakes are not put any further on global free trade. We see an uplift in both M&A and IPO activity as dealmakers and investors gain greater confidence in the business prospects of acquisition targets and newly-listed businesses," said Paul Rawlinson, Baker McKenzie's global chair.
"However, it's not a done deal, with the threat of a Hard Brexit and a NAFTA collapse both still very real. Business will need to continue to make the case for liberal trade and investment frameworks."
In South Africa, the forecast shows that growing political risk and a sluggish economy contributed to a halving in total M&A in 2017 versus 2016. However, the forecast predicts that economy should improve in 2018 thanks to the impact of monetary policy easing and stronger commodity prices.
But at around $9 billion in 2019, the forecast for the peak in M&A activity in this region will be less than a third of the level seen in 2015.
Wildu du Plessis, Head of Africa at Baker McKenzie in Johannesburg notes, however, "For South Africa, there is no guarantee that the predicted upswing will come to pass. There is just too much political uncertainty. If the ANC National Conference in December does not deliver the solution that markets are hoping for, then deal flow and IPO activity will be affected and depressed. If on the other hand there is some hope of a change to the political situation, things may well indeed change for the better."
Morne van der Merwe, Managing Partner of Baker McKenzie in Johannesburg says, “Current conditions have slowed M&A growth in that international investors are reluctant to invest in South Africa due to the political and economic uncertainty. This uncertainty has caused a reduction in Foreign Direct Investment, which, in turn, hindered deal-making. Due to the downgrades and potential for further downgrades, the cost of raising capital for acquisitions has also become more expensive.
“On the positive side, a number of commentators believe that the Rand is currently undervalued. This provides entities with greater appetite for risk with opportunities to acquire South African assets cheaply. Current conditions are also enhancing deal-making in the context of divestment deals, but while this may be a good thing in the short term, there are adverse long-term consequences. The requirement to meet BEE ownership targets is also stimulating the deal-making environment. Further, there is also currently a lot of opportunity in respect of South African assets as they are comparatively cheap. However, there is a tendency for locals holding local assets to hold on to such assets. At present, locals will be less inclined to sell their local assets than foreigners.
"There are a number of assets in the mining sector that offer great value. If there is an upswing in the South African economy, as predicted, these assets may offer significant upside,” notes van der Merwe.
Baker McKenzie's previous forecast in January 2017 predicted a flat M&A market this year with a modest decline in global M&A values, from US$2.8 trillion in 2016 to US$2.5 trillion in 2017.
Baker McKenzie's global head of M&A, Michael DeFranco, said, "2017 played out as we predicted and there have been a number of positive developments in the global economy that have led to the forecast for global M&A values in 2018 to be increased from our previous forecast of US$3 trillion to US$3.2 trillion. This would represent the 3rd highest yearly deal value since 2001 and the 2nd highest since the financial crisis in 2008."
In addition to positive economic developments, underlying strategic drivers like the search for growth and yield, the use of consolidation to achieve synergies, the deployment of unspent capital, and the use of M&A to drive business model changes will aid the increase of M&A activity in 2018.
According to the report, a range of factors will cool deal activity from 2019 onwards particularly in developed markets, including higher interest rates, a cyclical easing in global trade and investment growth, and a correction in equity prices back towards fundamentals.
The forecast predicts M&A values to drop to US$2.9 trillion in 2019 and US$[2.4 trillion] in 2020. In South Africa, M&A transactions were valued at US$ 10.7 billion in 2017, this is predicted to drop to US$ 4.5 billion in 2017.
In 2018, this is predicted to rise to US$ 8.5 billion and to US$ 9.2 billion in 2019. It is forecasted that this amount will decrease to US$ 4.1 billion in 2020.
In terms of deal volume, there were 115 M&A and IPO transactions in South Africa in 2016, this is predicted to rise to 172 transactions in 2017, 273 deals are expected in 2018, rising again to 295 in 2019 before decreasing to 186 in 2020.
In the IPO market, the forecast predicts values to climb from US$187 billion in 2017 to a cyclical peak of US$290 billion in 2018, a near record-breaking number. This is a little higher than the previous cyclical peak of US$276 billion in 2014, but remains below the US$300 billion-plus raised during the previous peak in 2010.
However, the forecast does not include Saudi Aramco's proposed IPO due to uncertainty over the amount of proceeds the IPO will raise and its timing. If the deal does go through in 2018, it will be a record year for IPO listings by value.
"As anticipated in our last forecast, the IPO market has rebounded in 2017, ahead of the M&A cycle. At the global level, domestic IPOs rose to US$145 billion in 2017, up from US$92 billion in 2016, and we forecast that domestic IPO activity will continue to rise, to a peak of over US$220 billion in 2018," said Koen Vanhaerents, global head of capital markets at Baker McKenzie. "However, as equity valuations become more stretched, and borrowing costs start to rise, the value of domestic IPO proceeds may be expected to cool in subsequent years."
Similar to M&A activity, a range of factors will cool deal activity from 2019 onwards and the forecast calls for IPO values to drop to US$274 billion in 2019 and US$187 billion in 2020.
In South Africa, the value of IPO transactions was US$ 718.6 million in 2016. This amount is predicted to drop to US$ 539.1 million in 2017, before increasing to US$ 672 million in 2018 and US$ 806.9 million in 2019. In 2020, the value of IPOs in South Africa is predicted to drop to US$ 179.5 million.
M&A accelerated in the consumer, energy and basic materials sectors in 2017, bolstered by megadeals.
Given the potential for stronger global consumer spending in 2018, the report predicts even more dealmaking in the consumer sector in 2018, rising to US$633 billion, along with finance, which is forecast to reach US$616 billion.
While underperforming in 2017, the pharmaceutical and healthcare industry is positioned for higher levels of dealmaking due to long-term trends such as aging and demographics.
The technology and telecommunications industry also dropped in 2017 but several trends of embedding new technology across sectors, plus activist investment in technology firms by emerging markets such as China and Saudi Arabia, suggest that deal values will rebound in the next two years.
"The pervasive expansion of emerging technologies across industries, including foodtech, fintech, and the automotive sector, will drive M&A activity as we expect to see more cross-sector deals involving technology in the next couple of years," added DeFranco.
The technology and telecommunications industry is expected to drive the rebound in IPO activity in 2018, aided by the Chinese government's efforts to spur technology firms to go public.
With household spending remaining strong globally, consumer goods & services companies should also benefit from positive market conditions.
North America and Europe are forecast to reach cyclical peaks for M&A and IPO activity in 2018. North America M&A activity is forecast to pick up to US$1.5 trillion, a 15 percent increase over 2017, and domestic IPOs are forecast to reach an all-time high of US$78 billion in 2018, a 77 percent increase over 2017.
Europe M&A activity is forecast to reach US$856 billion, a 34 percent increase over 2017, and domestic IPOs to US$60 billion in 2018, a 58 percent increase over 2017.
Asia Pacific, Latin America, and the Middle East and Africa are forecast to reach cyclical peaks for M&A and IPO activity in 2019. Asia Pacific M&A activity is forecast to peak at US$754 billion and domestic IPOs at US$82 billion in 2019.
Latin America M&A activity is forecast to peak at US$134 billion and domestic IPOs at US$7.5 billion in 2019. Middle East and Africa M&A activity is forecast to peak at US$41 billion and domestic IPOs at US$7 billion in 2019.