BusinessesForSale.com spoke to leading expert and founder of Arcay Capital Partners, Carl Liebenberg, about government finance for agribusiness, Black Economic Empowerment, misconceptions about mining and how deals fall apart.
*** Editors note: This article was published in 2012. For a more up to date overview of B-BBEE codes read this article.
How much activity is there in the businesses-for-sale marketplace?
We're seeing deals across all sectors - quite a lot of commodity deals, IT has been quite busy, lots of telcos... In the property sector there's been a lot of distressed companies, so there's been quite a lot of activity there to get people out of trouble or offload assets that these guys can't afford any more.
Back in 2008-2009 deals were taking 20-24 months rather than 9-12 months because there wasn't enough money around. There's quite a lot of private equity money but on the capital markets - on the equity and debt side - it's been very tough.
Ironically it's been easier to do private equity deals than doing listings or raising capital on the markets. You're not getting money from the banks or public sector, so the only real source of money is on the private equity side.
I think money is slowly coming back into the property markets. Banks are looking at property again.
There's money available for Black Economic Empowerment [BEE], which comes from quasi-governmental institutions like the development banks and development funding agencies like the IBC and the DBSA.
But the traditional banks are still very skittish, particularly for BEE transactions, because the BEE partners who want to invest generally don't have enough money, so they're borrowing, which is tough for them to do.
There's pressure on the South African government to do transactions for black economic empowerment purposes, so a BEE transaction is very easy to do now
What you're seeing is some interesting foreign entrants to the market, such as Chinese and Indian private equity. A lot of private equity firms here raised money in 2006-2007 and are sitting on balance sheets which they haven't yet deployed.
And you're also seeing strong companies which have built their balance sheets over the last two years being able to fund their own acquisitions internally. We just sold an agribusiness this morning that had access to the Land Bank, and they were kind of given an open cheque book together with their internal private equity.
An 'open cheque book' is not to be underestimated given the general dearth of credit…
I think agri is an interesting sector. And there's pressure on the South African government to do transactions for black economic empowerment purposes, so a BEE transaction is very easy to do now. We're looking at a R500m transaction with a BEE company that is borrowing the money from the state.
And we're seeing a big appetite for agri deals in Sub-Saharan Africa. Generally speaking, the assets are quite dull, in terms of the return on assets, so what people are generally looking for in agri is processing capabilty, or secondary agri, where they buy the raw material and do something with it, as that generates better margins.
So the South African government can still afford to finance BEE or farms for sale deals in the difficult economic climate?
It's actually quite ironic; there's a perception among many people that the South African government haven't been running the economy very well, but one area they have been really good is in fiscal management. The balance sheets are in their best state for 50 years.
Part of the reason is that we've had exchange controls so we haven't been able to take money offshore willy nilly. To be fair to the government, they've run a very tight ship - our borrowing is somewhere around 10-12% of GDP.
There's a very big drive in South Africa to invest in infrastructure. They spent a lot of money in the run up to the World Cup and there's quite a big allocation to spend on roads and other infrastructure.
What about telecoms infrastructure, in particular broadband?
We're still about 10 years behind the rest of the world, but having said that, we've just installed the Seacom cable, a broadband cable that comes down the east coast of Africa and into southern Africa via Mozambique. That has increased broadband rates by about 10 times, so it's had a fairly significant impact, both in terms of capacity and in pricing - our pricing has come down dramatically in the last 12 months.
What about bureaucracy and corruption, which have held back South Africa in the past?
I think a lot of people perceive Black Economic Empowerment as a barrier. We've just finished raising R100m for a small, junior gold mining company.
We tried to raise the money in the UK, Canada and Australia - usually very safe places to raise finance - but investors in those countries were very nervous about investing in South Africa. They expressed concern about rumours of corruption in the Department of Mineral resources which aren't strictly true - but that's the perception.
And there has been a lot of talk about nationalising mines by some fairly junior leftwing people in the government, which created a perception among investors abroad that there is potential for nationalisation in South Africa, which there isn't, because we're constitutionally protected from nationalisation. It isn't even on the agenda to nationalise assets, but because this guy makes so much noise it creates a bad perception and people stay away.
When we've talked to investors they often say they'd rather do business in Zambia and Ghana and places like that, where these issues don't exist in the public domain - which is ironic, because South Africa is the biggest economy in South Africa by quite a big margin, and is one of the more stable, advanced economies, and yet has this negative perception among some investors.
So any investor who can ignore such misconceptions can presumably get some good deals where those who would otherwise posed rival bids fear to tread…
Yes, exactly. That's why you see the Chinese come over because they're not worried about all that nonsense. It doesn't affect them at all. The R100m invested in the junior gold mine was from a Chinese equity firm.
How do deals go wrong in this sector?
There are a number of major factors going into a deal: price warranties, guarantees.... those would be where most problems occur.
Number two would be egos getting in the way of a deal. People take a position and become inflexible.
Whenever you're doing an acquisition or a merger - particularly a merger where you have two equals coming together - you can't have one set of egos being bruised by another one.
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