The easing of key economic and political risks and the emergence of positive macroeconomic deal drivers will accelerate global deal activity in 2018, according to the third edition of the Global Transactions Forecast issued by Baker McKenzie. Deal making in Nigeria looks set to increase in 2018 and 2019 after a period of policy uncertainty which saw M&A transactions decrease.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 materialise. 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.
Wildu du Plessis, Head of Africa at Baker McKenzie in Johannesburg, noted that in Nigeria, policy and economic uncertainties had contributed to stalled dealmaking in the country. Uncertainties included a lack of access to foreign exchange, blockages to the government budget process, and low oil production that had constrained GDP growth.
“As these conditions ease in the final months of 2017 and into 2018, a rebound in M&A to around US$4 billion in both 2018 and 2019 is forecasted,” said du Plessis.
In Nigeria, M&A transactions were valued at US$ 1,202.5 million in 2016, this is predicted to drop to US$ 716.4 million in 2017. In 2018, this is predicted to rise to US$ 3,977.4 million and to US$ 3,936.1 million in 2019. There were 28 M&A transactions in 2016 and 28 are predicted again in 2017, 35 deals are expected in 2018, rising to 40 in 2019.
In South Africa, the forecast is similar. 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 $9 billion in 2019, the forecast for the peak in M&A activity in this region will be less than a third of the level seen in 2015.
Du Plessis noted, however, “For South Africa, there is no guarantee that the predicted upswing will come to pass. There is just too much political uncertainty. If the ANC National Conference in December does not deliver the solution that markets are hoping for, then deal flow and IPO activity will be affected and depressed. If on the other hand there is some hope of a change to the political situation, things may well indeed change for the better.”
Morne van der Merwe, Managing Partner of Baker McKenzie in Johannesburg said, “Current conditions in South Africa have slowed M&A growth in that international investors are reluctant to invest in South Africa due to the political and economic uncertainty. This uncertainty has caused a reduction in Foreign Direct Investment, which, in turn, hindered deal-making. Due to the downgrades and potential for further downgrades, the cost of raising capital for acquisitions has also become more expensive.”
In South Africa, M&A transactions were valued at US$ 10.7 billion in 2016, 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. In terms of deal volume, there were 115 M&A 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.
Globally, “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,” added 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.”