Opportunities within times of Crisis: M&A amidst COVID-19

M&A deal flow is generally perceived to be cyclical. Drivers, such as favourable regulatory changes and the emergence of new technologies, can result in increased M&A activity. Conversely, depressors, such as a global financial crisis resulting in the collapse of major lending institutions or political uncertainty that affects investors' available cash flows, can result in the market's stagnation. As the world, and South Africa, stepped into a new decade, a pressing question rose on the back of the COVID-19 outbreak, its variants and government lockdowns: What impact was the global pandemic going to have on M&A deal flow in 2020?

The South African economy was already in a very fragile state at the start of 2020 following a decrease in the gross domestic product (measured by production) of 0.8% in the third quarter of 2019 and a further 1.4% decrease in the fourth quarter of 2019. Things were not looking hopeful on the M&A landscape. Nevertheless, as usual, we listed our new year's resolutions and hoped for the best.

2020 - the year of plenty. Some were still uttering this affirmation when COVID-19 unleashed a global pandemic. To give these optimists credit, plenty was correct - plenty of trouble. To make matters worse for South Africa, Moody's downgraded South Africa's ratings and the Rand sank to a record low. M&A teams grew very worried, to say the least. They carried that worry, alongside their laptops, boxes and stationery, as they left their offices to begin remote working in the midst of the country's nationwide lockdown. Many deals that were in process at the time were put on hold. Those that continued, relied on M&A teams' creativity to bring the deals to a close. The "new normal" meant M&A experts had to depend on negotiations via Zoom, electronic signatures and conducting closings via email without handshakes or the usual celebratory champagne.

But how did the pandemic actually affect deal flow? There was a noticeable decline in listed company transactions, IPOs and new listings during 2020. On the unlisted and private equity front there was some deal activity, most of it in sectors that were either not affected by the pandemic or that saw an uptick in investment or transaction opportunities as a result of the pandemic. Unfortunately, the hospitality and leisure, and tourism and liquor sectors were severely affected by the pandemic and many private equity funds and investors with stakes in these sectors had to focus on survival or recovery plans instead of pursuing new deal-making opportunities. There were, however, also some exceptional M&A opportunities created by the pandemic including investment opportunities that were cheaper-than-usual or that resulted from the increased demand for COVID-19-related medical supplies.

South Africa's converging crises of energy and COVID-19 drew increased M&A activity during 2020 in the energy sector. The energy crisis provided, and continues to provide, various investment opportunities in energy solutions that are in high demand. The release of the Risk Mitigation Independent Power Producer Procurement Programme (RMIPPPP) tender by the Department of Mineral Resources and Energy in August 2020 also contributed as a driver of M&A activity. The publication of the RMIPPPP inspired various parties to acquire and dispose of development rights in fully or partially developed projects so they could quickly submit bid responses for these projects by 22 December 2020.

2020 taught us that the M&A sector has a "strong immune system"; that its adaptable and capable of meeting each crisis with ingenuity. As noted by Jawaharlal Nehru, "Crises and deadlocks when they occur have at least this advantage, that they force us to think". It is this type of thinking that will lead us not only to the solutions 2021 will require, but to the opportunities the year holds.

ENDS

By: Elnalene Cornelius, Senior Associate in the Corporate and Commercial practice at Cliffe Dekker Hofmeyr; Tessa Brewis, director in the Corporate and Commercial practice at Cliffe Dekker Hofmeyr and James Wewege, Candidate Attorney at Cliffe Dekker Hofmeyr