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GHOST BITES (Astral | Fairvest – Dipula | Goldrush | Naspers – Prosus | PPC | Sanlam – MultiChoice | Sirius | Telkom | WeBuyCars)

The Finance Ghost
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GHOST BITES (Astral | Fairvest – Dipula | Goldrush | Naspers – Prosus | PPC | Sanlam – MultiChoice | Sirius | Telkom | WeBuyCars)

Astral: a terrific example of operating leverage (JSE: ARL)

Just a 6% increase in revenue makes all the difference

Astral has released results for the year ended September. They reflect exactly why the poultry sector is anything but a low-stress way to make a living. Revenue increased by just 6%, yet this was enough to drive a massive swing from a headline loss per share of R13.24 to HEPS of R19.20!

To understand this, you have to look at how the additional revenue drops to the bottom line. Astral generated additional revenue of R1.23 million and additional operating profit of R1.75 million! That sounds a bit daft of course, but it shows how a business with very high operating leverage benefits from a modest uptick in revenue and a decent period of cost containment – not least of all thanks to the disappearance of load shedding costs. When profitability has been marginal (or negative), you can end up with wild percentage swings at net profit level despite modest moves in revenue.

The lesson here is to be cautious of businesses with very thin profit margins. They can deliver a wild ride, thanks to an operating margin of just 3.4% in the key poultry division. It doesn’t take much volatility further up the income statement to cause chaos by the time you reach the bottom.

As a sign of just how much better things are, there’s a dividend of 520 cents per share. For now at least, the sun is shining on the poultry industry once more. Given its importance to South Africa, I’m very glad to see this!

Fairvest increases its stake in Dipula Income Fund (JSE: FTA | JSE: DIB)

Coronation is swapping Dipula exposure for Fairvest

Fairvest’s strategy is to become a retail-only REIT focusing on low-income communities in South Africa. This is a really lucrative growth segment of the market, so I don’t blame them. This means selling off properties that don’t fit that strategy and reinvesting in properties that do.

Dipula Income Fund also happens to be listed and has a portfolio of assets that fit what Fairvest is looking for. Fairvest has been invested in the group since 2014 and will now increase its shareholding to 26.3%, making it the largest shareholder in Dipula.

Is this part of a broader pathway to control? Maybe. It certainly wouldn’t be the first time that a listed fund has gobbled up another one. For now at least, they remain a non-controlling shareholder, albeit the largest individual one.

To achieve this, one of Coronation’s funds is selling a chunk of shares in Dipula to Fairvest in exchange for new shares being issued by Fairvest. Just in case Fairvest pulls the trigger on a bigger deal, Coronation has protected itself with an agterskot structure (future payment) if Fairvest makes a takeover offer before 19 November 2025 on more favourable terms than this deal.

Goldrush has released its first consolidated accounts (JSE: GRSP)

They are now long accounted for as an investment entity

A change in accounting approach at Goldrush means that the financials look very different to before. Instead of focusing on investment holding company metrics like net asset value per share, the market is likely to pay more attention to the ratios typically applied to an operating company, like earnings multiples.

As this is the first period of consolidation accounting, the income statement and balance sheet aren’t comparable to the previous period. To assess performance, you instead have to refer to management commentary, with notes like Gross Gaming Revenue up 5% for the year. Gross profit was up only 2%, so it’s been a difficult period for the group despite the reduced load shedding.

As we are seeing in a number of local businesses, the small interest rate cut hasn’t had much of an impact yet on consumer discretionary spending.

The one exception is online gaming, which saw revenue more than double year-on-year. All the gaming groups are fighting hard for market share in this space.

A reduction of debt in the group will go a long way towards driving growth for shareholders. Interim operating profit was R101 million and the interest expense was just below R70 million. The silly lease accounting standard means that lease costs are in finance costs as well (around R16 million), but even then the banks are getting a significant slice of the pie before shareholders.

The market seemed to like the change in accounting and the additional disclosure that it brings, with the share price up 17.4% on the day!

Earnings have roughly doubled at Naspers – Prosus (JSE: NPN | JSE: PRX)

The focus on profitability is paying off – literally

Naspers and Prosus have released a trading statement for the six months to September. To give you an idea of just how much things have improved, eCommerce profitability was higher in this six months than in the preceding 12 months! This is what happens when these platform businesses finally reach an inflection point where the contribution margin from additional revenue is very high. In other words, thanks to all the fixed costs, much of the additional revenue drops to the bottom line.

For this period, Naspers expects core HEPS from continuing operations to increase by between 87.2% and 93.8%. For total operations, the increase is between 99.0% and 106.0%.

The percentage is a bit different as Prosus, as the underlying exposure of Prosus excludes a couple of other assets that are further up in the structure in Naspers. At Prosus, core HEPS from continuing operations will be between 84% and 93% higher, whilst core HEPS from total operations will be between 94% and 104% higher.

Whichever way you cut it, this is excellent.

PPC wants to “awaken the giant” – but that giant is struggling to get out of bed (JSE: PPC)

Above all, they need a major boost in infrastructure spend

With new management in place for the next stage in PPC’s turnaround, the theme is “awaken the giant” – and with revenue from continuing operations down 4.2% for the six months to September, this giant is in hibernation mode. That’s because the South African economy has been sleeping for years in terms of infrastructure investment, while imported cement takes market share and causes even bigger problems for local manufacturers with loads of excess capacity.

If this giant does indeed awaken, then the rewards for shareholders could be immense. In a manufacturing business like this, even modest improvements in revenue can do wonders for net profit.

At least there are signs of strong cost management even if the revenue growth isn’t there, with EBITDA up 5.9% in South Africa and Botswana despite revenue down 0.6%. This means that EBITDA margin improved from 9.9% to 10.6%. Even better, there was a decent cash inflow and debt has reduced from R855 million to R502 million in the past 12 months.

PPC Zimbabwe struggled though, with imports driving a drop in revenue of 11.6%. EBITDA fell 6.3%, so at least the pain was mitigated through cost control. EBITDA margin has dropped from 26.1% to 24.6% in that segment, but it’s still a far more lucrative business than the South African and Botswana operations in terms of margin.

With EBITDA in Zimbabwe of R402 million vs. R394 million in South Africa and Botswana, the two geographical segments are of similar size these days.

With all said and done, group HEPS ticked up by 10% to 22 cents. They have had to survive some really tough times. If things can improve for them and if they can maintain discipline, there’s a good chance of decent returns here.

The share price is up just 3% year-to-date, although the volatility has been extreme with a 52-week high of R4.34 and a 52-week low of R2.92.

Sanlam completes the acquisition of 60% of MultiChoice’s insurance business (JSE: SLM | JSE: MCG)

Here’s something unusual: good news for MultiChoice!

Sanlam and MultiChoice couldn’t look more different right now. The former is growing beautifully, with various deals to grow its reach in emerging markets. The latter is hanging on by a thread, hoping for the Canal+ deal to close so that the (very costly) strategy of building out Showmax can be delivered.

It therefore made sense back in June when the companies announced that Sanlam would acquire a 60% stake in MultiChoice’s insurance business and enter into a long-term commercial arrangement to expand insurance and related financial service offerings into the subscriber base in Africa.

For Sanlam, this gives them further reach into important markets. For MultiChoice, this gives them R1.2 billion in cash and potentially another R1.5 billion based on earn-outs measured at 31 December 2026. It’s quite rare for deals to achieve a full earn-out, so just manage your expectations there.

Watch the dilution at Sirius Real Estate (JSE: SRE)

The timing of equity raises vs. deployment of capital makes a difference

Sirius Real Estate managed to grow funds from operations by 14.5% for the six months to September. That’s clearly a great outcome. The trouble is that funds from operations per share fell by 5.5%, thanks to many more shares being in issue after capital raises in November 2023 and July 2024.

This is what happens when there’s a lag between raising and deployment of capital, which is why it’s quite rare to see funds raising capital for a future acquisition strategy rather than specified deals that will only close when the capital raise is completed.

It’s less of an issue over a longer time period, but it does cause near-term irritations like an increase of just 2% in the dividend per share.

With a loan-to-value ratio of 30.5% (down from 33.9% at March 2024) and a free cash balance of nearly €300 million, Sirius has to manage the cash drag here – the negative impact on shareholder returns of sitting on a lazy balance sheet. The solution of course is to deploy capital into the right opportunities.

Telkom’s cost initiatives are paying off (JSE: TKG)

In this case, adjusted EBITDA is the right metric to look at

I’m always wary of management teams using “adjusted EBITDA” to tell their story. This metric gets heavily abused by US tech companies who like to hide loads of stock-based compensation in the adjustments, pretending that paying employees with shares isn’t a real cost. Thankfully, South African management teams haven’t adopted a culture of nonsense around adjusted EBITDA, but you still have to be careful.

In the case of Telkom’s numbers for the six months to September, the use of adjusted EBITDA is more than reasonable. They’ve incurred R160 million in restructuring costs and a massive R618 million in derecognition losses for the Telkom Retirement Fund. Without adjusting for these once-offs, group EBITDA is just 2.1% higher and in line with revenue growth. With adjustments, group EBITDA is actually up 18.3%, thanks to the benefits of Telkom’s cost control coming to the fore.

The gap between adjusted EBITDA and free cash flow is huge though, so that’s something to be careful of. Adjusted EBITDA was R5.6 billion, but free cash flow was only R768 million. The telco sector is incredibly good at eating up cash flow for capex, which is part of why returns haven’t been great historically. It’s worth highlighting that capex from continuing operations fell 17.9% year-on-year, so the conversion of revenue into free cash flow is improving. This becomes even clearer when you consider that the comparable period was negative free cash flow of R478 million, so there’s a R1.25 billion positive swing at play here!

The free cash flow statement does a great job of showing the improvement:

WeBuyCars signs off on a year full of accounting distortions – and decent growth in sales (JSE: WBC)

With the listing and share issue out the way, next year should be simpler

WeBuyCars has released results for the year ended September. They come with important adjustments, as you can’t judge the performance of the underlying business by including things like R45 million in listing costs and a loss on a call option derivative of R426.5 million after those call options were cancelled.

Instead, the focus should be on revenue growth (16.5%) and core headline earnings, up 23.4%. The core HEPS metric is less exciting at 9.9% growth, as many new shares were issued as part of the listing. The group hasn’t been able to deploy the capital in a meaningful way yet. To be fair to management, the capital raising plan was driven more by Transaction Capital’s needs than the exact timing of cash requirements at WeBuyCars.

In my view, the area that does deserve some attention from shareholders (like me) is working capital. The number of cars bought increased by 17.8% and cars sold increased by 16.4%, so the expansion of the footprint naturally led to more cars on the book and thus the absorption of working capital i.e. investment in inventory. Net cash generated from operating activities increased by only 1.6%.

During a period of expansion, expecting the group to be a cash cow is unreasonable. Still, it’s worth keeping an eye on this metric, along with comments related to concepts like inventory turn – how quickly the inventory is sold. Inventory turn improved year-on-year and gross margins were maintained, so that’s good enough for me.

A successful expansion should hopefully improve the HEPS view as well, as the cash raised in the listing can be deployed in such a way as to drive additional earnings.

Despite the investment in the footprint, a final dividend of 25 cents per share (25% of earnings for the second half of the year) has been declared.

Although I’m nervous about how hard the share price has run this year, I also believe in the long-term story of this business and hence I’m not selling.

Nibbles:

  • Director dealings:
    • Christo Wiese hasn’t wasted any time in buying up Brait (JSE: BAT) shares after the release of results, with purchases worth R14.6 million.
    • A director of a major subsidiary of Woolworths (JSE: WHL) sold shares worth just over R2 million.
    • The CFO of Exemplar REITail (JSE: EXP) bought shares worth R854k and the company secretary bought shares worth R196k.
    • A director of BHP (JSE: BHG) has bought shares worth A$40.38k.
    • A director of Brimstone (JSE: BRT) bought shares worth R51.5k.
  • Crookes Brothers (JSE: CKS) isn’t the most liquid stock around, so their trading statement only gets mentioned in the Nibbles on an otherwise busy day. HEPS is down 30% for the six months to September, attributable to the discontinuation of the deciduous segment and the timing of certain agricultural expenses this year vs. the previous season.
  • Afine Investments (JSE: AFI) is also firmly in the illiquid bucket, so the release of results for the six months to August only gets a passing mention. Distributable earnings increased 8% and HEPS was up 7.2%, yet the dividend per share fell 0.5%.
  • Efora Energy (JSE: EEL) released a trading statement dealing with the six months ended August. The company expects a headline loss per share of between 1.47 cents and 1.61 cents, significantly worse than the loss of 0.74 cents in the comparable period.
  • Sable Exploration and Mining (JSE: SXM) released results for the six months to August. The company doesn’t make a cent of revenue as they are in the exploration phase. The loss for the period was R5 million and the cash balance is just R600k. With a lack of funding from joint venture partner IPace, there are major question marks around whether Sable is a going concern.
  • If you are a BHP (JSE: BHG) shareholder or you are interested in copper, then you’ll want to check out the presentation that has been made available from a site tour for investors. You can find it here in all its 141 page glory.
  • In the extremely unlikely event that you are a shareholder in obscure property group Globe Trade Centre (JSE: GTC), be aware that they have entered into a deal to acquire a residential portfolio in Germany for EUR 448 million.

How SA investors can hedge against hackers

Satrix
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How SA investors can hedge against hackers

Recent Southern African Fraud Prevention Service statistics paint a concerning picture, reporting a 32% increase in fraud incidents and a staggering 54% rise in impersonation fraud victims compared to 2023. Although October may have been Cybersecurity Month, the reality is that investors need to remain vigilant every month against the rising tide of digital fraud.

René Basson, Head of Brand at Satrix, warns, “The digital landscape has become a hunting ground for sophisticated scammers. They’re not just after your personal information; they’re targeting your hard-earned investments. Globally, we’re seeing increasingly clever tactics, from fake investment platforms to impersonation of financial advisers on social media. Investors must arm themselves with knowledge and exercise extreme caution, especially when encountering investment opportunities online.”

Social media is a double-edged sword for investors

Basson says that while social media platforms have become valuable resources for investment tips and financial news, they’ve also opened new avenues for fraudsters. “Social media is well and truly integrated into our daily lives. However, investors need to stay alert, considering the increasing number of scammers taking to social media. Often, the scams are so believable it’s easy to be deceived.”

The Association for Savings and Investment South Africa (ASISA) also recently warned that investment companies have seen increased fraud via social media channels. “Fraudsters have even taken to imitating key personnel by using their profile photos and company logos. If you receive a request for financial assistance from a family member or friend via social media, contact that person directly to ensure they are the person you’re communicating with,” adds Basson.

Protecting your digital financial footprint

Basson offers these critical tips to help South African investors safeguard their investments and personal information:

  • Strengthen Your Passwords: Strong passwords are non-negotiable. Use at least 10 characters comprising a combination of upper and lowercase letters and special characters such as & or @. Use different passwords for different investment websites.
  • Embrace Two-Factor Authentication: Two-factor authentication offers additional protection. A thief would need both your devices (cell phone and laptop) to access your account.
  • Keep Software Updated: Investors should regularly update and install anti-virus software on all their devices.
  • Avoid Public Wi-Fi for Financial Transactions: Never use public Wi-Fi to perform financial transactions.

Timeless investment principles in the digital age

Basson emphasises the importance of adhering to fundamental investment principles when evaluating investment opportunities online. “As always, there are timeless truths regarding investing, and they apply equally to social media. She says investors should keep the following in mind when considering investment-related content on social media:

  • Understand What You’re Investing In: If you can’t articulate it, don’t invest in it. Does the investment suit your risk profile? Will you have to tie your money up for a certain period, and if you do, for how long? Who is offering the investment, and is it regulated? The FSCA website lists all entities registered as authorised financial product providers.
  • Research and Ask Questions: Review their website after confirming that the company is authorised to sell the product. Do they provide contact details, and are they transparent about providing information on the company and its investment professionals? A Google search may also highlight the company’s incidents.
  • Don’t Be Pressured into Investing: Take your time to read through everything, understand the investment, read the fine print, and understand how the investment will fit into your overall portfolio. Only invest when you feel ready. Someone pressuring you into investing or providing your details is a warning sign. Scammers often use this tactic.
  • Trust Your Intuition: Trust your instincts if they tell you something about the social media post or investment isn’t right. Get advice from an authorised financial adviser before proceeding with the investment.
  • If It Sounds Too Good to Be True, Beware: Promises of high returns are warning flags – especially when markets are struggling – including promises of returns within a short period.

Verifying legitimate investment platforms

Basson cautions investors to be particularly careful when interacting with investment firms online. “At Satrix, for example, we operate a DIY platform. We never initiate contact about investments or request personal details via phone, SMS, or WhatsApp. If someone claiming to be from Satrix does this, it’s a scam.”

She advises investors to double-check they’re on investment companies’ official social media pages before engaging or sharing any information. Investors can do this by visiting the company’s official website and following links to their verified social media accounts.

What to do if you’ve been scammed

Basson advises investors who have fallen victim to an investment scam to report the incident to the police immediately and alert their bank. Quick action can sometimes mitigate the damage.”

“Satrix is committed to empowering South Africans to take control of their financial future by making investing as widely accessible and secure as possible. So, take the time to review your online investment practices and strengthen your digital defences. Your financial future may depend on it,” concludes Basson.

Disclaimer

Satrix Investments (Pty) Ltd is an approved FSP in terms of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. Consult your Financial Adviser before making an investment decision. Satrix Managers is a registered Manager in terms of the Collective Investment Schemes Control Act, 2002.

While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSPs, their shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaim all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information. 

For more information, visit https://satrix.co.za/products

A version of this article was first published here.

GHOST BITES (Barloworld | Clientèle | Novus – Mustek | Trematon)

The Finance Ghost
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GHOST BITES (Barloworld | Clientèle | Novus – Mustek | Trematon)

Barloworld is struggling – and the CEO is part of a plan to take it private (JSE: BAW)

This very quickly becomes a dangerous corporate governance situation

Usually, shareholders sleep at night knowing that the CEO of the company they have invested in is working day and night to try and grow the value of the share price. When the CEO is potentially looking to make an offer for those shares, the incentive to increase the value suddenly disappears. In fact, the incentive is arguably the exact opposite!

Now, this isn’t to say that it is never appropriate for a CEO to lead a consortium to take a company private, or that this is an outcome that we don’t want to see in the markets. It’s certainly a sensitive situation though and one that needs to be carefully managed. Nobody at Barloworld wants to see a similar situation to the blow-up we saw at Ascendis this year. The independent board at Barloworld has made an explicit statement that “sufficient safeguards” have been put in place in this regard.

The inherent conflict of interest isn’t helped by the recent performance, with a trading statement for the year ended September noting a drop in HEPS from continuing operations of 10.7% to 12.5%. Barloworld is a cyclical business and has some tricky exposures to manage, but it’s still not a great look right now.

Of course, if a massive offer comes through for shareholders, then nobody will be upset. The company is in negotiations with a consortium that includes Dominic Sewela (the current CEO) and Gulf Falcon Holding, part of a Saudi Arabian conglomerate that already has an effective 18.9% in Barloworld.

Even though this is only a potential offer at this stage, the share price is up 6% in anticipation.

Clientèle releases the circular for the Emerald Life acquisition (JSE: CLI)

There’s a lot of private equity thinking going on here

Clientèle wants to acquire 100% of Emerald Life, a micro-insurer focused on funeral insurance products. With 380 permanent employees, 3,500 independent sales advisors and an embedded value of R600 million, Emerald is a sizable business in the mass market segment.

Clientèle wants to create preference shares to fund the deal. They are priced at 69% of prime. It’s quite common to see pricing of 73% of prime, reflecting the tax differences between a preference dividend and interest. Pricing at 69% of prime means that in reality, this is a finance raise at below prime. Investec is subscribing for R600 million worth of these preference shares if the deal goes ahead.

It’s no coincidence that the embedded value of Emerald Life is the same as the value of the preference shares. The deal price has been agreed as a base consideration of R597.5 million, plus various smaller adjustments and a potential agterskot amount (conditional payment) of R50 million. The agterskot is based on the number of defined new funeral policies written and premiums collected, at a rate of R312.50 per policy. I do appreciate seeing such a clearly defined conditional payout.

Emerald Life managed profit after tax of R50.2 million for the year ended February 2024. The preference shares priced at 69% of prime (i.e. 7.935%) carry an annual financing cost of R47.6 million. This deal is therefore accretive to earnings, but with little room for error, especially if interest rates stay stubbornly high.

The preference shares are redeemable after five years. They can potentially be extended for a further five years.

This is effectively a highly leveraged deal in which Clientèle is paying a full price for Emerald Life in the hope that they can lock in a return above the preference share funding cost and therefore turbocharge the return on equity for shareholders. This is classic private equity thinking, which comes with plenty of risk. They must be feeling confident of what Emerald can achieve.

Novus swings for Mustek with a mandatory offer (JSE: NVS | JSE: MST)

This isn’t a delisting of Mustek – at least not at this stage

In takeover law, when a shareholder and its concert parties move through the 35% ownership threshold of a listed company, they need to then make an offer to all the other shareholders. This is totally different to a scheme of arrangement, which is an expropriation mechanism where all shareholders are forced to sell their shares if the scheme meets the required approval. In a mandatory offer, the “mandatory” description refers to the offeror being forced to make the offer, not to the offerees being forced to accept it.

The price on the table is R13 per Mustek share, or R7 cash plus 1 Novus share, or no cash and 2 Novus shares. Novus is currently trading at R7.810, so there’s a bit of a deal sweetener there for Mustek shareholders who are happy to swap for Novus shares.

Mustek was trading at R13.70 on Thursday before the announcement came out. It closed at R14.71 on Friday as the market priced in the Novus share sweetener.

Holders of 20.29% in Mustek, including key executives, have given undertakings that they will not accept the offer.

The percentage holding that Novus will end up with will depend on how many Mustek shareholders are willing to accept the offer. Although there’s no indication right now that Novus could go all the way and try take Mustek private, the market will certainly consider that possibility when valuing Mustek going forward.

We need to wait for full details from Trematon (JSE: TMT)

The trading statement leads to more questions than answers

Trematon is an investment holding company that has seen a busy period of corporate actions, including important asset disposals. This always leads to all kinds of accounting distortions. Also, as an investment holding company, measures like HEPS aren’t as helpful as intrinsic net asset value (INAV) per share, which speaks to the value of the underlying investments.

A trading statement for the year ended August suggests that INAV is down between 18% and 20% year-on-year. In the interim results, it was down 7%, attributed to a distribution paid to shareholders. That will be part of why the full-year INAV is lower, but it doesn’t explain the full percentage move.

We therefore have to wait for the detailed numbers to understand this drop, as I wouldn’t draw conclusions just based on the percentage move. Those details are due for release on 29 November.

Nibbles:

  • Director dealings:
    • A director of WBHO (JSE: WBO) sold shares worth R6.2 million.
    • An associate of a director of Sea Harvest (JSE: SHG) acquired shares worth R31.8k.
  • Richemont (JSE: CFR) released its interim results on 8 November and I covered them at that stage in Ghost Bites. Those who want to dig deeper can now refer to the interim report which has been published.
  • Lesaka Technologies (JSE: LSK) shareholders may be interested to know that the company is moving ahead with an employee share ownership plan (ESOP). This can become expensive for listed companies, but can also be a useful staff retention and incentivisation mechanism when correctly structured and managed. Importantly, given the recent acquisitions by the group, staff of those companies will also qualify for this plan.
  • The JSE has censured Thabi Leoka after she was unable to prove her claim that she has a PhD in Economics from the London School of Economics and Political Science. This results in a fine of R500,000 and a disqualification from holding the office of a director for five years. She previously served as a non-executive director of Remgro (JSE: REM), Netcare (JSE: NTC) and Anglo American Platinum (JSE: AMS). Clearly, the quality of background checks done by listed companies needs to improve.
  • The Brazilian court has ruled that there is no criminal liability for the Samarco Dam failure, as the evidence did not support a causal link between the companies and the way in which the dam failed. This is relevant to BHP (JSE: BHG), as the group also recently settled the civil claims.

In loving memory of the internet

Dominique Olivier
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In loving memory of the internet

With bots on the rise, algorithms controlling what we see and machine-written content filling in the cracks, is there any space left on the internet for humanity?

While scrolling along social media this week, I was confronted with a number of sponsored ads from a certain local used car marketplace. Although the campaign featured a variety of images (I saw at least two different ads, each with a unique image), the gist was the same: each image featured a “candid” image of a car that had been scrawled on with marker, as well as the doe-eyed child/children responsible. 

I wish I could tell you what the tagline for the campaign was, but I honestly don’t think I read it – I was too distracted by the eerie quality of the images, which had the uncanny “too perfect” giveaway of something AI-generated. In one of the images, two little redheaded girls stand in front of a white sedan they have supposedly drawn on, their expressionless yet perfectly beautiful faces looking straight back at me. To their left, a retriever-type dog with shiny golden fur sits and stares with the same blank expression. 

Gentle reader, I am not for a moment suggesting that this is the first time I’ve encountered AI-generated images in ads. I’ve recognised AI images (and writing!) in ads for quite some time now – just never this obviously, and never by such a big-name company. This particular occurrence stopped me in my tracks because of how obviously fake it was, as if no effort at all had been made to hide its origins. Surely, I thought, the comments on this ad must be full of people who are just as shocked by this creative choice as I am. 

Instead, I found comment after generic comment – “love this!”, “so cute!” – etc, as well as a flurry of stickers and emojis. The ad had been shared three times, and amassed over 87 likes. 

At first I was confused by this – could people not recognise that this wasn’t a real image they were responding to, or did they not care? But then I realised that none of the responses in the comments felt particularly human either. They were all generically positive, and none of them spoke to the image or what it contained directly.

A computer-generated image of fake humans, being responded to by a crowd of fake humans, in the hope that real humans will buy something. Welcome to the internet in 2024.

Is anybody out there?

The Dead Internet Theory is an online conspiracy theory that claims that the internet as we know it has largely been taken over by bots and algorithm-driven content, leaving only a shell of human interaction behind. According to believers of this theory, this shift wasn’t accidental but part of a calculated effort to fill the web with automated content, quietly nudging all of us along pre-determined thoughts and ideals while crowding out genuine human voices and opinions. 

Some suggest that these bots – crafted to influence algorithms and pump up search rankings – are being wielded by government agencies to shape public opinion, making our online world a little less real and a lot more controlled. Others believe that big corporates are in charge, and that every step we take online is on a guided path towards an eventual purchase. The supposed “death” of the Internet is believed to have happened in either 2016 or 2017. If that’s true, that would mean that we’ve been interacting mostly with bots and curated content for years. 

Of course, it’s vital to acknowledge that this is a conspiracy theory – with extra emphasis on the “theory” part. In a way, the fact that you are reading this article right now, which was researched and written by a flesh-and-blood human being, kind of dispels the idea that the internet is dead. Here I am, adding living content to it as you read. So maybe the internet isn’t completely kaput – but that doesn’t mean that it’s flourishing, either.

What makes the Dead Internet Theory so compelling is that there definitely are some measurable changes in online behaviour, like a rise in bot traffic and fake profiles. Here’s one of my favourite examples: earlier this year, a video was posted on X of a Kazakhstani anchorwoman reading a news report. The poster jokingly compared the sound of the Kazakh language to “a diesel engine trying to start in winter”. The post garnered 24,000 likes and more than 2000 reshares. This would have been normal, if not for the fact that the video was mistakenly uploaded with no audio, therefore rendering the joke completely inaccessible. Does that seem like the kind of thing that 24,000 human beings would click the like button for, or are we seeing evidence of bot-driven traffic right in front of our eyes?

What fascinates me the most is that the predicted “death” of the internet occurred half a decade before the mainstream adoption of AI text and image generators. A recent Europol report estimated that by 2026, as much as 90% of the content on the internet may be AI generated. So is the Dead Internet Theory really a conspiracy theory, or rather the ringing of a warning bell?

They do not come in peace

So a few ad agencies are using bots to boost engagement on their social media posts. So what, right?

Actually, what I saw on social media is just a small symptom of a much larger sickness. One potential outcome of an overabundance of bot behaviour is what’s called an inversion. This is a term first coined by YouTube engineers to describe a scenario where their traffic monitoring systems would begin to mistake bots for real users, and vice versa. In an inversion scenario, bot content would be labelled as real, while human content would be marked as suspicious and ultimately blocked.

While the likelihood of such an inversion happening might be a bit exaggerated, the underlying concern points to a larger truth about how online interactions have become so distorted. It’s a bit unsettling to think that we could soon be navigating a digital world where we can’t even tell who’s real anymore.

The bots aren’t all of the friendly, social-media-commenting variety either. An Imperva report from 2021 found that nearly 25% of all online traffic that year was generated by “bad bots.” These are the bots that aren’t just harmlessly lurking in the background but are actively working to manipulate and undermine the internet. They’re responsible for everything from scraping websites for content, harvesting personal and financial data, and running fraud schemes, to creating fake accounts and generating spam. They’re essentially eating the internet – and their hunger never stops. 

Humanity, beware

I’ve been wandering around the internet like it’s my personal library since I was a teenager. Even in the span of a decade and a half, I can confirm that the place feels distinctly different. It’s not just the eerie presence of AI and bots online that’s unsettling; it’s the fact that they might be subtly altering how we, the humans, behave. When every interaction feels curated by algorithms or influenced by faceless bots, how much of what we do online is genuinely our own?

Charlie Warzel, a journalist for The New York Times, highlighted the phenomenon of “context collapse”, which is what happens when random events or fleeting moments are intentionally made to seem like huge cultural moments online, sparking mass conversation, all while masking the real significance — or lack thereof. Everyone’s talking about it, but does anyone really know why?

The big digital platforms don’t just create space for these cycles of emotion and conversation, they actively encourage them. They prompt us to react on impulse, to respond the same way every time to the same types of content. And in doing so, it’s almost as if we’re becoming part of the machine; a cog in the ever-turning wheel of predictable, click-driven responses. Which begs the question: are we truly still in control, or have we become just another predictable part of the system?

About the author: Dominique Olivier

Dominique Olivier is the founder of human.writer, where she uses her love of storytelling and ideation to help brands solve problems.

She is a weekly columnist in Ghost Mail and collaborates with The Finance Ghost on Ghost Mail Weekender, a Sunday publication designed to help you be more interesting.

Dominique can be reached on LinkedIn here.

GHOST BITES (Blue Label | Gold Fields | MTN | Sanlam | Stefanutti Stocks | Telkom)

The Finance Ghost
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GHOST BITES (Blue Label | Gold Fields | MTN | Sanlam | Stefanutti Stocks | Telkom)

Blue Label dives even deeper into Cell C (JSE: BLU)

In this case, the adjustment seems reasonable

Blue Label has agreed to take Gramercy SA Telecom Holdings out of Cell C. This takes the form of the purchase of Gramercy’s 6.09% equity stake in Cell C for R6 million, as well as a claim (money owed by Cell C to Gramercy) at its face value of R450 million. The deals have been structured separately i.e. they aren’t inter-conditional, which is unusual.

Essentially, Blue Label is showing even more conviction around the future of Cell C, getting rid of a potentially problematic debt claim that was payable by March 2026, while locking in a greater shareholding.

I was a little surprised to see that the claim is being bought by Blue Label at face value (rather than at a discount), as Gramercy is swapping credit risk exposure to Cell C for exposure further up the chain at Blue Label. Perhaps the focus was more on obtaining the additional equity exposure in Cell C. It’s also possible that the underlying security package on the debt meant that Blue Label was the ultimate exposure anyway.

As you need a PhD in Financial Accounting to understand the Blue Label accounts, it’s hard for me to really have a view on what Cell C is worth or whether they got this for a steal. Blue Label’s share price is up 39% this year and 4% over 3 years, so it’s a stock that traders tend to love and investors mostly avoid.

Gold Fields has some positive momentum, but the year-on-year numbers aren’t as strong (JSE: GFI)

Always be sure of which percentage movements you are looking at

The highlights section of the latest Gold Fields quarterly update focuses on the quarter-on-quarter moves i.e. the three months to September vs. the three months to June. All metrics look good on that basis, with attributable production up 12%, all-in sustaining costs down 3% and net debt down by $30 million.

If you look at the year-on-year numbers though, it tells quite a different story. Even if we just consider continuing operations, attributable gold production was down 3%. All-in sustaining costs jumped 22.7% for continuing operations. Thankfully, gold prices are 29.6% higher than a year ago, so the economics still work.

Full-year guidance is unchanged, although they expect attributable production to be at the low end of guidance.

And yes, in case you are wondering, the group is still having to carefully navigate the capture and relocation of chinchillas at Salares Norte!

MTN continues to be whacked by currency depreciation in Africa (JSE: MTN)

Nigeria now has a lower EBITDA margin than South Africa

MTN has released a quarterly update for the period ended September. As you likely know by now, the theme is one of growth in Africa being ruined by currency depreciation, leading to such disappointing outcomes at group level that MTN had to extend its B-BBEE structure just to avoid it maturing with little or no value.

There’s no sign of this situation improving. The gap between reported growth and constant currency growth is immense. For example, voice revenue was up 1% in constant currency and down 31.3% as reported. Data revenue was down 15.3% as reported and up 21.3% in constant currency. Fintech revenue was at least in the green overall, up 8.5% as reported and 28.9% in constant currency.

So although there is some underlying growth in the business (like active data subscribers up 7.4%), it’s just not enough to offset the currency depreciation. Also, don’t be fooled by those constant currency growth rates – there are some high inflation territories, which is exactly why the currencies are depreciating over time.

But what choice do they have but to chase growth elsewhere? MTN South Africa could only grow EBITDA by 2.6% in this quarter, with voice revenue down 5.5% (no surprise there) and fintech revenue as the highlight with growth of 61.8% (also not a surprise).

Looking at the year-to-date performance now that we have three quarters of data, group EBITDA margin in Nigeria took such a knock (15.5 percentage points!) that it is now below South Africa. It’s truly a mess, as the operating risks are much higher in Nigeria and hence that business needs to be more lucrative on a margin basis to justify the exposure. Nigeria is now on an EBITDA margin of 36.2%, just below South Africa at 36.3%. For reference, Ghana is 55.8% and Uganda 51.7%.

Dividend guidance of 330 cents per share for FY24 is unchanged heading into the fourth quarter.

The good times continue at Sanlam (JSE: SLM)

Double-digit growth is the order of the day

Sanlam has released an update covering the nine months to September. The momentum in the interim period has continued into the third quarter, with a 15% increase in the net result from financial services for the nine-month period. As the icing on the cake, strong investment returns on the shareholder capital portfolio took the increase in net operational earnings up to 17%.

There’s strong strategic focus at the moment on integrating Assupol into the group’s operations. This R6.6 billion acquisition gives Sanlam strong reach into an important part of the market. There are various other corporate actions either underway or recently finalised, as they never sit still over at Sanlam.

In case you’re wondering, the two-pot system has seen withdrawals of R2.5 billion from retirement savings at Sanlam.

On a strong dividend yield and with these kind of growth numbers, Sanlam is one of those stocks on the JSE that makes it easy to sleep at night for its shareholders.

Stefanutti Stocks is profitable (JSE: SSK)

And not just in continuing operations

The construction sector is a wild place. Get your timing right on the broken stories and you can make incredible amounts of money. Over 3 years for example, Stefanutti Stocks is up more than 800%!

Recoveries from the brink of disaster are extremely risky. As you know by now, more risk can mean more reward.

A trading statement for the six months to August reveals that interim numbers have swung into the green. Looking at HEPS from continuing operations, the loss of 11.67 cents in the comparable period is now a distant memory, with an expected range for this period of between 27.42 cents and 29.76 cents.

If we look at total operations (i.e. including those earmarked for disposal), the move is from a loss of 22.41 cents to positive HEPS of between 11.21 cents and 15.69 cents.

Full details are due for release on 26 November.

On an adjusted basis, Telkom’s earnings have jumped (JSE: TKG)

In this case, the adjustment seems reasonable

Telkom has released a trading statement for the six months to September. It’s a voluntary statement, as HEPS as reported is expected to differ by -5% and 5% – i.e. flat at the midpoint.

The very important nuance is that there’s been a substantial after tax charge of R451 million relating to the termination of Telkom’s obligation of the defined benefit within the Telkom Retirement Fund. There have also been restructuring costs.

These types of movements are not reflective of the underlying business, which is why Telkom goes on to disclose an adjusted HEPS move of between 50% and 60%. That’s certainly a lot more like it, suggesting an adjusted range of 292.5 cents to 312 cents for the interim period.

Nibbles:

  • Director dealings:
    • There is some very large “rebalancing of the portfolio” by Shoprite (JSE: SHP) CEO Pieter Engelbrecht, with sales of shares worth around R30 million.
    • The spouse of a director of Mantengu Mining (JSE: MTU) bought shares worth R602k.
  • Astral Foods (JSE: ARL) has announced a successor to CEO Chris Schutte. He is due to retire at the end of January 2025, with current COO Gary Arnold set to take the top job. He’s been with Astral for the past 28 years, so that’s about as strong a succession plan as you can ever hope to see.
  • In further succession news, Harmony (JSE: HAR) has appointed Beyers Nel and Group CEO and Floyd Masemula as Deputy Group CEO. Current CEO Peter Steenkamp is retiring at the end of December 2024 after nine years in the job. Nel is the Group COO, so this is an internal appointment. Masemula is also an internal appointment, with his focus remaining on the South African mines.
  • Keep an eye out for Goldrush Holdings (JSE: GRSP) numbers in the next week or so. The group (previously RECM & Calibre) has changed to consolidated accounts rather than investment entity accounts, so NAV per share is no longer the appropriate performance metric. A trading statement based on an expected move in NAV per share is thus not the best way to look at this, so rather wait for the consolidated accounts for the six months to September that are due for release in the next 7 days.

South African M&A Analysis Q1-Q3 2024

Marylou Greig
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South African M&A Analysis Q1-Q3 2024

Mergers and acquisitions (M&A) activity in South Africa was subdued during the first six months of 2024, influenced by a combination of domestic economic and political challenges, and global market trends. This impacted deal valuations and financing conditions, making M&A more complex to execute.

While certain sectors have showed resilience and strategic focus, there was a noticeable recovery in announced M&A during Q3, on the back of optimism ignited by the emergence of favourable domestic and international trends.

During Q3, 93 deals – executed by primary and secondary SA exchange-listed companies – were recorded by DealMakers (valued at R216,85 billion), of which 80 deals (with a value of R98,9 billion) were executed by companies with a primary listing. For the period Q1 – Q3 2024, a total of 204 deals were recorded – valued at R198,1 billion – against 217 deals valued at R120 billion during the same period in 2023.

Analysis of the deals’ target sectors shows that M&A activity in the real estate sector remains buoyant, accounting for 32% of deal activity, followed by resources (10%) and retail and general industrials, both at 8%.

South Africa has continued to attract cross-border M&A, with investors from Europe, the Middle East and Asia showing interest. These deals have often targeted companies that can provide access to broader African markets, benefiting from South Africa’s established infrastructure and financial systems.

Source: DM Online

Of the top 10 deals by value for the year to end September 2024, the Canal+ buyout of MultiChoice minority shareholders remains the largest, with a price tag of R35 billion. South Africa has well-established regulations for M&A, but the uncertainty surrounding government policy and business reforms has sometimes deterred investment.

Private equity (PE) firms have remained active, although their strategies have shifted toward more selective investments and value-creation opportunities. The challenging economic environment has encouraged PE players to focus on portfolio optimisation and exits, while scouting for opportunities in resilient sectors like fintech, healthcare and logistics.

DealMakers Q1 – Q3 2024 League Table – M&A activity by the top South African advisory firms (in relation to exchange-listed companies).

DealMakers Q1 – Q3 2024 League Table – General Corporate Finance activity by the top South African advisory firms (in relation to exchange-listed companies).

The latest magazine can be accessed as a free-to-read publication at www.dealmakersdigital.co.za or on the DealMakers’ website

DealMakers is SA’s M&A publication.
www.dealmakerssouthafrica.com

Who’s doing what this week in the South African M&A space?

Marylou Greig
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Who’s doing what this week in the South African M&A space?

Exchange-Listed Companies

South32 is to acquire a 19.9% stake in American Eagle Gold (AEG), a TSXV-listed Canadian copper explorer. AEG holds an option to acquire the Nakinilerak exploration project located in the Lake Babine Nation region and within the Babine copper-gold porphyry district in central British Columbia. South32 will acquire the stake at C$29,16 million ($22 million) at C$0.875 a share, representing a 15% premium to the five-day volume-weighted average trading price. For South32, the investment aligns with its strategy to build on its portfolio of transformation and exposure to its next generation of base metal mines.

Europa Metals has completed its C$7 million disposal of Europa Metals Iberia to Denarius Metals. The company is now a cash shell and has six months to make an acquisition. The company is currently in reverse takeover discussions with Viridian Metals around its Tynagh re-cycling and reclamation project in Ireland.

Shareholders of Capital & Regional plc have voted in favour of the scheme of arrangement which will see NewRiver REIT acquire the group. Shareholders were offered 31.25 pence in cash and 0.41946 new NewRiver for each C&R share held. Growthpoint Properties holds a 69% stake in C&R and will receive £101,4 million, £50,7 million in cash and a 14% stake in NewRiver’s share capital. The trading of Capital & Regional shares on the JSE will be suspended E on 10 December 2024. The longstop date is 20 April 2025.

On 11 December 2024, Workforce shareholders will vote on the R1.65 offer by Force. The offer, which represents a 16% premium to the 30-day VWAP, is to minorities holding just 2.76%. Force currently has a 45.63% interest in Workforce and shareholders excluded from the offer represent a further 51.61% stake. If accepted, Workforce’s listing on the JSE will terminate on 18 February 2025.

Unlisted Companies

Private equity firm Sanari Capital has announced a R87,5 million investment in Energenic Holdings, a group of companies providing a range of energy generation products and solutions. Energenic operates in 32 African countries providing reliable cost-effective energy solutions to key growth sectors including telecommunications, tourism and general commerce. The capital injection will be used to fund the scaling of the business both within South Africa and across the rest of the continent.

Global specialty chemical group Vishnu Chemicals has signed an agreement with Volclay South Africa to acquire Bonmerci Investments 103, the holding company of Batlhako Mining, owner of the Ruighoek Chrome Mine, situated in the western bushveld of the country. The consideration payable will not exceed US$7,25 million for the mine and $2,75 million for the acquisition of the processing plant and associated mining and infrastructure assets.

DealMakers is SA’s M&A publication.
www.dealmakerssouthafrica.com

Weekly corporate finance activity by SA exchange-listed companies

Marylou Greig
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Weekly corporate finance activity by SA exchange-listed companies

Diversified healthcare REIT Assura plc is to take a secondary listing on the Main Board of the JSE from 21 November 2024. The UK REIT will list 3,250,608,887 shares, via the fast-tracking process introduced by the JSE in 2014, with a market capitalisation of c.£1,3 billion. As at end September, Assura had a portfolio of 625 properties with a total value of £3,15 billion across the UK.

Details of the Boxer Retail listing have been announced. The IPO, with an offer price of between price R42.00 and R54.00 per share, is due to close on 22 November 2024. Up to 202,380,953 shares will be issued (40.3%) with an overallotment of up to 11,9 million shares. On 28 November, Boxer will list 477,083,334 shares in the Food Retailers & Wholesalers sector reflecting a market capitalisation of between R20 and R25 billion. This compares with Pick n Pay Stores’ current market cap of R19,4 billion, The Spar’s R24,7 billion and Choppies’ R1,2 billion.

Transaction Capital has advised that it has changed the name of its wholly owned subsidiary TransCapital Investments to Nutun Investments. The name change has been placed on file by the Companies and Intellectual Property Commission and accordingly the name change is effective immediately.

Trustco, which currently has primary listings on the NSX and JSE and is quoted on the OTCQX Best Market in the US, has applied for a primary listing on the Nasdaq Stock Exchange. Trustco intends to maintain a secondary listing on the JSE and NSX – having traded on these exchanges for 15 and 18 years respectively.

This week food and quick delivery company Swiggy, in which Prosus with a 25% stake is the largest shareholder, listed on India’s NSE and BSE valuing the company at US$11,3 billion. Prosus sold shares worth more than $500 million as part of the IPO. The listing represents the second largest in India in 2024.

This week the following companies repurchased shares:

Hammerson plc continued with its programme to purchase its ordinary shares up to a maximum consideration of £140 million. The sole purpose of the buyback programme is to reduce the company’s share capital. This week the company repurchased 776,312 shares at an average price per share of 287 pence.

South32 announced in its annual financial statements released in August that it would increase its capital management programme by US$200 million, to be returned via an on-market share buy-back. This week 705,788 shares were repurchased at an aggregate cost of A$2,59 million.

In line with its share buyback programme announced in March, British American Tobacco this week repurchased a further 464,875 shares at an average price of £27.44 per share for an aggregate £12,76 million.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 4 – 8, November 2024, a further 4,287,973 Prosus shares were repurchased for an aggregate €167,65 million and a further 303,554 Naspers shares for a total consideration of R1,27 billion.

Two companies issued profit warnings this week: MultiChoice and Sable Exploration and Mining.

During the week, three companies issued cautionary notices: Tongaat Hulett, TeleMasters and PSV.

DealMakers is SA’s M&A publication.
www.dealmakerssouthafrica.com

Who’s doing what in the African M&A and debt financing space?

Vanessa Aitken
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Who’s doing what in the African M&A and debt financing space?

DealMakers AFRICA

Varun Beverages is looking to acquire 100% of SBC Beverages Tanzania (SBCBT) and SBC Beverages Ghana (SBCBG). The Tanzanian transaction is valued at US$154,5 million and the Ghana deal is at an equity value $15,06 million. SBCBT has five manufacturing facilities in Tanzania and SBCBG has one manufacturing facility in Accra. Both firms manufacture and sell a variety of PepsiCo franchised brands.

Mergence Investment Managers has acquired the remaining 51% stake in Lesotho’s Sanlei Premium Trout, an integrated aquaculture producer of sushi-grade trout, for an undisclosed sum. Mergence acquired an initial stake in Sanlei back in 2019.

Agventure, a Kenyan company that works with non-irrigated farms with a focus on enabling Sustainable Conservation Agriculture practices, has received a US$9,5 million mezzanine loan from specialist agricultural investor AgDevCo.

Sahel Capital has approved a US$1 million term and working capital loan from its Social Enterprise Fund for Agriculture in Africa facility for Uganda’s Sukuma Commodities, an enterprise that specialises in the supply and processing of exportable green coffee for European traders and roasters.

Kua Ventures has invested an undisclosed sum in Kenya’s Olerai Schools to support its expansion and growth.

The Emerging Africa & Asia Infrastructure Fund (EAAIF), the Dutch entrepreneurial development bank (FMO) and the Deutsche Investitions-und Entwicklungsgesellschaft mbH (DEG) have provided €84 million in debt funding to AXIAN Energy to finance a 60MW solar energy and 72MWh energy storage system in the Senegalese region of Kolda.

Egyptian interior design startup Efreshli has announced that Dina Elhaddad has joined Heba Elgabaly as co-founder and that Efreshli has raised an undisclosed sum of seed funding. The round was led by Algebra Ventures and included 500 Startups, Dar Ventures and some angel investors.

DealMakers AFRICA is the Continent’s M&A publication
www.dealmakersafrica.com

M&A trends: SA is going through a profound transformation

Tholinhlanhla Gcabashe and Cathy Truter
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M&A trends: SA is going through a profound transformation

M&A activity was tepid in South Africa (SA) in the first half of 2024, which proved to be a challenging business environment, though it did not stop buyers from pursuing opportunities where they saw value.

However, SA is undergoing a profound transformation. After the general election, the formation of a Government of National Unity (GNU) has ignited a wave of optimism. This has coincided with an environment where inflation has begun receding, interest rates have been reduced, and efforts in the energy sector have started to bear fruit. The longest uninterrupted period without load-shedding since 2020 has sparked predictions of additional growth.

Progress has been made in addressing economic challenges through the intentional drive of government-private sector collaboration, with improvements in electricity supply and freight rail and port operations. Significant contributions have been made by the private sector, including financial support, technical expertise and CEO pledges.

Operation Vulindlela, which aims to create a more conducive environment for investment and development, has successfully completed almost all of its initial reforms, including the auction of digital spectrum, regulatory changes for private electricity generation, and improvements in water licences, rail, ports and visa regimes.

These changes are collectively anticipated to spur a recovery in M&A activity over the remainder of the year.

Artificial intelligence (AI)

The focus on AI in M&A discussions has been notable, and economists differ on its ultimate impact on economies and equity capital markets. Some say AI will amplify the division between the first world (which will benefit from increased productivity and innovation) and emerging economies, which are constrained by infrastructure challenges, less research and development (R&D), and slow diffusion.

Others argue that AI will be the ultimate equaliser, enabling emerging economies to capitalise on younger populations, with fewer barriers to social acceptance and the injection of supplemental skills.

All agree that it will lead to disruption and opportunities. Whether this plays out through corporate diversification and other hedging strategies, restructurings or simplification remains to be seen.

From a transactional perspective, companies are starting to negotiate the allocation of risk, particularly regarding data, AI governance and compliance.

Foreign direct investment (FDI)

Notwithstanding some of the more recent disposals, there has been evidence of inbound M&A activity with foreign companies looking to invest in SA assets, reaffirming the country’s position as an attractive market and strategic entry point into the continent.

A recent PwC1 report indicated that net FDI into South Africa has been consistently positive since the global financial crisis (2007–2009). In 2023, FDI inflows into South Africa amounted to R96,5bn, equivalent to 1.4% of South Africa’s GDP.

In other parts of Africa, there has been a notable uptick in FDI from countries like Saudi Arabia, the United Arab Emirates and Qatar.

International expansion

African companies are continuing to pursue international expansion for geographic diversification, fuelled by a recovering global economy and improved macroeconomic conditions.

Geographic expansion has its challenges, and corporates are assessing their strategies. According to KPMG’s second quarter Global Economic Outlook2, economists are predicting an adjustment to supply chains with corporates bringing production back to regions where products are sold, or countries with similar values. There are considerations pertaining to ongoing global disruption and political uncertainty as the year of elections continues.

Recent proposed reforms to SA exchange controls aim to encourage high-growth private equity (PE) funds and companies in technology, media, telecommunications, exploration and research and development (R&D) to establish offshore entities from a domestic base. It remains to be seen if these draft reforms will be implemented, and if they will have the desired effect.

Fund managers’ reactions to recent regulatory changes empowering pension funds to independently invest offshore have, in some cases, dampened fund support of local companies’ overseas ventures, now that they can make these investments themselves.

African trade

The African Continental Free Trade Area (AfCFTA) is expected to further drive M&A activity from within Africa and globally. The World Bank predicts3 AfCFTA will lead to an 80% increase in intra-regional trade, reaching US$450bn by 2035.

SA’s first shipment and preferential trading under AfCFTA took place in January 2024. More than half of the African countries have ratified AfCFTA and are set to implement rules of origin soon.

Also notable is the United States’ preliminary agreement with African nations to extend preferential trade access for another decade under the African Growth & Opportunities Act (Agoa), pending Congress approval. Agoa aims to allow over 30 African countries to continue exporting goods to the US market duty-free, focusing on increased manufactured exports and modernising the current trade accord. Also notable is the agreement between the US and SA to revive the bilateral trade and investment framework agreement and the expansion of BRICS.

Further trends

Restructuring to avert business distress and unlock value has been pervasive. Unbundlings and the divesting of non-core assets to streamline operations and reduce debt have increased.

The increase in significant shareholder-driven changes underscores the active role of investors in corporate governance, with increased scrutiny on executive pay and a rise in environmental, social and governance (ESG) activism playing out in the boardroom.

There is an increasingly programmatic approach to M&A, with companies regularly engaging in M&A as core to their growth strategies by pursuing a series of smaller to mid-sized acquisitions over time, instead of occasional large, transformative deals.

Opportunities for PE firms are emerging in infrastructure, energy and digital infrastructure, with PE expected to play a significant role in the M&A rebound, driven by a need to divest ageing assets and a substantial amount of available capital.

Success factors

Key deal success factors are linked to valuations, financing and the management of the regulatory environment (competition and sector-specific). There has been an uptick in ESG due diligence and warranties, and a greater focus on the negotiation of the transitional services agreement and interim period undertakings, and supply-side risk mitigation.

These developments bode well for a healthy investment environment in SA and across Africa in the future.

1 https://www.strategyand.pwc.com/a1/en/press-release/south-africa-economic-outlook-april-2024.html
2 https://assets.kpmg.com/content/dam/kpmg/za/pdf/2024/Global%20Economic%20Outlook.pdf
3 https://openknowledge.worldbank.org/server/api/core/bitstreams/ef1aa41f-60de-5bd2-a63e-75f2c3ff0f43/content

Tholinhlanhla Gcabashe is Head of Corporate/M&A and Cathy Truter is Head of Knowledge| Bowmans South Africa.

This article first appeared in DealMakers, SA’s quarterly M&A publication.

DealMakers is SA’s M&A publication.
www.dealmakerssouthafrica.com

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