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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

Is South African merger control raining on private equity’s Dezemba?

Chris Charter
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Is South African merger control raining on private equity’s Dezemba?

By all accounts, investor sentiment is trending positively. In principle, this should provide a shot in the arm for South African private equity (PE), which has been languishing somewhat.

There are compelling arguments for why a dynamic private equity sector is good for an economy. PE funds compete at two levels – for investors’ funds and for opportunities to invest in sectors with upside – and both of these imperatives drive investment innovation. Successful investors need to bring something extra to the table to ensure that portfolio companies grow quickly, to realise a demonstrable return and enhance the fund’s reputation in subsequent rounds, to secure funding and be the preferred bidder. As far back as 1890, English economist Alfred Marshall developed the notion of “knowledge spillover”, and recent studies of data across the OECD have revealed that when there is private equity intervention in an industry, there is an overall increase in employment, productivity, capex and profitability, as peers react to the competitive innovations introduced by PE and venture capital1.

In the USA, PE has developed a bad rap for loading investee companies with debt and then driving short-term operational improvements by effectively “looting” their investee companies – at the expense of workers and long-term sustainability.

Although South Africa has had the odd leveraged buyout scandal, for the most part, our approach to PE (particularly, home-grown funds) is decidedly less venal. It has to be: progressive labour laws, aggressive unions and merger control rules make retrenchments difficult, and so returns cannot be based on driving “synergies” as a euphemism for job-cuts. Our economy is not as vast as the US’s and cannot absorb the odd failing firm without contaminating whole industries. Just as a rising tide lifts all boats, they go down with the ebb, and PE funds in South Africa surely know that in an emerging market, overall growth is an imperative. PE firms here have become adept at fundamentally improving businesses, not hollowing them out. Amid current challenges, they provide access to capital where many businesses would otherwise struggle to find it. In the South African environment, PE is becoming well versed in matters such as ESG, supplier and enterprise development, and all manner of socio-economic imperatives that go with responsible investing in this country.

The sector also has tremendous potential for transformation. Although still under-indexed, black fund managers are becoming more prevalent, and many young, driven, black professionals and entrepreneurs see PE as an exciting space. But private money demands results, and like any PE, black-owned PE can succeed only where it develops a track record of enough successful investments coupled with successful exits to ensure repeat business from investors.

Finally, South African PE is also a valuable conduit for foreign investment and local pension funds (many funds have an offshore component and a local fund to cater for both sources).

So, if a strong PE sector contributes so significantly to the economy, should we not be doing all we can to foster and support PE firms as they endeavour to inject capital, innovation and growth into various industries? This brings into focus the policy decisions of a key gatekeeper for investment in South Africa: the competition authorities.

While no-one would deny the importance of merger regulation to avoid substantial anticompetitive outcomes or significant risks to the public interest, it would be regrettable if regulation operates to trammel activity that raises no such concerns. And yet the murmur from boardrooms in South Africa and abroad increasingly suggests that merger control is a major factor in deciding whether to invest or not.

While some big M&A transactions can price in the challenges and take a long-term view, PE is disproportionately hit by overzealous merger regulation, as a successful PE model involves making serial investments in circumstances where frictionless exits in relatively short order are as important as closing the investment in the first place.

In PE, trips to the Competition Commission are a regular headache, not a once-off ordeal. There are a number of factors that PE firms need to manage when devising an investment case:

• The Commission’s public interest guidelines for mergers emphasise that all mergers should result in increased levels of worker ownership, with the introduction of an employee share ownership plan (ESOP) a typical quid pro quo for approval. However, PE typically seeks to deploy growth capital and stimulate reinvestment in the business. This often eliminates dividend flow, which makes an ESOP ineffective.

• The Commission’s public interest policy also drives HDP ownership commitments. While this may aid black fund managers at the point of entry, it complicates exit as maintaining the same level limits the pool of potential buyers. The notion that a black fund manager’s stake is less liquid could affect the ability to seed the funds.

• Perversely, this reduces any incentive to introduce higher BEE ownership at or after the investment, as this will create a bigger issue to be solved for on exit, as a reduction in HDP ownership is considered to be contrary to the public interest.

• In practice, many firms are exploring ways to avoid triggering a merger, introducing complex structures or a need to avoid any controlling stake or minority investor protections that could give rise to control. This reduces the amount of capital that can be deployed, and also stunts the prospect of meaningful new strategies to grow and disrupt industries.

• The Commission’s approach to small mergers could chill PE and venture capital support for startups, as valuations that exceed large merger thresholds, even if the business is fledgling, attract merger scrutiny. While these measures were designed to police big tech “killer acquisitions”, the size of many private equity funds means they are also caught.

• Many of the most attractive industries for private equity investment (such as healthcare, renewables and other infrastructure and technology) are also focus sectors for the Commission, resulting in investigatory delays.

• A lack of understanding of fund structures and management means that larger funds face complicated filing disclosures to identify potential cross-shareholdings, even across separate funds, fueling unfounded information exchange concerns. This erodes the proposition that PE investment is less risky for competition than trade buyers.

There is hope that the competition authorities will begin to consider that its policy should not make PE investment in a difficult economic climate more difficult, as this leaves valuable growth and foreign investment money on the table. By the same token, investors need to be sanguine about the reality of the regulatory environment, which means factoring in merger control law and policy at an early stage of developing a deal strategy.

1 Aldatmaz and Brown Private equity in the global economy: Evidence on industry spillovers, Journal of Corporate Finance, Feb 2020, 10524)1

Chris Charter is a Director, Competition | Cliffe Dekker Hofmeyr.

This article first appeared in Catalyst, DealMakers’ quarterly private equity publication.

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

PODCAST: MAGAnomics – Trump and the global economy

The Finance Ghost
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PODCAST: MAGAnomics – Trump and the global economy

Listen to the podcast here:

What impact will Trump’s presidency have on the global economy and emerging markets? Tune in to the latest episode of the No Ordinary Wednesday podcast for insights from Investec experts, Annabel Bishop (SA) and Ellie Henderson (UK). 

Hosted by seasoned broadcaster, Jeremy Maggs, the No Ordinary Wednesday podcast unpacks the latest economic, business and political news in South Africa, with an all-star cast of investment and wealth managers, economists and financial planners from Investec. Listen in every second Wednesday for an in-depth look at what’s moving markets, shaping the economy, and changing the game for your wallet and your business.

Also on Spotify and Apple Podcasts:

GHOST BITES (Brait | Dipula Income Fund | Emira | Ethos Capital | Southern Sun)

The Finance Ghost
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GHOST BITES (Brait | Dipula Income Fund | Emira | Ethos Capital | Southern Sun)

Virgin Active has injected some energy into Brait (JSE: BAT)

Membership numbers and pricing are up at the gym group

Virgin Active represents 61% of Brait’s total assets. The other really important stake is Premier (JSE: PMR), which you can invest in directly on the JSE. Premier just released excellent numbers showing growth in HEPS of 34%, so that set the scene for Brait to hopefully come out with a decent story at Virgin Active.

Sure enough, memberships at Virgin Active grew 6% year-on-year and pricing was up 9%, so that’s 16% revenue growth excluding Kauai. Add in the growth at Kauai (my favourite takeaway option) and you’re at 23%. All territories grew solidly, with the UK the lowest at 11% and Singapore the highest at 34%.

With this kind of growth and a fixed cost base, the revenue drops to the bottom line beautifully. There’s been a more than fourfold increase in EBITDA!

As Brait has been valuing Virgin Active based on their estimate of maintainable EBITDA, there’s actually no valuation uptick here. The carrying value on the investment came down slightly if you can believe it, despite debt being reduced. It just shows how daft the valuation approach has been, which is why the market ignores the Brait net asset value per share and conducts its own valuations.

If you’re wondering about New Look, the fashion retailer in the UK that comprises 5% of Brait’s total assets, I’m afraid that it isn’t good news. Revenue fell 3.5% and EBITDA was down 22.7%. We’ve seen really mixed numbers out of UK fashion retailers recently, with Truworths doing well there and TFG struggling. New Look has always been a poor cousin to those businesses, so I’m not surprised to see the numbers down.

The share price closed 5.5% on the day. The chart this year looks like a pretty decent gradient profile on a spinning bike:

Property costs are hurting Dipula Income Fund (JSE: DIB)

Distributable earnings per share is down 4%

Dipula Income Fund holds a portfolio of property assets across various property types in South Africa. Even though they have really painful exposure like a government-tenanted office portfolio, they still achieved 7% growth in revenue for the year ended August 2024.

Alas, there was a 15% increase in property expenses, driven by issues like municipal tariff hikes and maintenance – you know, all the things that make property an unattractive asset class in many cases. Net property income therefore only increased 2%.

To make it worse, net finance costs were up 3%, so distributable earnings ended up decreasing by 4%. At least the net asset value per share increased by 5.2%, so there’s something to make shareholders feel better. Another small highlight is that the loan-to-value ratio has been quite stable, coming in at 35.48% vs. 35.18% the prior year.

Unsurprisingly, the best uptick in value is in the retail portfolio, up 8.3%. At the other end of the spectrum, we find the office portfolio down 2.0%.

The group pays out 90% of distributable earnings per share as a dividend. This puts the share price on a trailing dividend yield of almost exactly 10%.

A slight increase in the Emira dividend (JSE: EMI)

The office sector is still facing difficulties

Emira isn’t shy of doing deals and building an unusual portfolio. For example, they have the residential portfolio inside Transcend Residential Property Fund. They also have exposure to the US and Poland. Remember, complications are usually a negative rather than a positive, as time has shown us on the JSE.

The dividend for the six months to September has increased by just 1.1% to 62.39 cents. This is despite distributable income being 6.9% higher. Whilst you would immediately assume here that this must be due to more shares being in issue, that isn’t actually the case at Emira. The difference is due to the adjustment for the equity-accounted investments in the US, with a new approach of simply paying out 95% of distributable income rather than actual dividends received.

The loan-to-value ratio has improved from 42.4% to 42.0%. I would argue that this is still on the high side, although we are at least in a decreasing interest rate cycle now.

The net asset value (NAV) per share increased by 12.3% to R19.455. The share price is R11.01, so as usual the market cares much more about the dividend yield than the theoretical NAV.

I must also note that the office sector remains difficult. Emira holds a high quality portfolio and although vacancies continued to decline (down from 10.9% to 9.4%), negative reversions worsened from -6.3% to -9.6%. In other words, there’s still pricing pressure on landlords.

Ethos Capital saw NAV grow in the past three months on an adjusted basis (JSE: EPE)

And yes, you do need to adjust for the Ethos unbundling

When an investment holding company unbundles part of its portfolio to shareholders, it is literally making itself smaller. You therefore need to adjust for this when comparing the net asset value to the previous period, otherwise it will look as though the value decreased when the reality is that some assets were simply passed upwards to shareholders.

This is the case at Ethos Capital, which unbundled R121.3 million worth of Brait shares in July this year. It was a busy period of other corporate actions, with R73.3 million of Brait exchangeable bonds sold to Brait, the sale of Synerlytic for R286.4 million and the sale of Adumo for R55.9 million. This is why net debt has come down to R234 million as at the end of September and R180 million based on subsequent repayments.

Thanks to valuation gains in Optasia which more than offset some pressure in the unlisted asset portfolio, the net asset value per share is up 5.6% on a like-for-like basis since June 2024. The NAV per share is R6.95 and the current share price is R5.00.

Southern Sun tightens up its earnings guidance (JSE: SSU)

This has been an excellent period for the group

Southern Sun released a preliminary trading statement back in mid-September, dealing with the six months ended September. They initially guided for an increase in earnings of at least 20% – the vaguest disclosure allowed under JSE rules. When you see that, there’s always a great chance that the move could be a lot higher.

Indeed, a further trading statement confirms growth in HEPS of 33% to 39% and adjusted HEPS of 33% to 44%. Either way, that’s excellent.

Even more encouragingly, the group notes that trading in the month of September was a highlight, so the exit velocity in this period sets them up very nicely for the busy summer.

Interim results are due to be released on 21 November. With the share price up 60% year-to-date, there will be many interested parties.

Nibbles:

  • Director dealings:
    • An entity associated with the Sassoon family has sold R37.6 million worth of shares in Sasfin (JSE: SFN) to Wiphold.
    • An associate of Michael Georgiou, the man who put together Accelerate Property Fund (JSE: APF), was forced to sell R25 million worth of shares pursuant to a lending arrangement. This is what happens when shares are put up as security and things don’t go well. Together with previous similar sales, this means that RMB now holds 6.99% in the company, based on lending arrangements being settled with shares.
    • There’s another sale by the director of CMH (JSE: CMH) who has been selling shares recently, this time to the value of R3.2 million.
    • Dr Christo Wiese and an associate of the Collins family each bought shares in Collins Property Group (JSE: CPP) worth R313k (so a total of R626k).
  • The Capital & Regional (JSE: CRP) deal with NewRiver REIT has been strongly supported by shareholders. This means that the scheme of arrangement will go ahead and Capital & Regional will soon disappear from the JSE.
  • Lighthouse Properties (JSE: LTE) has noted potential tax changes in Spain that would eliminate the benefit of SOCIMI structures. Although Spain is 42% of Lighthouse’s assets, they further note that even if the tax change goes ahead (and it’s by no means a guarantee), it won’t have a material impact on distributable earnings. Interestingly, Vukile (JSE: VKE) noted the same potential issue but wasn’t prepared to make a statement on materiality.
  • Workforce Holdings (JSE: WKF) is trying to head for the exit, releasing the circular detailing the offer by Force Holdings. Force Holdings has 45.63% of shares in issue and concert parties to the offer have another 51.61%, so the shares eligible to participate in the scheme represent just 2.76% of issued shares. Despite such a narrow voting class, the scheme consideration is a premium of just 16% to the 30 day VWAP. Irrevocable undertakings have been obtained from holders of 32.71% of the shares eligible to vote, so they actually have a long way to go here and I’m not sure the premium is juicy enough for such a small voting class. Time will tell.
  • Universal Partners (JSE: UPL) released its quarterly earnings. The net asset value per share has decreased by 0.8% in the past year in GBP. You simply won’t find a more varied portfolio than this, ranging from a dental group in the UK down to the company that always makes me laugh: Propelair, which claims to have reinvented the toilet. The fact that Propelair is always behind on its business plan suggests that perhaps the toilet didn’t need to be reinvented?
  • Montauk Renewables (JSE: MKR) releases its 10-Q each quarter and doesn’t add any management commentary on SENS, making it painful to try and follow the company. That’s a real pity, as earnings per share have almost doubled year-on-year for the nine months to September, driven by a decent increase in revenue.
  • Burstone Group (JSE: BTN) has completed the transaction that puts in place a strategic partnership with Blackstone in Europe.
  • Europa Metals (JSE: EUZ) has completed its disposal of the Toral Project in exchange for shares in Denarius Metals. This effectively turns Europa Metals into a cash shell under AIM rules on the London exchange, with the planned reverse takeover by Viridian Metals set to address that issue.
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