Opportunities for industrial sector M&As

SA’s moribund economy has resulted in low M&A activity, but experts say the industrial sector presents an opportunity for brave investors to buy into the logistics, automotive and energy generation segments at appealing prices.

More than 60 deals were completed in the second quarter of this year compared with more than 200 in 2021’s second quarter, according to data compiled by research group Dealmakers.

The industrial sector, which spans manufacturing, logistics and packaging, was among the sectors hit hardest by the Covidrelated lockdowns owing to its reliance on supply chains. It has also been hit by rising production and energy costs.

Still, experts agree that there are nuggets of prospects and opportunities for the sector as it doggedly recovers from the pandemic.

Daniel Bodewig, a director at Deloitte Capital, said the severe macroeconomic environment focused executives more inwardly to improve efficiencies and manage margin pressure created by high fuel costs, loadshedding and high borrowing costs.

“Interestingly, this inward focus also gives rise to M&A activity as companies acquire tech-enabled businesses to deliver the needed efficiencies or peers to extract volume or market synergies,” said Bodewig.

RMB industrials analyst Alex Volschenk said that since the “post Covid-19 hangover” — when all the deals that were put off then took place the year after — there is a lot of uncertainty about the source of growth in the country.

However, he said, “there are good acquisition opportunities in the sector for those who are willing and brave enough to search for them through a value-orientated lens”. Players who had held back in the challenging Covid-19 times were on the prowl for quality deals.

“What we are seeing at the moment is a lot of activity in the logistics and automotive spaces,” said Volschenk.

One of the biggest and most recent deals to come out of the sector is Afrimat’s deal to acquire leading construction materials provider Lafarge for almost R1bn, which will give it access to some of the best assets in the SA construction industry, amid a lift in demand and at a discounted price.

The market welcomed the news. Afrimat’s share price leapt 12.17% to R60.85 on the day, its biggest one-day rise since August 2016.

Highlighting activity in two areas in the logistics value chain, he said transactions are happening mainly on the more assetlight side such as freight forwarding and services.

Investments are also being made in strategic storage facilities on the logistics infrastructure front with the expansion of warehousing, terminals and depots, he said.

“In the supply chain constrained environment, [these] are facilities that will be highly used where people will store goods,” said Volschenk.

Auto parts, whether manufacturing, distribution or original equipment manufacturing (OEM), are also gaining interest from investors bolstered by the state’s bid to make the sector attractive through incentives and protectionist measures.

Alwyn Naidoo, senior associate director of infrastructure and capital projects at Deloitte Africa, said that certain parts of the construction sector are seeing an uptick in activity, notably in infrastructure; power, water and transport, logistics, mining and industrial. Conversely, the property sector remains stagnant, including commercial office accommodation, hotel and leisure.

“Projects anticipated for the medium term include more renewable energy projects in parts of the country with available grid capacity, gas to power and associated LNG import infrastructure, automotive rail link, N3 upgrades, Boegoebaai port and rail link, revitalisation of six border post and hospital PPPs [public-private partnerships],” said Naidoo.

Bodewig said the global drive to lower carbon emissions may bode well for the industrial players that can react quickly to green demand.

“SA industrial companies that invest in lower carbon intensive processes may benefit from the green premium that European customers are willing to pay,” he said, but warned that “taking advantage of this trend will however require large sums of capital.”

WHAT WE ARE SEEING AT THE MOMENT IS A LOT OF ACTIVITY IN THE LOGISTICS AND AUTOMOTIVE SPACES Alex Volschenk

RMB industrials analyst

60 or more mergers and acquisitions deals were completed in the second quarter of this year compared with more than 200 in 2021’s second quarter