South Africa is beginning to hit the radar screens of global private equity funds, with two big transactions, one completed the other still being negotiated, grabbing the headlines. Bain Capital bought Edgars Consolidated Stores (Edcon), while an Actis-led consortium raised its bid for Alexander Forbes, Africas biggest independent retirement fund administrator. The deals signal a shift towards buyouts in South African M&A, which has tended to be dominated by black economic empowerment transactions.
On February 8 Edcon, South Africas largest retailer, accepted a R25 billion ($3.5 billion) takeover bid from US buyout firm Bain Capital. This is South Africas largest deal and firmly places the country in the private equity arena.
The Bain Capital bid came in at 51% above Edcons share price, an offer that some market participants say illustrates the premium levels firms are willing to pay to enter this growing market. Bain adopted an interesting strategy for its bid. Instead of putting in an opening offer, which could be increased, the companys first bid was legally bound as its only bid a method that made price negotiations impossible but sped up the deal-making process.
Dwight Poler, managing director at Bain Capital, says: "We think South Africa is a market with tremendous growth dynamics. The consumer base is growing rapidly with the development of a new middle class."
Steven Ross, CEO of Edcon, adds: "We are excited that a global equity firm has offered a premium for our company and believe they can add significant future value." The deal is expected to close by the beginning of this month.
Actis, by contrast, is embroiled in a bidding war for Alexander Forbes. It saw Forbes as a good candidate for a leveraged buyout more than two years ago and placed its first bid more than a year ago. But despite this interest, shareholders have felt that bids are too low, resulting in a protracted process. The shareholders meeting on February 28 was adjourned and a new one should be scheduled, with a buy-back amendment, within two months. Actis has already increased the bid three times and its offer is now R17 a share, which values the company at R8 billion. John van Wyk, the South African-based partner at the firm, confirms that a further bid increase is "very unlikely".
The management board has offered more support for the Actis bid than Alexander Forbess shareholders. "The board is closer to the business than the shareholders. They have more understanding of the complexities and risks that the business is facing. We had a fair and reasonable evaluation done by KPMG and they said that it was a fair price," says van Wyk.
Other South African companies falling under the gaze of private equity firms include retailer Shoprite, leisure company Peermont Global and Consol Glass. The combined value of these deals could be R60 billion.
"I have personally met with at least six of the top global private equity businesses," says van Wyk. All the truly global firms are sending people down here to look at specific opportunities, or on a fact-finding mission. South Africa is now very much registered on the radar screens of large private equity firms."
Even the few big firms that have yet to enter the market have declared an interest. David Rubenstein of Carlyle is reported to have called Africa "a sleeping giant in terms of private equity".
Poler says: "The underpinnings of South Africa now include a well-organized administrative system, a strong government, a well-invested infrastructure and a growing broad-based economy. Each year the country continues to realize more of its potential, and 2007 will further illustrate this."
"We believe South Africa has passed an inflection point. Today there are enough people who are experiencing the economic benefits [of sustained growth]," adds Poler. The government hopes to achieve 6% growth this year and cut inflation to 4.3% from 5%.
But South Africa still has problems. "When I met potential investors the most asked questions related to the stability of the rand, who is to succeed president Mbeki and how is the notoriously high crime rate going to be tackled," says van Wyk. "We still have our problems. But it is an environment where you can understand the risks and can take advantage of the huge opportunities available right now."
|South African financial sponsor M&A buyouts 2006 to 2007 YTD|
|Date||Target||Acquirer||Acquirer nationality||Deal value $mln||Financial Announced sponsor|
|8 Feb 07||Edgars Consolidated Stores||Bain Capital Partners||South Africa||3,484||Bain Capital Partners|
|24 Nov 06||Shoprite Holdings||Brait Private Equity (MBO)||South Africa||2,120||Brait|
|2 Oct 06||Alexander Forbes||Actis Capital-led consortium||United Kingdom||1,028||Actis Capital; Ethos Private Equity; Teachers Private Capital|
|17 Jan 06||Waco International||Existing Management (MBO)||South Africa||899||AMB Private Equity Partners; Ethos Private Equity; CCMP Capital|
|19 Dec 06||Consol (Bid No 2)||Brait Private Equity||South Africa||878||Brait|
|1 Dec 06||Barloworld (steel tube division)||RBR Investments||South Africa||67||RMB Capital Partners|
|3 Aug 06||Exactmobile (50.05%)||Primedia||South Africa||n/a||Kohlberg Kravis Roberts & Co|
|2 Oct 06||Trellicor Security Group (69.5%)||Hibridge Capital (IBO)||South Africa||n/a||Hibridge Capital|