foreign & local investment opportunities in south africa offered by the business rescue process:...

Foreign & local investment opportunities in SA offered by the BR processWerksmans SeminarWanya du Preez

7 August 2014

Analysing the current macro- and micro-economic

landscape in SA and identifying those sectors of the

market which are ripe for distressed investing

SA Investment opportunities using Business Rescue

Senior Manager, Restructuring ServicesSouth Africa

Tel: +27 (11) 209 6126

Mobile: +27 (0) 83 272 0892

Office: Deloitte, Johannesburg

Email: [email protected]

Wanya du Preez

Introductions

2

Career summary:

• Wanya completed her articles with Deloitte in Durban where she qualified as a Chartered Accountant in 2006. She completed a JIT assignment in the USA as well as a secondment to Deloitte Athens on an international assignment.

• Thereafter she worked on an 18 month assignment in Deloitte UK and returned to Johannesburg in 2009.

• Following a period in Deloitte Consulting in 2012, she joined Corporate Finance in February 2014.

• Wanya recently completed her MBA with a specialisation in Business Rescue in South Africa. Her dissertation was entitled: “The status of post-commencement finance for Business Rescue in South Africa.”

• Her current role involves the following:

– Independent business reviews, including the preparation and review of short term cash flow forecasts

– Reviews of distressed investments on behalf of debt providers

– Turnaround strategy and implementation

– Preparation and review of short term cash flow forecasts

– Business Rescue focus

• Team of 9 professionals, across all industries:

• 2 Directors -1 Associate Director

• 2 Senior Managers - 4 Staff

Key service areas:

Detailed analysis and review of company business plans

Providing options advice

Assisting with turnaround plans

Running a distressed M&A process

Providing debt advisory and restructuring services

Reviewing and assisting with the preparation of short term cash flow forecasts

3

Brief macro economic overview


Global prospects are less gloomy

• The world economy will grow faster in 2014, spurred by recovery in the United States and most European countries

• In Europe, the debt crisis has been replaced by the risk of deflation, while events in the Ukraine are more likely to cost Russia dear than result in war or impact trade

• Slower growth in China was anticipated but fresh investment on railway construction and social housing could bode well for South Africa.

Not in glowing health, but certainly recovering

Source: Monitor Deloitte analysis; The Economist Intelligence Unit

1.41.1

-0.4

1.51.51.52.63.0

1.9

4.54.03.6

6.97.37.7

2.8

20152014

2.9

2013

2.0 China

World

Sub-Saharan Africa

US

Japan

Euro area

Real GDP (% change y-o-y)

− Gross Domestic Product (GDP) of the region is expected to grow by 4-6% in next few years, based on the rising household spending and expansion in domestic markets.

− Growth is forecasted to vary across subregions and individual states due to the political stability variations across these regions.

Sub-Saharan Africa is considered an attractive investment region fuelled by its economic growth

An

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Eth

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ia

Gh

an

a

Ke

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a

Mo

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Nig

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a

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ica

Ta

nz

an

ia

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ara

n A

fric

a

US

Wo

rld0

2468

10121416

2010 2011 2012 2013 2018

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

-2

0

2

4

6

8

10

GDP Private Consumption Gross Fixed Investment

Consumer Prices

Real GDP Growth (%, 2010–2018)

Sub-Saharan Africa key metrics % change(%, 2010–2018)

Source: Economic Intelligence Unit

%%


Risin

g House

hold

spen

ding a

nd Gro

wth

in F

DI

Growing opportunity for

investments in Africa’s

natural resources

Growth

of d

eman

d in

the

domes

tic m

arke

ts

due to

rise

in th

e lo

wer

mid

dle-c

lass

popula

tion.

Gradual normalization

of activities in conflict

countries

South Africa and Nigeria account for more than 64% of the GDP of the region

Nominal GDP (US$B, 2013)


Angola; 14%

Cameroon; 3%

Ethiopia; 4%

Ghana; 5%

Kenya; 5%

Mozambique; 2%Nigeria; 29%

South Africa; 35%

Tanzania; 3%Nominal GDP % of Total Sub-Saharan Africa (%, 2013)


An

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Ca

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Eth

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Ke

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nia

Su

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ah

ar.

..

0

200

400

600

800

1,000

1,200

US

$’b

n

Tanzania• Stringent government

regulations, corruption, and less transparent policy making are few of the challenges of the country

Kenya• The economy is well

supported by local financial markets and a relatively efficient labor market

Ethiopia• It requires significant

improvement in the areas of infrastructure, higher education, and technological readiness

Cameroon• Political stability, robust

and investment-supportive government reforms and infrastructure development is required drive the growth

South Africa• Politically stable

business environment

• Biggest opportunity, size, growth prospect, and growing domestic demand

• Fastest growing financial market in the region

• County’s strong ties to advanced economies supports the foreign investment scenario

Mozambique• Low macroeconomic

stability, and need of significant change in reforms and regulations are needed in the country

Ghana• Infrastructure

development is required to drive growth as compared to other countries in region

• Downward trend of macroeconomic indicators

Angola• Economy with the

fastest growing GDP in past decade within the region

• Strong macroeconomic fundamentals

Nigeria• Delivery of reforms is

required

• Growth prospects in medium-term depends on the political stability

SA presents most attractive investment destination to invest in distressed companies

2009 2010 2011 2012 2013 2014 2015 2016 2017 20180

100

200

300

400

500

-2-10123456

Nominal GDP Real GDP

Real GDP growth and nominal GDP (US$, 2009–2018)


Overview• Real GDP growth is expected to decline to 1.7% in 2014,

driven by modest global recovery.• Growth will accelerate in 2015-17, spurred by

consumption and investment, before tailing off in 2018 as their might be global and local interest rates rise. Politically stable environment is driving the country to a consolidated economic growth.

• The current-account deficit (CAD)is forecasted to be narrow in 2014-15, as export earnings growth quickens although the CAD will widen from 2015 onwards, reaching 6.5% of GDP in 2018, due to rise in imports.

Government policies and recommended outlook• A new Infrastructure Development Bill proposes several

initiatives to speed up major infrastructure projects.• The government will need to make tough choices in the

face of persistent pressure to spend more on infrastructure, social welfare, and wages.

• South Africa’s ruling African National Congress emerged victorious from elections in 2014, but uncertainty and non-clarity about its economic direction may hamper the sentiments of investor eyeing the country.

Challenges• The main challenge during the next few years for the

policy makers in the country will be to expedite faster growth by tackling long-standing structural constraints, such as skills shortages, inadequate infrastructure, and high unemployment.

• Sound policies, sluggish consumer demand, and spare industrial capacity will help to keep tab on inflation, although their might be upward pressure from expected rise in electricity tariffs and wages along with currency depreciation.

• High unemployment, income inequality, and poor service delivery are likely to pose challenges for the country’s medium- term growth.

No

min

al G

DP

$b

n

Real G

DP

(%)

SOUTH AFRICA

Northern Cape

Western Cape

Eastern Cape

Free State

Kwa-zulu Natal

North West

Gauteng

Mpumalanga

Northern Province

Painting the South African Economic LandscapeWhy South Africa?

1. Key investment location, both for market opportunities in SA and the rest of Africa, especially through the special International Headquarter Company (IHQ) regime.

2. South Africa was admitted to the BRIC group of countries of Brazil, Russia, India and China (now called BRICS) in 2011.

3. A wealth of natural resources (including coal, platinum, coal, gold, iron ore, manganese nickel, uranium and chromium).

4. World-class infrastructure, exciting innovation, research and development capabilities and an established manufacturing base.

5. Sophisticated financial, legal and telecommunications sectors.

6. Has political and macro-economic stability, an abundant supply of semiskilled and unskilled labour.


8 © 2014 Deloitte Touche Tohmatsu Limited

SA Investment opportunities using Business Rescue9

South African Economic OverviewGlobal Competitiveness

10 SA Investment opportunities using Business Rescue

South African Economic Overview (cont)Global Competitiveness

South Africa’s high ranking areas

• Strength of auditing and reporting standards (1st)

• Efficacy of corporate boards (1st)

• Protection of minority shareholders’ interests (1st)

• Regulation of securities exchanges (1st)

• Legal rights index, 0–10 (best) (1st)

• Availability of financial services (2nd)

• High accountability of its private institutions (2nd)

• Financial market development (3rd)

• Soundness of banks (3rd)

• Quality of air transport infrastructure (11th)

• Affordability of financial services (13th)

• Extent of staff training (17th)

• Intellectual property protection (18th)

• Property rights (20th)

• Efficient market for goods and services (28th)

• The quality of its institutions (41st)

Gross fixed investment as a % of GDP (%, 2013)

Ang

ola

Ken

ya

Nig

eria

Sou

th A

f...

Sub

-Sah

...

Indi

a

Chi

na

0

10

20

30

40

50

Ang

ola

Ken

ya

Nig

eria

Sou

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fric

a

UK

Ger

man

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Fra

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Sw

itzer

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0123456789

2009-20132014-2018

Business environment score (2009-13, 2014-18)

Back home, the news is not entirely goodExternal factors will have a mixed impact on the South Africa economy in 2014, while domestic drivers will continue to create downward pressure

Source: Monitor Deloitte analysis; IMF World Economic Outlook, April 2014

Exports to China Fed tapering Industrial action High unemployment Election year causes

uncertainty

Exports to US and Europe

A weaker rand supporting international competitiveness?

Monetary variables are not helpingThe weak rand, slightly higher inflation and marginally higher interest rates may have been factored in by economists, but possibly not by small businesses

Source: Monitor Deloitte analysis; Business Monitor International

Monetaryvariablesare in a vicious

cycle

Weak rand

Higher inflation

Interest rate increases

0

2

4

6

8

10

12

2008 2010 2012 2014 2016 2018

Lending rates (average, %)

Producer inflation (y-o-y % change, eop)

Consumer inflation (y-o-y % change, average)

%

Outlook for interest rates and inflation

Interest rates indirectly driving inflation

The impact of a weaker randA weaker rand is unlikely to boost competitiveness with respect to exports due to the pattern of trade and is more likely to drive imported inflation

Source: Monitor Deloitte analysis; International Trade Centre, www.intracen.org, accessed 5th May 2014; The Economist Intelligence Unit

-7

-27

-15

2520

712

-6

ChinaUnited States

Western Europe

Other SADC

2013 imports (% of total)

2013 exports (% of total)

Trade balance with key partners

10.30

13.84

0

2

4

6

8

10

12

14

2008 2010 2012 2014 2016 2018

Prognosis for the rand

R

R :US$

:€

http://www.intracen.org/

The credit market is over-extendedProportionately fewer credit-active consumers are in good standing than during the financial crisis, suggesting little flexibility to cope with higher rates and prices

Source: Monitor Deloitte Analysis; National Credit Regulator, Credit Bureau Monitor – various years

10.710.610.49.99.910.3

10.7

525354545558

62

0

1

2

3

4

5

6

7

8

9

10

11

0

10

20

30

40

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70

2013201220112010200920082007

# in good standing% in good standing

millions %

Credit standing of consumers at year-end


Survey Results - Restructuring Outlook 2014

The South African Economy and Restructuring Industry72% expect a stagnant economy driven by labour and political unrest, and decreased consumer spending

18.8%

71.9%

9.4%

Outlook for the South African economy over the next 12 months

Recession Stagnant Growth

Recession: Negative growth in the economy for two consecutive quartereStagnant: No growth in economy for two consecutive quartersGrowth: Increased business activity for two consecutive quarters

8.5%

1.9%

1.9%

3.8%

3.8%

5.7%

5.7%

14.2%

15.1%

18.9%

20.8%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

Other

The Euro crisis

Commodity prices

Low corporate growth

Growing current account deficit

Reluctance of corporates to reinvest

Availability of corporate funding

Exchange rate –currency depreciation

Consumer spending and credit

Political uncertainty

Labour unrest

Reasons for outlook for the South African economy over the next 12 months

“I believe we are entering a 10 year period of real difficulty in South Africa, a lot of which will depend on the elections.”

– Commercial Bank

“We are still to face challenges in the labour sector as there is always unrest in an election year.”

– Commercial Bank

“Interest rate hikes by the Reserve Bank is indicative of tough trading conditions.”

–Commercial Bank


16

The South African Economy and Restructuring Industry (cont)Sectors at most risk of distress include manufacturing, retail, construction and energy and resources

“Manufacturing is struggling due to the price crunch and low volumes. Construction has been affected by labour strikes, delays in government payment and penalty clauses.” – Commercial Banker

“We are going to struggle, retailers…are taking strain…due to exchange rate depreciation.” – Business Rescue Practitioner

"In the mining industry, commodity prices are very low, and mining costs are escalating.”– Development Finance Institution



South AfricaM&A market overview

Copyright © 2014 Deloitte Development LLC. All rights reserved.19 Sub-Saharan Africa M&A opportunity and challenges

Key observations

• The deal volume has been gradually increasing over the years after a dip in 2011 primarily due to the constant increase in the investments returns, stabilizing economy, and boost in 'Middle Class' population.

• From a long-term perspective, the total deal value has increased due to the significant rise in investment from the Asia/Pacific countries as they look to expand into regions with untapped natural resources.

• Inbound deal activity is driven by mineral wealth, strong demographics, low interest rates, low regulatory barriers, and opportunities to acquire undervalued companies.

• The positive outlook provided by International Monetary Fund (IMF) indicates that the African region is forecasted to achieve a GDP growth rate of 6% in 2014, which is likely to boost the deal activity.

M&A activity has been increasing although average deal size declined marginally in 2013

2009 2010 2011 2012 20130

200

400

600

800

1,000

1,200

Disclosed Undisclosed

Number of deals — Total

(In numbers, 2009–2013)

Deal value — Total and average deal size

(In US$M, 2009–2013)

2009 2010 2011 2012 20130

5,00010,00015,00020,00025,00030,00035,00040,00045,00050,000

0

10

20

30

40

50

60

Deal Value Average Deal SizeSource: Capital IQ Source: Capital IQ


South Africa, with presence of cash-rich corporates, leads the M&A deal activity in the region

Key observations• The deal activity in South Africa is expected to rise

further due to the presence of numerous cash-rich corporates in the region and investors looking to invest in a market that is well regulated and provides opportunities to expand operations. – However, due to some government regulations, such as

the new hydrocarbons law granting the state oil company PetroSA a 20% free carry, the deal activity may deter in the future.

• Nigeria is enjoying an increase in the inbound deal activity as the investors are looking to take advantage of the low interest rates in this region.

• The abundance of natural resources in Kenya is driving the M&A deal activity with new oil discoveries happening in the region.

• In Mozambique, the deal value in 2013 has boosted primarily due to three multibillion dollar deals in the oil & gas sector

Angola 6.4%

Cameroon 1.1%

Ethiopia 0.7%

Ghana 1.7%Kenya 3.2%

Mozambique 3.5%

Nigeria 15.1%

South Africa 66.6%

Tanzania 1.7%

Deal value — By key countries

(In %, 2009–2013)

Source: Capital IQ

2009 2010 2011 2012 20130

5,000

10,000

15,000

20,000

25,000

30,000

Angola Cameroon Ethiopia Ghana Kenya Mozambique Nigeria South Africa Tanzania


(In US$M, 2009–2013)

Number of deals — By key countries (in numbers, 2009–2013)

Source: Capital IQ

Source: Capital IQ

2009 2010 2011 2012 20130

100200300400500600700800

Angola Cameroon Ethiopia Ghana Kenya Mozambique Nigeria South Africa Tanzania


Investments from Asia-Pacific countries have increased as they look to achieve energy security

Key observations• Asia Pacific leads the cross-border investments M&A

activity (by deal value) mainly due to the interest from the Chinese investors, as they look to target the region’s untapped natural resources.– Further Chinese companies are investing to set up new

plants and facilities to cater to growing domestic demand– Indian investments have also surged in the recent years

to reap the benefits of untapped natural reserves.• From Europe, although the total deal value has

decreased in the recent times, the volume of the deals has remained stable as these acquisitions in Africa provide a way to generate growth during the sluggish periods

• Inbound deal activity from North America, particularly the U.S., has decreased due to lack of proper infrastructure. However, U.S.’ is focusing on improving ties with the African countries is likely to drive the growth in future investments.


(In %, 2009–2013)

Source: Capital IQ

Deal value — By investor geography(In US$M, 2009–2013)

Number of deals — By investor geography(in numbers, 2009–2013)

Source: Capital IQ

Source: Capital IQ

North America; 5.4%

South America; 0.8%

Africa; 49.8%

Asia-Pacific; 19.7%

Europe; 16.7%

Middle East; 7.5%

2009 2010 2011 2012 20130

200

400

600

800

1,000

1,200

Africa Asia / Pacific Europe Middle EastNorth America South America

2009 2010 2011 2012 20130

10,000

20,000

30,000

40,000

50,000

Africa Asia / Pacific Europe Middle EastNorth America South America


Key observations

• Investment in E&R sector continues to improve significantly, as there are new oil discoveries in resource-rich countries, such as Kenya, Sierra Leone, and Domestic Republic of Congo.

• Financial services industry proved to be an area of growth because of the lack of such services for the rising middle-class segment. The rise in investments is set to continue in the future, as well.

• Private equity investors across the world prefer longer-term investments in sectors, such as consumer, financial services and pharmaceuticals and medical and biotech over capital intensive sectors, such as energy and mining, as these areas offer high returns and far less capital and political risk than the extractive industries.

• The consumer business segment has grown significantly over the years due to the rise in Africa’s middle-class segment and the increase in household spending in the region.

With new oil discoveries in the region, the deal activity in the E&R sector has improved significantly

2009 2010 2011 2012 20130

200

400

600

800

1,000

1,200

CB E&R FSI LSHC Mfg TMTSource: Capital IQ

Number of deals — By sector

(In No’s, 2009–2013)

Deal value — By sector

(In US$M, 2009–2013)

2009 2010 2011 2012 20130

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

CB E&R FSI LSHC Mfg TMTSource: Capital IQ


M&A challenges

Generally, there is limited financial disclosure, both for listed and unlisted companies operating in the region, which means that access to valid, accurate, complete, and reliable financial information can fall short of investor expectations. This lack of information makes the due diligence process difficult.

In Sub-Saharan Africa, it is important to maintain awareness of noteworthy events such as elections and understand their potential effect on the transaction timetable. Investors are required to have an understanding of the political association of the major stakeholders involved in the transaction, both business partners and regulators that may need to approve the transaction.

Many countries have adopted, or are in the process of adopting citizen empowerment laws, which typically require a minimum percentage of local shareholder ownership. The challenge though is that local shareholders are often unable to raise required funds especially in capital-intensive projects.

While this is important in most transactions, it is especially critical when the local partner is relied upon to drive local relationships and is likely to have a longer-term involvement in the business. Deficiency of such local partners may act as a obstacle for the investors.

It is equally important for investors to work with advisors they know and have trust, have local knowledge and an on-the-ground presence, which are vital for implementing transactions.

Financial Disclosure

and Due Diligence

Understanding Political

Environment and Stability

Local Ownership

Requirements

Right Partner


Identifying the opportunities

Moments that matterAre companies displaying the following warning signs…

Declining cash flows as a result of deteriorating trading performance and uncertain

market conditions

Underperforming division or subsidiary causing cash pressure for the group

Incoherence amongst and major changes in management team

and / or board and struggling to achieve a succession plan

Current or expected breach of banking facilities and / or covenants and facing a tightening credit market

Lack of timely and insightful financial reporting and Limited

visibility of cash requirements in the business

Deteriorating working capital trends, particularly stretching of

creditor terms

Significant underperformance against budget and performing below stakeholder expectations

Overleveraged balance sheet and major upcoming debt repayments

Company in distress

Deloitte Restructuring Survey25 © 2014 Deloitte Touche Tohmatsu Limited

Deloitte – Financial support

• Investor will work closely with the accountants who understand the financial aspects of a restructuring and of the business rescue process and who can assist with –

− identifying that the company is in financial distress

− introducing Chinese investors to the company and its management

− appointing a competent and professional business rescue practitioner

− identifying the need for, and amount of, PCF

− reviewing and commenting on the business rescue plan that is voted on by the creditors and shareholders (in some instances)

− ensuring the company comes out of business rescue with the investor having acquired the company at heavily discounted prices – a cheap but valuable acquisition



Detailed analysis and review of company

business plans

Reviewing and assisting with the preparation of short term cash flow

forecasts

Providing options advice

Assisting with turnaround plans

Running a distressed M&A process & negotiation with

creditors

Providing debt advisory services and sourcing alternative

funding


Thank you


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foreign & local investment opportunities in south africa offered by the business rescue process:...

Business

turnaround plans running

monitor deloitte analysis

south african economy

low interest rates

inbound deal activity

capital iq source

natural resources

business rescue