Upload
werksmans-attorneys
View
151
Download
0
Tags:
Embed Size (px)
DESCRIPTION
Deloitte presentation on investment opportunities in South Africa offered by the business rescue process
Citation preview
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
SA Investment opportunities using Business Rescue
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• In Europe, the debt crisis has been replaced by the risk of deflation, while events in the Ukraine are more likely to cost Russia dear than result in war or impact trade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
go
la
Ca
me
roo
n
Eth
iop
ia
Gh
an
a
Ke
ny
a
Mo
za
mb
iqu
e
Nig
eri
a
So
uth
Afr
ica
Ta
nz
an
ia
Su
b-S
ah
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
%%
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)
Source: Economic Intelligence Unit
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)
Source: Economic Intelligence Unit
An
go
la
Ca
me
roo
n
Eth
iop
ia
Gh
an
a
Ke
nya
Mo
zam
b...
Nig
eri
a
So
uth
Afr
ica
Ta
nza
nia
Su
b-S
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)
Source: Economic Intelligence Unit
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.
SA Investment opportunities using Business Rescue
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
th A
fric
a
UK
Ger
man
y
Fra
nce
Spa
in
Sw
itzer
land
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$
:€
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
50
60
70
2013201220112010200920082007
# in good standing% in good standing
millions %
Credit standing of consumers at year-end
15 SA Investment opportunities using Business Rescue
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
SA Investment opportunities using Business Rescue
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
SA Investment opportunities using Business Rescue
17 © 2014 Deloitte Touche Tohmatsu Limited
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$M, 2009–2013)
2009 2010 2011 2012 20130
5,00010,00015,00020,00025,00030,00035,00040,00045,00050,000
0
10
20
30
40
50
60
Deal Value Average Deal SizeSource: Capital IQ Source: Capital IQ
Copyright © 2014 Deloitte Development LLC. All rights reserved.20 Sub-Saharan Africa M&A opportunity and challenges
South Africa, with presence of cash-rich corporates, leads the M&A deal activity in the region
Key observations• The deal activity in South Africa is expected to rise
further due to the presence of numerous cash-rich corporates in the region and investors looking to invest in a market that is well regulated and provides opportunities to expand operations. – However, due to some government regulations, such as
the new hydrocarbons law granting the state oil company PetroSA a 20% free carry, the deal activity may deter in the future.
• Nigeria is enjoying an increase in the inbound deal activity as the investors are looking to take advantage of the low interest rates in this region.
• The abundance of natural resources in Kenya is driving the M&A deal activity with new oil discoveries happening in the region.
• In Mozambique, the deal value in 2013 has boosted primarily due to three multibillion dollar deals in the oil & gas sector
Angola 6.4%
Cameroon 1.1%
Ethiopia 0.7%
Ghana 1.7%Kenya 3.2%
Mozambique 3.5%
Nigeria 15.1%
South Africa 66.6%
Tanzania 1.7%
Deal value — By key countries
(In %, 2009–2013)
Source: Capital IQ
2009 2010 2011 2012 20130
5,000
10,000
15,000
20,000
25,000
30,000
Angola Cameroon Ethiopia Ghana Kenya Mozambique Nigeria South Africa Tanzania
Deal value — By key countries
(In US$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
Copyright © 2014 Deloitte Development LLC. All rights reserved.21 Sub-Saharan Africa M&A opportunity and challenges
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.
Deal value — By key countries
(In %, 2009–2013)
Source: Capital IQ
Deal value — By investor geography(In US$M, 2009–2013)
Number of deals — By investor geography(in numbers, 2009–2013)
Source: Capital IQ
Source: Capital IQ
North America; 5.4%
South America; 0.8%
Africa; 49.8%
Asia-Pacific; 19.7%
Europe; 16.7%
Middle East; 7.5%
2009 2010 2011 2012 20130
200
400
600
800
1,000
1,200
Africa Asia / Pacific Europe Middle EastNorth America South America
2009 2010 2011 2012 20130
10,000
20,000
30,000
40,000
50,000
Africa Asia / Pacific Europe Middle EastNorth America South America
Copyright © 2014 Deloitte Development LLC. All rights reserved.22 Sub-Saharan Africa M&A opportunity and challenges
Key observations
• Investment in E&R sector continues to improve significantly, as there are new oil discoveries in resource-rich countries, such as Kenya, Sierra Leone, and Domestic Republic of Congo.
• Financial services industry proved to be an area of growth because of the lack of such services for the rising middle-class segment. The rise in investments is set to continue in the future, as well.
• Private equity investors across the world prefer longer-term investments in sectors, such as consumer, financial services and pharmaceuticals and medical and biotech over capital intensive sectors, such as energy and mining, as these areas offer high returns and far less capital and political risk than the extractive industries.
• The consumer business segment has grown significantly over the years due to the rise in Africa’s middle-class segment and the increase in household spending in the region.
With new oil discoveries in the region, the deal activity in the E&R sector has improved significantly
2009 2010 2011 2012 20130
200
400
600
800
1,000
1,200
CB E&R FSI LSHC Mfg TMTSource: Capital IQ
Number of deals — By sector
(In No’s, 2009–2013)
Deal value — By sector
(In US$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
Copyright © 2014 Deloitte Development LLC. All rights reserved.23 Sub-Saharan Africa M&A opportunity and challenges
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
24 SA Investment opportunities using Business Rescue
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
SA Investment opportunities using Business Rescue
26 © 2014 Deloitte Touche Tohmatsu Limited
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
27 SA Investment opportunities using Business Rescue
Thank you
28 SA Investment opportunities using Business Rescue
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.
Deloitte provides audit, tax, consulting and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. The more than 200 000 professionals of Deloitte are committed to becoming the standard of excellence.
This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte Network”) is, by means of this communication, rendering professional advice or services. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this communication.
© 2014 Deloitte & Touche. All rights reserved. Member of Deloitte Touche Tohmatsu Limited