Zuma’s Success With Wal-Mart Job Pledge Crimps South Africa M&A

Zuma’s Wal-Mart Job Pledge Success Crimps South Africa M&A
An employee delivers a customer's purchases at a Game supermarket, part of Massmart Holdings Ltd, in Johannesburg. Photographer: Nadine Hutton/Bloomberg

South African President Jacob Zuma’s success in getting foreign buyers such as Wal-Mart Stores Inc. to guarantee jobs may curb the pace of takeovers in the region’s biggest economy.

The Wal-Mart acquisition was “so politically charged,” said Nick Matthews, head of mergers and acquisitions at KPMG International’s South African unit. “Debates about ANC policy and the fact that they have put nationalization on the agenda will be a worry for foreign investors.”

Companies announced 86 deals valued at 49.2 billion rand ($7.3 billion) in the first half of this year, the lowest level since the final two quarters of 2009, according to data compiled by Bloomberg. There were 106 transactions in the year-earlier period totaling 55.3 billion rand.

Zuma’s government is trying to slash the country’s 25 percent unemployment rate. It used the antitrust regulator to secure a halt in job cuts when Wal-Mart purchased a stake in retailer Massmart Holdings Ltd. and Kansai Paint Co. bought Freeworld Coatings Ltd. Threats to nationalize mines by Julius Malema, leader of the ruling African National Congress Youth League, are also deterring foreign buyers.

South Africa’s trade, economic development and agriculture ministries asked the country’s Competition Tribunal to force Wal-Mart, the world’s largest retailer, to restrict imports after its purchase of Massmart, a move designed to protect the company’s smaller suppliers. The competition authority approved the transaction on June 1 with the condition that no jobs are cut for two years.

‘Strained Credibility’

“These interventions strained South Africa’s credibility as a destination for foreign direct investment,” Massmart Chairman Mark Lamberti wrote yesterday in Johannesburg’s Business Day newspaper. “In the end, wisdom and independence of the Competition Tribunal prevailed.”

The government “doesn’t have a blanket view” on takeovers and bids are studied on a “case-by-case basis to determine the balance of benefit to the economy,” the Economic Development Department said in an e-mailed response to questions on June 5. It welcomes foreign investment in operations that bring capital and skills, it said.

The ANC agreed in September to study nationalization in South Africa, the biggest producer of platinum, a miner of gold and the biggest supplier of coal to European power plants.

Government interference “is a bit of a headwind,” said Alan Pullinger, chief executive officer of FirstRand Ltd.’s investment banking unit, Rand Merchant Bank.

‘Hit Pause’

Acquisitions also are being hampered by the Treasury’s announcement in June of an 18-month suspension of Section 45 of the Income Tax Act, a move that may tax transactions previously exempt. The risk of extra charges caused companies to “hit the pause button,” Pullinger said.

Rio Tinto Plc’s Palabora Mining Co. postponed a share sale on June 20, saying the adjustment means the transaction is no longer viable. Computer manufacturer Mustek Ltd. scrapped a buyout by management and private equity investors on June 7 for the same reason.

Finance Minister Pravin Gordhan said June 23 that he suspended the provision to stamp out tax avoidance.

The $1.3 billion purchase of Cape Town’s Victoria & Albert Waterfront shopping mall by Growthpoint Properties Ltd. and the Public Investment Corp. was the biggest announced transaction in the first half, according to Bloomberg data.

Investec Tops Tables

Investec Ltd. topped the ranking of M&A advisers at the end of the second quarter as it worked with Growthpoint on its V&A purchase and Brazil’s Vale SA on its $1.1 billion bid to buy copper producer Metorex Ltd., according to Bloomberg data.

Jinchuan Group Ltd., the biggest Chinese nickel producer, made a rival offer of $1.36 billion on July 5 for Metorex, which controls the Ruashi open-pit mine in the Democratic Republic of Congo and the Chibuluma copper development in Zambia.

Investors may try overcoming obstacles to benefit from faster economic growth and the country’s access to other African markets, said Yianni Pouroullis, head of advisory and distribution at Nedbank Group Ltd.’s investment banking unit.

South Africa’s economy, the largest in Africa, expanded an annualized 4.8 percent in the first quarter, compared with 1.9 percent in the U.S. and 0.8 percent in the euro area.

‘Healthy Pipeline’

Nedbank Capital and RMB, which advised FirstRand last year on the sale of its 45 percent stake in property and casualty insurer OUTsurance Holdings Ltd., aren’t in the top 15 M&A transactions announced in the first half.

There has been an increase in corporate finance activity, such as capital raising and lending, giving Nedbank Capital a “healthy pipeline” of transactions, Pouroullis said.

RMB’s deal pipeline still looks promising, Pullinger said.

“We’ve been busy, but I think it’s fair comment to say that transactions are taking much longer to consummate,” he said. “They are being considered a lot more deeply.”

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