From Pariahs To Multinationals?Alan Fine
In early October, Sappi, a South African maker of pulp and paper, laid out a cool $1.6 billion to acquire S.D. Warren, a leading U.S. maker of coated papers. As the biggest foreign investment ever made by a South African company, the deal signals a new era for the country's top companies.
Now that South Africa is a member of the world community in good standing, the country's major companies are taking advantage of their renewed status. Since their own economy is only just turning around after three years of recession, South African executives are scouring the globe for growth by acquisitions and joint ventures. And they figure they can capitalize on their existing knowhow--mostly in natural resources--and in return draw in badly needed technology, particularly in manufacturing. Going global could help reestablish South Africa as a major business center.
Sappi's U.S. purchase comes just two months after another splashy deal, when conglomerate Gencor Ltd. paid $1.2 billion for Billiton, Royal Dutch Shell Group's mining and metals operations with ventures in 16 countries. Gencor made headlines by rehiring, as Billiton's chairman, Derek Keys, the popular Finance Minister whose resignation in June jolted the nation and briefly sent the rand plunging. Keys, 62, had been Gencor's chief executive before he entered politics in 1992 and played a key role in guiding the country through the minefield of deconstructing apartheid. By acquiring far-flung Billiton, Gencor becomes the world's fifth-largest aluminum producer, with bauxite and nickel among its other main interests. In another recent deal, retailer Pepkor Ltd. paid $100 million to acquire Poundstretcher, a chain of 150 food stores in Britain.
Financing such deals requires some tricky maneuvering abroad. South Africa's exchange controls ban the transfer of funds or other assets offshore to finance acquisitions. So to buy Billiton, Gencor issued $300 million in bonds to Shell, sold some British assets for $335 million, and borrowed $600 million from a consortium headed by Union Bank of Switzerland (UBS).
In Sappi's case, the money to buy Warren was raised mainly in Europe and the U.S., with help from UBS, Chemical Bank, and Donaldson, Lufkin & Jenrette. South Africa's restrictions on the flow of assets owned by foreigners are likely to be abolished soon. But, says Sappi Finance Director Bill Hewitt, carte blanche for South Africans is still a long way off.
South Africa's largest conglomerate, Anglo American Corp., is also expanding its overseas links. Through the company's international arm Minorco, it has long been established in mining and other primary production in Africa, the Americas, and Australia. Now the giant is deploying its massive resources to shift into high-tech manufacturing. The "prime experiment," says Laurie Olivier, head of Anglo American Industrial Corp.'s business development unit, is a $200 million joint venture to manufacture color-TV tubes in South Africa. The venture was formed a year ago with South Korea's Daewoo.
GAINING LEVERAGE. Although Anglo American and other South African companies are strong in mining technology, they are generally weak when it comes to manufacturing. "If we want to grow into a big-league manufacturing business, we need to increase our presence outside the country," says Olivier. "We need to get control of technology and, because of the exchange-control problem, set up partnerships to leverage South Africa's position."
The Daewoo venture illustrates Anglo's long-term plan to crack international markets. Step one is to build the manufacturing plant. Construction will start as soon as the government approves Daewoo's request to grant the new plant infant-industry status and protect it by slapping duties on all imported TV tubes. The facility, designed to produce more than 1 million tubes a year, is envisaged as a supplier to the African market and an exporter to South America and, possibly, parts of Europe. A successful venture with Daewoo, Anglo hopes, will lead to additional international partnerships.
For Sappi, Anglo, and other South African companies, the challenge over the next decade is to deepen their overseas ties. That's likely to mean taking some risks. But it's a price they're willing to pay for finally getting to stretch beyond their own borders.