South Africa remains a springboard for new firms spreading wings

SINCE the discovery of vast mineral wealth at the end of the 19th century, SA has provided fertile ground for many world-class companies that have grown into formidable global players, both in Africa and around the world.

One need look no further than SABMiller, Aspen Pharmacare, MTN, Old Mutual, Bidvest, Remgro, BHP Billiton, Steinhoff and Anglo American to find companies with solid roots in SA that are now well-known names on the global stage.

At first, SA’s relatively small size in the context of the global economy was enough to encourage many South African companies to turn their attention to seemingly greener pastures offshore to further their growth ambitions. More recently, headwinds arising from the local macroeconomic, political and labour environment have provided extra impetus to South African companies’ desire for international expansion. The reasons are numerous, but include decreasing local confidence owing to lower-than-expected economic growth, regulatory uncertainty, a weakening of the rand against most major currencies, along with a perception that its decline will continue unabated, and the desire of most shareholders to seek diversification and offshore earnings.

 

According to the latest South African Reserve Bank data (second quarter of this year), outward-bound foreign direct investment increased, and inbound foreign direct investing decreased on a quarterly basis.

This is not surprising given that South African real gross domestic product is expected to grow at less than 2% in the near term, while myriad structural and economic issues hamper business growth and development. Management teams are heeding the sentiments of their investor bases, which favour companies with meaningful offshore exposure, a fact supported by the high market ratings for companies with successful offshore expansion strategies.

Earlier in the year, one of SA’s largest firms, Steinhoff International, migrated its primary stock exchange listing to Frankfurt, with a secondary listing on the JSE. Steinhoff has grown into one of the JSE’s largest counters, with a market capitalisation of more than R300bn. It already had a significant presence in Europe, the UK and Australasia, and with the recent Pepkor acquisition, continues to expand its geographic reach and diversify earnings.

After Woolworths acquired David Jones in Australia, the expansion of South African retailers offshore continued with The Foschini Group’s acquisition of international retailer Phase Eight, which has a good track record in the UK and Europe, and huge expansion potential. This allowed it to extend its range from eight to 26 countries. Mediclinic is another SA-headquartered company that continues to expand. In June it announced the acquisition of a 29.9% stake in UK-based private hospital group Spire Healthcare. This allowed Mediclinic to enter another developed market with good growth prospects given the growth potential for private health-care providers in the UK, and gave it diversification of earnings into a strong currency.

The group has followed this with the proposed merger with Al Noor, a United Arab Emirates-based hospital group listed on the London Stock Exchange, forming the largest hospital group in that country. After the transaction, Mediclinic will become a FTSE Top 100 firm with operations in Europe, the Middle East and SA, and it will generate more than 70% of its earnings from operations outside SA. A listed platform on the London Stock Exchange will enable it efficiently to raise new equity capital and pursue its growth plans through the use of valuable scrip.

After the sale of its Pepkor stake to Steinhoff, Brait, the investment holding company listed on the Luxembourg Stock Exchange and the JSE, has also favoured offshore opportunities, evinced in its recent acquisitions of fashion retailer New Look and Virgin Active health clubs, and an increased stake in UK-based Iceland Foods.

Foreign expansion plans are not limited to large South African firms. Super Group, a midcap firm, diversified its earnings by acquiring niche German logistics operator IN tIME Holding in August. It now expects more than 60% of its earnings to be generated outside SA (including its existing offshore operations in sub-Saharan Africa, Australasia and the UK). While some firms have chosen global markets, others have repackaged their South African operations into standalone entities and have unbundled them to shareholders. Most notably, BHP Billiton unbundled its South African operations along with various noncore operations globally into a new company, South32. Shareholders approved the demerger on the basis that the firm would simplify its operations from 41 to 19 assets, and focus on core resources such as iron ore and oil.

This followed the spin-off by Gold Fields of certain of its South African gold mines into a newly created vehicle, Sibanye Gold. Given the tough operating conditions, ranging from rising labour costs to regulatory uncertainty, electricity and water supply pressures, South African gold mines have been facing declining profitability over the past decade. These challenges no doubt contributed to Gold Fields opting to focus on its other operations, to help drive future growth and profitability.

The move offshore has been more pronounced recently and looks set to continue. Management teams are hard-pressed to find opportunities locally that can compete with those offshore, while companies with growing international exposure are enjoying premium ratings. Firms such as Aspen, Steinhoff International, Sanlam and Woolworths are shining examples. The reality is that capital will always be allocated where it is most productively deployed, and to that end, SA Inc faces challenging times.

While many global macro factors are outside the country’s control, there is a fair amount that can be done to encourage investment by local and foreign firms.

Continuing regulatory and policy uncertainty will need to be tackled to improve SA’s attractiveness to investors — uncertainty kills confidence, which in turn kills investment. Improving infrastructure, tackling corruption and reducing bureaucracy should be used to spur further growth.

As it stands, prudent fiscal management and monetary policies, a relatively stable democracy, a sound financial system and a highly regulated banking sector should provide a solid platform.

Importantly, investors should be sold the benefits of using SA as a gateway to the rest of Africa, one of the fastest-growing regions in the world.

Despite impediments in the domestic business environment, the excellent track record of most of the South African firms that have pursued offshore opportunities to diversify their businesses and access new markets for growth, should provide a platform for the next wave of world-class South African firms.

• Nagar is a corporate finance executive and Varughese a corporate finance transactor at Rand Merchant Bank