Ask most financiers what drives a deal and you will hear two questions: what is the target worth, and how much debt can its cash flows carry? In South Africa, a third question increasingly matters more than either: who is allowed to own the asset? Get that answer wrong and even the best-priced, best-structured deal will not close.
Ownership used to be a box ticked shortly before signing. Today, it is often the biggest risk in the deal. Financial services, mining, aviation and other regulated sectors all raise the same issue, and anyone financing South African M&A needs to plan around it from day one.
Ownership is now a regulatory condition
In our view, there are three layers to this.
The first is merger control. Since the 2019 amendments to the Competition Act, the authorities must decide whether every merger can be justified on public interest grounds, whatever the outcome of the competition analysis. The Competition Commission’s Revised Public Interest Guidelines, which are non-binding, take the view that promoting a greater spread of ownership should be considered in every merger. They also look at the ownership of historically disadvantaged persons and workers across all the firms controlling the acquirer and the target.
The second is sector regulation, and South Africa has plenty of it. In banking, acquiring more than 15% of a bank or its controlling company needs prior permission, with further approvals above 24%, 49% and 74%, and the regulator must be satisfied that the deal is not contrary to the public interest or the interests of depositors. Insurers and other financial institutions sit under a similar regime: anyone becoming a significant owner – broadly, a person able to control or materially influence the business, including by controlling 15% of the voting rights – needs prior written approval. In mining, the Minister’s written consent is needed to transfer a mining right or a controlling interest in an unlisted company that holds one, and the 2018 Mining Charter sets a target of a minimum 30% BEE shareholding for mining rights. Aviation has its own version: ownership rules effectively cap foreign ownership of a South African airline at 25%.
The third, and the one most often overlooked, is the regulatory position of the buyer itself. When the Prudential Authority assesses an applicant, it looks at ownership, governance, and the financial and other resources available to it, and the mining regulator likewise asks whether a transferee can meet the obligations of the right. In other words, regulators examine the acquiring group as closely as the target.
What this means for the financing
As a result of this, we see three changes in approach:
First, certain funds is a regulatory question, not just a commercial one. Lenders asked to commit through a long approval process from several regulators are taking a risk that is hard to price, and which neither side controls. Commitment periods, ticking fees, extension rights and the definition of an “acceptable” regulatory condition need to be negotiated with as much care as the margin. A long-stop date should be set by mapping out each approval realistically, not by working back from the date the parties want to complete.
Second, security must be enforceable by someone allowed to own the asset. Security over shares in a regulated entity is only as good as the lender’s ability to enforce it. If enforcing it, or selling the asset afterwards, would itself need ministerial consent, breach an ownership cap or unwind a BEE shareholding, the security is worth less than it appears. Transfer restrictions, permitted-transferee clauses and enforcement mechanics have to reflect who can actually hold the asset.
Third, the buyer’s capital structure is part of the regulatory case. Regulators assess whether the acquiring group can support the target, so how the acquisition is funded forms part of the approval application. Heavy holding-company leverage, or funding that depends on capital that the buyer’s home regulator may limit, can count against it. Equity consideration, development finance institution (DFI) participation and local funding are increasingly chosen for regulatory, as well as commercial, reasons.
Funding the ownership, not just the asset
There is a further layer that lenders often meet late: the ownership requirement must itself be financed. The 30% target from the 2018 Mining Charter includes carried interests for employees and host communities that are issued at no cost to them, with that cost recovered from the development of the asset. The Mining Charter itself notes that past structures, where dividends were used to service the BEE partner’s acquisition debt, left too little flowing to the intended beneficiaries. For financiers, that means vendor finance, preference share funding and dividend waterfalls for BEE partners are no longer side issues. They go to whether the ownership structure that the regulator relies on will hold, and so to the value of the lender’s own position.
Planning the deal from ownership first
The practical answer is to change the order in which a deal is put together. Too often, the asset is priced, the debt structured, and only then is the regulatory position worked out. We suggest the reverse. Start by asking who may own the asset, at what percentage, with whose approval and over what timetable, whether the asset is a bank, an insurer, a mine or an airline. Then build the capital structure, security package and certain-funds terms around the answers.
Sponsors and lenders who work this way will find that regulated ownership becomes a risk they can plan for and price. As local investors, DFIs and pan-African buyers compete for South Africa’s regulated assets, that discipline may well decide who wins those deals, and who gets them over the line.
Deborah Carmichael is an Executive, Banking and Finance | ENS
This article first appeared in DealMakers, SA’s quarterly M&A publication.
DealMakers is SA’s M&A publication.
www.dealmakerssouthafrica.com
