The rise of take-privates in South Africa:

Last year in the United States, the value of companies going private surpassed the value of companies going public. In the African context, South Africa is fit for private equity investment due to its advanced banking and regulatory systems, structured legal system and developed financial markets. Over the past few years, South Africa has experienced an upward trend of take-privates. Understanding how take-privates are implemented in South Africa is key.

Public-to-private transactions commonly occur when public companies are undervalued. This was so for a number of well-known companies such as Dell Inc. and Burger King, who have gone private in recent years. The South African market is likewise down, which creates an environment where private equity investments and p2p transactions are opportune. For political and economic reasons in South Africa, many public companies may be worth more in the private sphere. This presents an opportunity for foreign private equity investors or others to buy South African assets cheaply, as is the case with the proposed takeover by PepsiCo of Pioneer Foods for R25 billion.

Private equity investment in Southern Africa more than doubled in 2017, to a total of R31.3 billion, according to the Southern African Venture Capital and Private Equity Association (SAVCA) 2017 and 2018 Private Equity Industry Surveys. As private equity investments in the country rise, so have the number and value of take-privates. In recent years, we have seen some significant p2p transactions. AFGRI Limited successfully delisted. According to a statement by the Chairman of AFGRI, this has allowed AFGRI the opportunity to improve its financials, increase its black economic empowerment rating and improve its focus on the business. More recently, Mondi Limited published a circular proposing a take-private.

Take-privates in South Africa are usually structured by way of a scheme of arrangement in terms of section 114 of the Companies Act, 2008 (Companies Act). A scheme of arrangement is an agreement between the company and its shareholders to purchase the company’s shares. If 75 percent of shareholders approve the scheme, the scheme is binding on all shareholders. Schemes are proposed by the board to the shareholders after an offer from the buyer is received.

Once an offer is received by the board, the board is obliged to constitute an independent board and retain an independent expert to evaluate the effect of the arrangement. The report produced by the expert must indicate the material effects of the proposed arrangement, especially as they relate to the shareholders and the business and prospects of the company. This report will be provided to the independent board, and the independent board will in turn provide the report to the shareholders, along with a recommendation to shareholders whether to vote in favor of the scheme.

The offer requires a South African bank guarantee or cash confirmation from a third party reflecting that the funds are available. The proposal must be approved, at a duly constituted meeting, by 75 percent of the shareholders entitled to vote on the deal. Votes of the acquiring party, or any parties acting in concert with the acquiring party, may not be counted for quorum or in support of the resolution. Court approval may be required in limited circumstances.

The Takeover Regulations, as well as the JSE Listing Requirements, add additional layers of regulation to take-privates in the South African market. The company must obtain a compliance or exemption certificate from the Takeover Regulation Panel, as well as apply to the JSE for its delisting.

The South African market offers an exciting investment opportunity in relation to private equity deals in the context of take-privates. Understanding the legislative and regulatory framework is vital to a seamless public-to-private transition.