Sector Outlook

The business services sector encompasses a diverse profile of businesses, all of which provide some form of service to other companies. These services include consulting, facilities management, waste handling, staffing, and security services to name a few.

Given the diverse nature of the sector, it has historically provided a stable environment for mergers and acquisition activity. The outbreak of the COVID-19 pandemic in 2020 and the subsequent inflationary environment in 2022 however, introduced the sector to unprecedented uncertainty, resulting in deal activity declining during both years.

Global deal activity decreased by 11% during 2022 after reaching record highs the year before. While deal activity declined during 2022, deal values increased.

Aggregate deal values increased by 26% between 2021 and 2022 with the average deal size nearly doubling over the same period.

This was largely driven by a flight to size as larger acquisition targets offered investors the benefit of increased diversification. Moreover, these firms demonstrated resilience during the pandemic, maintaining their profitability in most cases, while the global economy declined – adding to their attractiveness.

Global M&A transactions

2022 was a good year for mega-deals in the business services sector (deals valued above R10 billion). The year saw a record total of 27 mega-deals completed, amounting to over R5.5 trillion. The most notable of them being Brookfield Business Partners’ acquisition of Nielsen Holdings (Consulting) during October, The Carlyle Group’s acquisition of ManTech International Corporation (Consulting) during September, and Clayton, Dubilier & Rice’s acquisition of select operations from PWC (Consulting) during April.

M&A activity on the African continent focusing on South Africa

In contrast to global M&A trends, deal activity in the African business services sector increased by 82% during 2022 as international investors flocked to acquire assets on the continent. Cross-border transactions increased substantially over this period, accounting for 75% and 64% of all completed transactions in Africa and South Africa respectively, an increase from 27% and 20% respectively compared to the year before.

The increase in cross-border transactions was a result of international acquirers capitalising on dampened valuations in the African market while simultaneously diversifying their service portfolios.

Since the rise of remote work initiatives, multinational services companies have been increasingly expanding their geographic footprint in search of value, with Africa benefiting in the process.

African M&A Transactions

Notable South African transaction

(Norway) DNV’s acquisition of Power System Dynamics, a consulting firm to the high voltage power sector, during November, expanding the company’s electricity grid analysis capabilities.

(USA) Wilson Human Capital Group’s acquisition of Tracking Talent during October, expanding the company’s presence in the region enabling them to better support their EMEA clients.

African Rainbow Capital’s (“ARC”) acquisition and subsequent delisting of the facilities management company, CSG Holdings, during April. The acquisition enabled ARC to implement its turnaround strategy unencumbered by JSE listing requirements and public shareholder scrutiny.

Trends expected to drive M&A activity in the sector

Sector consolidation to increase scale

-Entities operating in the business services sector are expected to continue looking to competitor acquisitions to unlock scale, reduce marginal costs, and improve profitability. While the economic outlook for 2023 might appear uncertain, business should focus their attention on areas where growth continues. We therefore expect providers of niche-offerings in growing business areas to become attractive targets for sector consolidators.

Acquisitions focusing on talent to maintain competitiveness and grow market share

-Companies in the business services sector depend on their staff’s skills to maintain their competitive advantage. As companies find it increasingly difficult to attract the right talent, business services companies are expected to look to acquisitions to enhance their staff capabilities. This creates opportunities in the training space as well, as companies look to upskill their existing staff compliment. As investment in employee training increases, training service providers will become increasingly attractive to potential acquirers, subsequently driving up valuations in this space.

Business process outsourcing becomes increasingly attractive as cost pressures mount

-As businesses face margin pressures, many look to business process outsourcing to streamline their operations and combat rising labour costs. We therefore expect the sector to remain attractive to both strategic and financial acquirers throughout 2023.

Continued involvement of private equity investors

Private equity investors accounted for 22% and 20% of all completed transactions during 2022 in South Africa and Africa respectively. The fragmented nature of the sector and recurring revenues provide investors with attractive opportunities to employ sector roll-up strategies with relatively high probabilities of success. We therefore expected private equity investors to remain active in the market throughout the year.

M&A activity within the South African Business Services sector is likely to be positive during 2023.

This is largely driven by the noticeable increase in private equity and cross-border transactions last year, paired with the fact that eight transactions have already been announced during the first month of 2023. Given the degree by which M&A activity during 2022 exceeded 2021 levels, we expect that activity in 2023 will continue at elevated levels.

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