Franchise industry continues to drive value through mergers and acquisitions

Dumisani Bengu, Head of Franchising at Absa

Mergers and acquisitions (M&A) have become an important driver of value in the South African franchise industry sector, which continues to grow in both volume and value for investors in this low risk high return sector of the economy. This is despite the recent trend of slow growth in the South African economy.

Our own data shows strong year-on-year growth in the franchise assets book between 2016 and 2017, which ran in excess of 20% and was primarily driven by M&A in the multiple store franchise groups. Most of this M&A activity was experienced in retail, restaurant and fast foods, and fuel franchise sub-sectors of the South African franchise landscape.

M&A generally refer to the transactions in which the ownership of companies, business organisations, operating units or assets are transferred or combined. In a merger, two organisations join forces to become one new business, usually with a new name whereas in an acquisition, one business buys a second which is normally a smaller company, which may then be integrated into the acquiring organisation, or run as a subsidiary.

This is done through a number of different transactions, such as mergers, acquisitions, consolidations, tender offers, purchase of assets and management acquisitions. There are a number of reasons why parties may want to engage in M&As, such as a need to secure capacity in areas like resources, technologies and brands. There may also be reasons such as industry consolidation and performance improvement. Others may want to diversify and or access new markets.

Whatever the reasons may be, ultimately the resultant efficiency improvements and growth contributes to business and/or corporate value accretion. The South African franchise sector has experienced heightened M&A activity as a result of almost all of the above reasons. It has, in the process, unlocked immense value to all involved parties, especially as it relates to consolidation of funding and investment, improved economies of scale and better efficiencies with Absa being an important financier of some of these deals.

At Absa, we have advanced considerable amounts in loans and advances as a consequence of recent M&A activity, with some single deals in the retail franchise sub-sector, for instance, exceeding R500-million, while the restaurant and fast foods sub-sector has also registered big single deals, with some coming at more than R300-million per deal. The restaurant and fast foods sub-sector asset book saw over 65% growth, with retail registering a credible 39%, and fuel growing at 23%.

Clearly, the franchise sector continues to experience buoyant activity and M&As have become a key vehicle of choice to enhance and unlock shareholder value. This is more so as franchising systems continue to grow, while a growing need for consolidation and scale become important to strengthen some franchise systems.

While parties may have varied reasons for embarking on M&As, it is important such deals are done properly to ensure that all the required benefits are realised. It is also important to check key attributes such as strategic, operational and cultural fit among the parties because, if insufficient attention is paid to these attributes, conflicts could arise in the process and destroy the value that was hoped for. In doing this, it is very important to use reliable and reputable experts from a host of professional fields, including lawyers, accountants, strategy consultants, deal architects, bankers, among others, to ensure that all legal and commercial attributes are handled properly. To ensure a successful M&A process, careful attention also needs to be given to doing proper due diligence as well as the structuring of the funding deal and corporate re-structuring.

As a bank, Absa has a huge appetite for these types of transactions and has the expertise to guide and assist parties involved in such deals. Also, as franchise is a focus sector to help drive growth in the bank and the broader economy, we have built a custom suit of offerings and capabilities to help clients. This is also important to us as it contributes positively to our citizenship imperative of enhancing economic growth, creating employment and reducing poverty.