Global Mergers and Acquisitions (M&A) hit new highs in 2021, breaking prior records with 62,000 deals announced globally, +24% Year-on-Year. Demand for technology, and for digital and data-driven assets, and the pent-up-deal-making demand from 2020 drove M&A activity in 2021.
In Sri Lanka, Deal activities (including M&A and private placements) rebounded in 2021, with 30+ announced deals, +32% Year-on-Year. Disclosed deal value exceeded LKR 33 billion, including three megadeals (deal value LKR 4 billion). Energy and export-oriented businesses led M&A activity in 2021 whereas sectors hardest hit by Covid-19 continued to struggle.
According to Nishadee Weragala, Associate Director M&A, the key themes that drove Deals were: divestitures of under performing/non-core businesses as entities want leaner balance-sheets and agile business models to weather any potential storms; government policies (clean energy, NBFI-sector consolidation, FX restrictions, building technology and logistics hubs and SME uplift) and attractive valuations. Founders and investors (PEs, family-offices, HNIs etc.) also capitalised on attractive valuations to realise their investments.
Development Finance Institutions invested a total of LKR 25 billion into financial services and retail sectors through private placements, to support socio-economic growth and SME uplift.
CSE saw 14 IPO’s raising LKR 12 billion of equity-capital in 2021, the highest ever since 2011. Tax concessions offered in the National Budget 2021, and excess market liquidity from low-interest rates drove equity-market activity.
PwC’s predictions for Deals in 2022
According to Ruvini Fernando, Director Deals Strategy, over the past few years, operating cost savings, lower-taxes, and low-interest rates helped many companies achieve year-on-year earnings growth whilst Covid-induced business reconfiguration spurred divestments and M&A.
However, currently each of these pillars are facing pressure in Sri Lanka, from rising interest rates, inflation, devaluation, taxes, commodity prices and tightening regulations. This volatility will see a wide range of new business trends and opportunities emerging during 2022.
PwC notes the following factors are expected to drive deals in 2022:
= Attracting FDIs: Sri Lanka is expected to go on a major push to attract FDIs, which will be a key contributor to foreign inflows and much-needed large scale investments. Projects at Colombo Port City will target high end investors. Sri Lanka’s proposed efforts to engage with the IMF will also spur investor confidence in international market thus driving FDIs
= Reduce import dependency: Government’s aim for energy self-sufficiency, fossil fuel import reduction, encouraging local pharmaceutical and food production to reduce import dependency will require substantive investments. Companies with high import content will look for local alternatives of local raw material and become more cost-conscious.
= Foreign currency: The dearth of foreign currency has incentivised export earnings, as import-dependent businesses look to complement their outflows with export earnings. Sri Lanka is also looking to increase its value-added-export-basket and strong local brands will seek overseas markets.
= Financial sector consolidation: CBSL’s master plan for NBFI consolidation is being fast-tracked to improve NBFI resilience and competitiveness.
= Cross-border expansion: Companies are looking for international expansion for shareholder value creation and to reduce country risk. This will most likely happen via strategic partnerships.
Sale of distressed assets – within the property and real estate markets in particular, the fallout from Covid-induced business contraction is likely to see asset sales at discounted values.
= Technology investments – capitalising on the e-commerce boom during the pandemic, businesses with greater technology orientation and tech service providers are likely to see enhanced activity and adoption.
= Global impact: Sanctions on Russia are expected to impact deal activity due to global volatility, making investors seek safe assets/economies, potentially affecting Sri Lanka’s inbound deals. Global volatility will create opportunities for a segment of investors who wish to enter currently risky economies with long-term growth potential at an attractive price point.
Following a record year, CSE is considering extension of concessions to encourage more companies to list, with six IPO’s in the pipeline for 2022.