Reflecting on mergers and acquisitions in the facilities management sector, and some opportunities as economies begin to open – A facilities management perspective

24 March 2021: The effects of the Covid-19 pandemic have certainly been felt across many areas of business. As far as mergers and acquisitions (M&As) are concerned, some potentially lucrative partnerships and transactions were brought to a standstill by the pandemic and the associated lockdowns. However, we are seeing some opportunities begin to emerge as […]

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24 March 2021: The effects of the Covid-19 pandemic have certainly been felt across many areas of business. As far as mergers and acquisitions (M&As) are concerned, some potentially lucrative partnerships and transactions were brought to a standstill by the pandemic and the associated lockdowns. However, we are seeing some opportunities begin to emerge as economies slowly recover, with economic recovery projections of up to 3.6% in 2021, according to Trading Economics.

The facilities management sector was not spared from the devastating impact of the pandemic. As restrictions eased in the last quarter of 2020, we observed that Covid-19 had impacted different countries and industry sectors differently. According to Fitch Solutions, a division of Fitch Ratings, out of six sub-Saharan African countries, South Africa was the most impacted by the Covid-19 lockdowns. The worst impact was seen in the second quarter of 2020 during Level 5 lockdown, when the country’s economy took the biggest dip, declining by 51.7% (Stats SA). While other countries such as Nigeria, Kenya, Ghana, Zambia and Uganda were affected, the impact was not as severe as that experienced in South Africa.

As with many industries, this sector has been forced to explore new ways of doing business to survive and to provide value add to its clients. Remote working trends that emerged during the pandemic led to services such as office cleaning, landscaping, office services and plans taking a lot of strain. The banking sector adopted new trends, with some banks now having permanently adopted the 60/40 working from home model.

Shifting to remote deal-making, especially at due diligence stages, was a challenge, as face to face has always been a norm. New ways of working emerged as we started to explore opportunities beyond conventional deals in the facilities management sector, and we continue to explore additional opportunities presented by technology to supplement our service offering to our clients.

M&A activity slowed down during the lockdown. Generally, deals that were already far into the process were concluded, while deals at exploration stages were affected. Valuations, for example, became irregular due to shocks in the economy. Some companies that were distressed have been available for sale at a discount. We have seen targets that are available for sale at previous EBITDA and EBITDA multiples, which are at premiums in these times and make no economic sense. The challenge that we face in the short term is ensuring that targets are fairly priced. Servest closed an acquisition of the 20-year-old intervention and specialist security service provider, Unite Group. This acquisition included acquisition of a fleet of armoured and Aardvark vehicles.

Globally, M&A activity has started to pick up, and the South African markets are following. My view is that we will not see the same levels of transaction volumes that we did in 2019. This is because of the COVI D19 impact; as the sector starts to recover, clients are likely to re-evaluate their needs, cutting down to save costs, preserving their cash while prioritising their needs.

Covid-19 vaccinations will play a vital role in how local industries and overall economies recover. According to a report by the Economist Intelligence Unit, widespread vaccination will have been achieved in 37 countries by late 2021, in 30 countries by mid-2022, in 37 countries in late 2022 and in 84 countries from 2023. South Africa is among the countries that are projected to achieve mass vaccinations by 2022/2023.

In efforts to achieve herd immunity, the South African government has set a target to immunise 67% of the population by the end 2021. According to global Covid-19 Vaccine Data, South Africa has fully vaccinated over 107,000 healthcare workers which represents 0.18% of the population.

These efforts could go a long way towards boosting economic recovery, as we will begin to see more companies being to operate at optimal levels. Economic sector recovery will depend on how well the South African economy recovers. According to Fitch’s Sector Outlook 2021, South Africa’s GDP growth will recover to 2.3% in 2021, reflecting base effects and the roll-out of Covid-19 vaccines from the second half of the year. Focus Economics forecast that the economy will grow at 3.6% in 2021, 2.5% in 2022 and 2.5% in 2023. Domestic and foreign direct investment should pick up on the back of this growth. SA growth, however, will remain weak relative to sub-Saharan African and Eastern Mediterranean averages.

All things considered, the expectation is that M&A activity and strategic partnerships will increase in 2021. The FM space is expected to perform better than in 2020, as a better understanding of the impact of Covid-19 on businesses is gained. Collaborations between the sector and its customers will emerge.

Beyond the Covid-19 pandemic, the facilities management sector must reinvent itself. Despite some of the challenges that the pandemic has imposed across different industries, facilities management will remain relevant. Businesses need specialist companies that can manage their facilities, logistics and asset data to improve performance and their triple bottom line. With this in mind, opportunities for M&A will emerge. The current trend is about adapting and staying ahead of the curve to stay in business, identifying those opportunities with a potential to produce current and future value, irrespective of the current context in which we find ourselves. We must still tread with caution.

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