Global M&A hit new highs in 2021, breaking prior records by a long shot. Over 62,000 deals were announced globally in 2021, up 24% from 2020. 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, up 32% from 2020. Publicly disclosed deal value exceeded LKR33Bn, including 03 megadeals (deal value >LKR4Bn). Energy and export-oriented businesses led M&A volumes and values 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 underperforming/non-core businesses as entities looked to have leaner balance sheets and agile business models to weather any potential storms; government policies (clean energy, NBFI sector consolidation, FX restrictions, building technology & logistics hubs and upliftment of SMEs) and attractive company valuations. Founders and other investors (PEs, family offices, HNIs etc.) also capitalized on attractive valuations to realise their investments.

Development Finance Institutions invested a total of LKR25Bn into financial services and retail sectors through private placements, to support socio-economic growth and SME upliftment.

The Colombo Stock Exchange saw 14 IPO’s raising >LKR12Bn 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, savings in operating costs, lower taxes, and low interest rates have 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 that 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, whichwill be a key contributor to the foreign inflows and much needed large scale investments. Projects at the Colombo Port City in particular will target high end investors. Sri Lanka’s proposed efforts to engage with the IMF will also spur investor confidence in the international market thus driving FDIs
• Reduce import dependency: Government’s aim for energy self-sufficiency, reduction of fossil fuel imports, encouraging local pharmaceutical, and food production to reduce the dependency of imports will require substantive investments. Companies with high import content will attempt to find alternative choices of local raw material and become more cost conscious.
• Foreign currency: The dearth of foreign currency has incentivized 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 masterplan for consolidation of NBFIs 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 due to economic headwinds. 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 some asset sales at discounted values.
• Technology related investments – capitalizing on the boom in e-commerce during the pandemic, businesses with a greater technology orientation and tech service providers are likely to see enhanced activity and adoption levels.
• Global impact: Sanctions on Russia are expected to impact deal activity due to global market volatility, making investors seek safe assets/economies, potentially affecting Sri Lanka’s inbound deals. Global volatility will also create opportunities for a segment of investors who wish to enter 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 go public, with six IPO’s in the pipeline for 2022, according to CSE.

PwC Sri Lanka Deals advisory offers a spectrum of transaction advisory services, working with clients to originate, create, execute, and realise value from deals. Through data driven insights, they help businesses realise the potential of their capital raisings, mergers, acquisitions, divestitures and capital markets transactions.

Photo Caption:  lest to right - Ruvini Frenando, Director Deals Strategy, Aruna Perera, Director Corporate Finance & Valuation Consulting and Nishadee Weragala, Associate Director M&A