African prospects ap­peal­ing

The con­ti­nent’s at­trac­tion as an in­vest­ment des­ti­na­tion con­tin­ues to grow

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - JAN GROE­NEWALD

AFRICA con­tin­ues to re­ceive more and more in­ter­est as an in­vest­ment des­ti­na­tion from in­vestors look­ing to emerg­ing mar­kets to ac­cess their growth po­ten­tial or from in­vestors look­ing to se­cure the nat­u­ral re­sources that the con­ti­nent of­fers.

These are some of the high­lights from PwC’s sixth edition of its bi­en­nial val­u­a­tion method­ol­ogy sur­vey.

An African Per­spec­tive: Val­u­a­tion Method­ol­ogy Sur­vey 2012 re­flects the views of 49 fi­nan­cial an­a­lysts and cor­po­rate fi­nanciers. This year the study broad­ens the reach of the pre­vi­ous South African sur­veys by in­clud­ing per­spec­tives from an­a­lysts in East and West Africa.

A sig­nif­i­cant num­ber of ex­ec­u­tives have de­clared their com­pany’s in­ten­tions of grow­ing their pres­ence in Africa, and the num­ber of global com­pa­nies look­ing to es­tab­lish a foothold on the con­ti­nent has in­creased.

A key char­ac­ter­is­tic of the post2008 re­ces­sion pe­riod has been the in­crease in promi­nence of Africa as an in­vest­ment des­ti­na­tion. With an al­ready higher than av­er­age growth rate, Africa is fast be­com­ing an at­trac­tive place to do busi­ness es­pe­cially as cor­po­rates in de­vel­oped mar­kets seek to aug­ment slow­ing growth rates in their home mar­kets. Price and value how- ever re­mains the key chal­lenge for com­pa­nies do­ing deals in Africa as the gap be­tween sell­ers and buy­ers seem larger on the con­ti­nent than in other ju­ris­dic­tions.

This year’s sur­vey looks at com­pa­nies’ per­cep­tions of in­vest­ment around Africa as an in­vest­ment des­ti­na­tion. Spe­cific ques­tions ad­dressed in this edition of the re­port re­late to the rea­sons for the in­creased in­vestor in­ter­est in Africa; the in­dus­tries that are at­tract­ing the most in­ter­est in Africa from po­ten­tial in­vestors; the level of cross-bor­der and in­tra-African in­ter­est in the con­ti­nent; deal ac­tiv­ity in African mar­kets; com­pa­nies’ per­cep­tions of African mar­kets; and the chal­lenges faced by com­pa­nies in per­form­ing val­u­a­tions in African mar­kets.

Eco­nomic growth in Africa has re­cently been sig­nif­i­cantly higher than that in many de­vel­oped re­gions, which is of­ten cited as the main rea­son for in­vest­ment in Africa. On av­er­age, de­vel­op­ing economies have an expected five year com­pound an­nual growth rate (CAGR) that is more than twice that of de­vel­oped economies, ac­cord­ing to the In­ter­na­tional Mone­tary Fund (2012). Africa has a lot to of­fer, par­tic­u­larly in terms of scarce re­sources. Cur­rently the level of de­mand in Africa is also im­prov­ing, mak­ing the con­ti­nent a more at­trac­tive place to do busi­ness. Growth in de­mand can be partly at­trib­uted to the ma­tur­ing bank­ing sec­tors in Africa. How­ever, there are also a host of fac­tors hin­der­ing the con­ti­nent’s suc­cess, such as a lack of in­fra­struc­ture, var­i­ous bar­ri­ers to trade, low pro­duc­tiv­ity and skills short­ages. In­fra­struc­ture and tech­nol­ogy are also im­prov­ing on the con­ti­nent.

There is a strong per­cep­tion in the mar­ket that African com­pa­nies have greater growth ex­pec­ta­tions than those in other mar­kets. No less than 92% of re­spon­dents see this as ei­ther “very rel­e­vant” or “ex­tremely rel­e­vant” in

There is a strong per­cep­tion in the mar­ket that African com­pa­nies have greater growth ex­pec­ta­tions than those in other mar­kets

ex­plain­ing the in­creased in­ter­est in African com­pa­nies.

In ad­di­tion, there is a strong drive to di­ver­sify away from low-re­turn mar­kets, with 92% of an­a­lysts and cor­po­rate fi­nanciers also see­ing this as ei­ther “very rel­e­vant” or “ex­tremely rel­e­vant”. This demon­strates in­vestors in de­vel­oped mar­kets’ de­sire to aug­ment slow­ing growth in home mar­kets. On a sec­ondary level, im­proved po­lit­i­cal sta­bil­ity and risk-re­turn trade­offs have con­trib­uted to a more pos­i­tive per­cep­tion of African mar­kets.

The re­sults of the study also in­di­cate that the ma­jor­ity of val­u­a­tions are still per­formed for in­vestors in home mar­kets. How­ever, a sig­nif­i­cant num­ber of val­u­a­tions are also be­ing per­formed for in­vestors from Europe and the US, which un­der­scores the height­ened level of in­ter­est from de­vel­oped mar­ket in­vestors seek­ing ex­po­sure to higher an­tic­i­pated growth in Africa.

The level of ac­tiv­ity by in­dus­try tends to dif­fer be­tween re­gions. The study shows that the most pre­dom­i­nant tar­get in­dus­try in West Africa ap­pears to be the re­tail, con­sumer goods and in­dus­trial prod­ucts in­dus­try, whereas min­ing con­tin­ues to be a key in­dus­try within the south­ern African mar­ket.

An­a­lysts and fi­nanciers cited the lack of data, both about com­pa­ra­ble com­pa­nies that could pro­vide val­u­a­tion bench­marks in a val­u­a­tion anal­y­sis, as well as in­dus­try data (eg, around mar­ket de­mand, the com­pet­i­tive en­vi­ron­ment and growth ex­pec­ta­tions) that could sup­port cash flow fore­casts as chal­lenges to per­form­ing val­u­a­tions.

The re­sults of the study in­di­cate that there is a lack of con­sis­tency in ac­count­ing stan­dards in East and West Africa, which also makes it dif­fi­cult to carry out val­u­a­tions.

The out­look for deal ac­tiv­ity in the emerg­ing mar­kets is clearly im­prov­ing. How­ever, there are also chal­lenges to per­form­ing val­u­a­tions in emerg­ing mar­kets, such as ac­count­ing for coun­try risk, lack of data and in­con­sis­tent ac­count­ing stan­dards. Com­pa­nies en­ter­ing new emerg­ing mar­kets need to spend time re­search­ing the prospec­tive mar­kets thor­oughly, even more than they would a po­ten­tial new in­vest­ment in a new de­vel­oped mar­ket.

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