Africa of­fers rich re­wards

Financial Mail - Investors Monthly - - Feature: Corporate And Investment Banking - Barnard. Jo­hann

ith the lo­cal econ­omy ex­pected to show muted growth over the next few years, it is un­sur­pris­ing that a growing num­ber of SA cor­po­rates are look­ing be­yond our bor­ders for earn­ings, writes

WEx­pand­ing into Africa is no walk in the park, and there are enough cor­po­rates with burnt fin­gers to at­test to that, but those that are able to do so suc­cess­fully tend to be richly re­warded.

The con­ti­nent rep­re­sents a mar­ket ripe for the pick­ing. And by all ac­counts it is one area that cor­po­rates and their bankers are keen to ex­ploit for ag­gres­sive growth.

Sas­fin cor­po­rate fi­nance head Fran­cois Otto is ex­cited about the growth po­ten­tial. He points out that this view is based on long-term prospects — the next 20-30 years and be­yond.

“I’m bullish about Africa over the long term. Right now, there is no doubt that some SA com­pa­nies have had a tough time, but the case of Shoprite il­lus­trates that if you have a lit­tle bit of guts and street smarts you can get very far be­cause the mar­ket is so big,” he says.

“[When it comes to] struc­tural chal­lenges on the con­ti­nent, un­for­tu­nately peo­ple do tend to tar [all of] Africa with the same brush. But peo­ple at the coal­face re­alise that these ju­ris­dic­tions are very dif­fer­ent and that you need the right part­ner for the right coun­try. And if you have the right struc­tures, lo­gis­tics and part­ners, there is a lot of money to be made and a lot of ap­petite.”

He adds that many com­pa­nies that en­tered the mar­ket dur­ing the com­modi­ties su­per-cy­cle have been burnt, as the valu­a­tions of those as­sets have fallen in tan­dem with com­mod­ity prices. The risk in­her­ent in such short-term op­por­tunism is also il­lus­tra­tive of the ap­proach re­quired to suc­ceed.

Or­ganic, not ac­quis­i­tive growth, is the route to suc­cess in Africa. Sim­ply en­ter­ing or buy­ing into a mar­ket is no sure recipe for suc­cess. In the ab­sence of an un­der­stand­ing of the busi­ness, a proper valu­a­tion and the right man­age­ment and part­ners, “you have a good chance that the ac­qui­si­tion will blow up in your face,” says Otto.

With a 20% share­hold­ing in pan-African group Ecobank, Ned­bank feels it has the right in­gre­di­ents, through a pres­ence in 36 coun­tries, to help steer clients in their African ex­pan­sion.

“Nu­mer­ous op­por­tu­ni­ties [re­main] in the rest of Africa, but you have to be quite care­ful about where you op­er­ate,” says Shab­bir No­rath, head of the bank’s cor­po­rate & in­vest­ment bank­ing di­vi­sion. “The ques­tion is: where ex­actly in Africa do you want to op­er­ate? There are some op­por­tu­ni­ties in North Africa, but the ma­jor­ity are in sub-Sa­ha­ran Africa, and even in that mar­ket it is mainly East or West Africa.

“East Africa is slightly eas­ier be­cause the lan­guage and laws are sim­i­lar to [those of] SA, whereas West Africa is more chal­leng­ing . . . Nige­ria is not nec­es­sar­ily the place for the faint-hearted. The size of the mar­ket is at­trac­tive but it is also a very chal­leng­ing en­vi­ron­ment.”

One of the chal­lenges, he says, is find­ing deals of the right size and na­ture. Buy­ing up a host of smaller play­ers can mean a dis­pro­por­tion­ate ef­fort is ded­i­cated to man­ag­ing or in­te­grat­ing these op­er­a­tions.

An in­ter­est­ing char­ac­ter­is­tic of larger groups on the con­ti­nent, he says, is that they tend to be fam­ily owned. Gain­ing con­trol of these is a lot more dif­fi­cult.

Look­ing at op­por­tu­ni­ties and sec­tors, Otto says com­mer­cial prop­erty re­mains at­trac­tive, though ac­tiv­ity lev­els are down as in­vestors wait to see how JSE-listed, pure-play African prop­erty coun­ters per­form.

“The other area where I see a lot of ac­tiv­ity is on the FMCG [fast-mov­ing con­sumer goods], con­sumer prod­ucts and food side,” he says. “Sub-Sa­ha­ran Africa has 1bn con­sumers. In many coun­tries, bad pol­icy is hold­ing those peo­ple back. But the beauty of hu­man na­ture is that we are sur­vivors and peo­ple are al­ways try­ing to bet­ter their lives . . . [so] ba­sic ne­ces­si­ties, at a min­i­mum, will al­ways be re­quired.”

It shows that if you have a lit­tle bit of guts and street smarts you can get very far

While the huge con­sumer mar­ket holds great prom­ise for firms look­ing to ex­pand in Africa, other op­por­tu­ni­ties, such as in­fra­struc­ture or man­u­fac­tur­ing, are en­tic­ing over the longer term.

Com­pa­nies and in­di­vid­u­als able to demon­strate the street smarts that Otto so ad­mires are likely to find ea­ger back­ers in the form of cor­po­rate SA bankers look­ing for sus­tain­able growth.

Pic­ture: iSTOCK

Fran­cois Otto … Bullish about Africa over the long term

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