Challenges and trends in the African M&A market
INSTABILITY. This is a word that has plagued African markets and their ability to expand, it has stifled investment into Africa and it has proven to be a challenge for mergers & acquisitions (M&A) lawyers across the continent.
This instability comes in many forms, be it social, political or economic and it has the ability to stall any potential growth in a region that has an abundance of resources.
Deepa Vallabh, Director, Head of Cross-Border Mergers and Acquisitions: Africa and Asia at Cliffe Dekker Hofmeyr says that it is no secret that Africa’s expansion rate has declined in the last few years, due substantially to the drop in commodity prices, such as oil and gold.
The decline in the oil price especially, has led to less resources and money being made available in the Northern Africa region to implement M&A transactions, she says.
While instability and the fluctuating commodity prices are proving to be significant challenges for companies and M&A lawyers alike, one needs to see the opportunity that Africa provides.
Winston Churchill once stated that: “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty,” and this has never been truer than for Africa in our present day and age.
“The forecasts and predictions for the African market still paint a promising picture. It is predicted that the global M&A market will grow from US$3 trillion in 2016 to US$3.4 trillion in 2017 and the International Monetary Fund has predicted that the African region will be the second fastest growing region in the world between 2017 and 2020.
“This is promising news for any company wishing to expand and diversify within Africa,” says Vallabh.
Practically, how can this growth be achieved by governments, law firms and businesses alike?
“Governments need to undergo structural reform and develop policies that allow for increased foreign invest- ment and a freeing up of restrictions on economic trade between countries within Africa.
“In order to grow investor confidence, governments and judiciaries should focus on maintaining and upholding the safety of its people and the Rule of Law, which includes among other things, judicial process and judicial independence.
“Governments should also focus on improving infrastructure across the region, such as electricity and connectivity.
“Markets with significant growth potential include the financial sector, the construction sector, the utilities sector and the wholesale and retail sectors.
“These high growth sectors will potentially be where M&A transactions are most common. African companies must also start looking to expand their cross border reach in order to fully realise the potential that Africa holds,” says Vallabh.
Businesses need to target gaps in the market and to expand accordingly. Vallabh gives the example of such a gap as being urbanisation. “Africa is the world's fastest urbanising region and this leads to an increased demand for services and goods.
“A recent study has identified that Africa has the potential to achieve nearly US$1 trillion in manufacturing output by the year 2025.
“Businesses should focus on expanding domestically by meeting the domestic demand currently not being met, or which is being met through the importation of goods and services.”
She suggests that companies should invest domestically and build up pools of talent capable of being transferred across borders.
“The market is ripe for bigger companies to expand and fill the gaps that appear to exist throughout Africa, as the region is dominated by smaller businesses.
“A study has shown that outside of South Africa there are no companies in Africa that fit the Fortune 500 criteria, due to this small business proliferation.
“Companies looking to expand across Africa should ensure they align their enterprises so as to suit these smaller businesses. This would help create income, ease the M&A process as well as consolidate the fragmented nature of Africa's markets.
“Larger companies would also do well to set up domestic distribution and supply chains before beginning the acquisition process as this would enhance all future cross-border expansion,” she says.
“There is large potential for company growth in Africa, and as Nicky Oppenheimer once said: ‘I am a great believer that if you know how to operate in Africa, there are unbelievable opportunities’.
“Africa is a land of opportunity, and by companies taking the gaps available to them in terms of the marketplace, there is space to grow, thrive and expand. The lure of Africa does not diminish,” says Vallabh.
As for South Africa, Shabbir Norath, Head of Advisory: Nedbank Corporate and Investment Banking, says that notwithstanding the weak macro and local economic environment, there remains a fair amount of activity within the South African M&A market.
“There still appears to be appetite from offshore funders to fund deals in South Africa largely as a result of the deterioration in the rand and South Africa’s continued perception as the gateway to the continent.
“This may result in local stakeholders assuming a level of confidence that is being inflated by global acquirers with the financial means to back their long-term bets on what are, right now, clearly undervalued local companies.
“As a result of various economic challenges, including weak commodity prices and drought, the South African equity market and many African markets as well have experienced a steady decline in prices of many listed stocks.
“In addition to this, a number of South African companies (both listed and unlisted), are finding themselves in a position of distress and are consequently desperately looking for ways to bolster their balance sheets with capital injections from new strategic equity partners,” says Norath.