Mergers and Acquisitions Dealmakers Q2 Review 2017 Title&Company logo
Charting the regulatory landscape of cross-border M&A
THE value of merger and acquisition (M&A) activity by JSE-listed companies for the first half (H1) of 2017 was 28.5 per cent less than the comparable period in 2016, which was itself down on the previous year, according to DealMakers. R185,5 billion (220 deals) were finalised compared with R259,67 billion off the same number of deals in H1 2016.
Commenting on cross border M&A trends, particularly the challenges of investing in Africa and what is required in order to establish an effective regulatory landscape which would facilitate unlocking this growth potential, Deepa Vallabh and Motheo Mfikoe, directors of law firm Cliffe Dekker Hofmeyr Inc, say: “Despite the fragile and slow economic growth in many developing countries, the growth of African markets in recent years has occurred through cross-border M&A activity, and has become an important source of foreign direct investment (FDI).
“Understanding the nuances of a target company’s regulatory framework in Africa is necessary to mitigate the risks of conducting deals. Doing a detailed due diligence often proves critical in giving investors more confidence.
“Consequently, African governments play a critical role in introducing reforms to create political, social and economic stability,” they say.
Despite some regulatory challenges, growing population and expanding middle class coupled with new consumption patterns should stimulate M&A growth in sectors such as the financial services, consumer goods, retail, healthcare and transportation services.
In 2015, M&A transactions in Kenya’s retail industry increased with supermarket chains such as Na-Kumatt having 52 stores in East Africa.
In the banking and finance sector, Kenyan banks Kenya Commercial Bank, Equity Bank, Fina Bank and Commercial Bank of Africa have 16 branches in Tanzania, 31 branches in Uganda and 16 branches in Rwanda.
In the telecoms sector, MTN Uganda and Safaricom concluded an agreement in terms of which Safaricom mobile money users were allowed to transfer money into MTN mobile money accounts in Uganda, and Orange Group exited all its East African operations by selling 70 per cent ownership in Telkom Kenya to Helios and its operations in Uganda to Africell.
Mfikoe notes that between 2010 and 2015, 5,000 individual FDI deals in Africa were identified by McKinsey Global Institute, in terms of which the deals were primarily produced by multinational companies operating in Africa with a pan-African footprint. Asia has become an important source of cross-border M&A activity in Africa.
“The investment interests from China, India and Japan are expected to lead to increased M&A activity in Africa. The continent is on an upward trajectory in terms of the volume of M&A deals, with cross-border transactions accounting for 36 per cent of the total M&A volume in 2016. However, deal value shows a downward trajectory,” says Vallabh.
Mfikoe explains that a lack of regulatory certainty or stringent regulatory barriers is known to be one of the biggest threats for M&A transactions in Africa.
“Merger control, exchange control and sector specific regulations are intrinsic to every M&A transaction and can affect the success or failure of the proposed transaction. For that reason, due diligence investigations are an important part of the M&A process.
“The due diligence investigation provides information, including but not limited to the regulatory framework of the country in which the transaction is proposed, the political and economic environment, infrastructure, the cultural aspects of the jurisdiction and the tax and labour issues that may arise.
“Further, the investigation allows for early mitigation of any risks uncovered in the target company and its jurisdiction.”
South Africa and Nigeria are examples of how the volatility of financial markets in host countries affects deal value. Currency instability and insufficient financial recourse against the seller also creates a hindrance to investor confidence.
In Nigeria, the Central Bank of Nigeria has implemented policies to increase control over foreign exchange and these policies, together with a substantially low supply of foreign exchange has led to the devaluation of Nigeria’s currency. Similar to Nigeria, Algeria contains a high fiscal budget deficit and like Angola, comprises of higher reliance on oil production.
As a result, the drop in global oil prices has created downward pressure on their currencies. Consequently, the combination of conservative prospects for financial and economic performance and increased risk built into the costs of capital has taken a toll on valuations and as a result on the transaction values of potential deals.
“African states can increase investor confidence by implementing exchange control policies in order to restrict the amount of foreign currency or local currency that can be traded. As a result, this allows countries a greater degree of economic stability by limiting the amount of rate instability due to currency inflows and outflows.
“However, caution must be exercised where exchange rate policies result in a further depreciation of currency, as was the case in Nigeria where the non-market derived exchange rate has devalued its currency. Further, African states must focus on having economic reforms improving fiscal policies that make it easier for investors to invest and transact in Africa. Morocco and Egypt have both shown increases in volume of deals.
“Egypt has done so by causing deep cuts to fuel subsidies to reduce its budget deficit and Morocco adopted a new banking law which aims to create a financial and economic crossroad between Africa and the rest of the world,” says Vallabh.
Africa has the additional difficulty of establishing competition law which aligns with each country’s national competition laws. Despite the challenges, common economic links between states makes it ideal to operate a regional competition authority.
In East Africa, the East African Community Council of Ministers adopted the East African Community Competition Authority (EACCA), which is the competition authority over Burundi, Kenya, Rwanda, Tanzania and Uganda.
The EACCA has jurisdiction over all M&A transactions and enforcement matters with cross-border competition effects in terms of the East African Community Competition Act, 2006.
However, there have been challenges in aligning the approach of both the national regulators and that of the EACCA.