The continent’s growing economies and burgeoning middle classes signify robust activity on the mergers and acquisitions front


In its most recent forecast, the IMF expects sub-Saharan Africa to grow by 4.5% in 2015 and 5.1% next year. This is well above its forecast for world economic growth, coming in at 3.5% this year and 3.8% in 2016.

This means that despite the economic difficulties faced by a number of Africa’s economies – whether as a result of severely depressed commodity prices, power shortages or political turmoil – the continent’s growth outlook remains positive and will continue to attract foreign investment as a result.

Colin Coleman, Goldman Sachs’ head of investment banking for sub-Saharan Africa, argues that because the continent’s three major economies – Egypt, Nigeria and SA – have solid democracies, an important platform is created for mergers and acquisitions (M&A) despite their respective economic challenges.

‘That Nigeria recently had a peaceful election was very important and demonstrated the maturity of the country’s politics,’ he says.

Alongside these economies, Coleman mentions ‘significant macroeconomic positives’ taking place in countries such as Tanzania, Kenya and Uganda.

According to international financial-software firm Dealogic, deal value in sub-Saharan Africa grew from $34.8 billion in 2013 to $40.7 billion in 2014. And, says Barclays Africa, the trend is likely to continue throughout 2015.

‘In a Mergermarket survey, 53% of respondents expect deal size in 2015 to increase significantly due to opportunities emerging from Africa’s increasing demand for services.’

Head of deals for PwC Africa Simon Venables confirms that there is a lot of movement around the consumer, with M&A activity in sectors such as telecoms, financial services and consumer goods. ‘We see the consumer area having a lot of M&A activity for the foreseeable future,’ he says. ‘For example, real estate is taking centre stage in certain areas, with an increased interest in shopping malls, linked to consumer demand.’

This is alongside ongoing investments in infrastructure and resources, as well as oil and gas. For instance, Goldman Sachs recently helped Nigeria-based IHS Towers raise $2 billion in equity funding to acquire cellphone towers owned by MTN Nigeria, among others.

PwC expects an uptake in M&A activity in the oil and gas sectors, as larger players secure resources from smaller players with a strong presence on the continent. Locations identified by exploration firms as having significant oil and gas reserves include Mozambique and Kenya.

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‘Even larger companies are beginning to understand that a pan-Africa strategy has to start on a granular basis’


It is, however, difficult to find comprehensive, accurate data on deal volumes and values across Africa, not least because some are announced but never closed or remain in negotiations for an extended period of time.

Based on information collected from Mergermarket, DealMakers and S&P Capital IQ, PwC estimates that there have been around 1 000 deals announced across the continent every year from 2012 to 2014.

‘Of those roughly 1 000 deals, the main sectors were consistent from 2012 to 2014, namely finance, insurance, real estate, services, mining and manufacturing, transport and telecommunications,’ says Venables.

‘You then have around 30 to 40 deals a year in agriculture and fisheries and slightly less in construction. Each country has a different concentration of deals in these industries.’

Sanjeev Gupta, lead partner for M&A Emerging Markets at EY notes that deal sizes vary widely, ranging from $30 million to $500 million, making an average deal-size number misleading.

‘This tells you that companies of varying sizes are looking at Africa, not just big companies. Even larger companies are beginning to understand that a pan-Africa strategy has to start on a granular basis,’ he says.

According to Barclays Africa, 73% of deals were below $100 million in 2014, up from 67% in 2013. Year-to-date, more than 90% of deals have been below $100 million in size. ‘Over time we expect to see more smaller-sized M&A deals driven by the rise in intra-Africa trade. Moreover, the growing number of private equity-sponsored deals, which usually tend to be smaller, has also contributed to deal volumes,’ says the bank.

Venables notes that private equity often leads the charge into what it believes to be growth sectors, which serves to spur interest from other corporates. ‘The private-equity portfolios have a lot of strong assets in them, which will start to come to market either as initial public offers [IPOs] or trade sales.’

In April, private-equity firm Actis sold half its 30% stake in Edita Food Industries – the largest independent snack food business in North Africa – via an IPO on the Egyptian and London stock exchanges. The IPO price per share reflected a market cap of $890 million for the company, says Actis.

According to Gupta, ‘companies from the US, Europe, the Gulf region and Japan are increasingly developing a go-to market strategy for Africa’.

‘We’re also seeing Middle Eastern and strong European interest,’ says Venables. ‘Even the US is looking at Africa, but is more cautious about who they partner with and which countries they go into.’

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The continent’s growth outlook remains positive and will continue to attract foreign investment as a result

SA is among the key considerations, as is Kenya, according to Charles Douglas, Bowman Gilfillan’s head of M&A. He says it’s because of their ‘gateway status’ for regional investment. ‘This is helped by sophisticated banking and legal systems, ICT capability and the status of their stock exchanges.’

Douglas says Nigeria is another hot spot, owing to the scale of its economy and population numbers.

‘We don’t necessarily see Nigeria as having a regional gateway status like SA and Kenya; focus on Nigeria is generally for Nigeria’s sake. The rate of urbanisation and a growing middle class are important factors, driving M&A in that country, while banking and ICT are also well developed.’

Other countries include Mozambique and Angola, by virtue of natural resources; Tanzania, because of its proximity to Kenya; Mauritius, for its financial services and tax-friendly investment profile; and Ethiopia, which like Tanzania, has the capacity to grow in key sectors for M&A, such as ICT and finance.

It is Gupta’s experience that the local business communities in countries such as Kenya, Ethiopia, Tanzania and Uganda are seeking out capital and technical partnerships. ‘This is a very important evolution. Historically insular, family-owned businesses are opening up and discussing external investment strategies,’ he says.

Venables believes that the approach of African governments to new investors will change, particularly as countries heavily reliant on commodities face increasing economic pressure. ‘They will need to develop plans to diversify their economies and encourage local investment, as well as attract foreign investors to invest with local partners.’

While lauding the potential for growth, Gupta warns of a mismatch between demand and supply, where valuations may be distorted because the buy side exceeds the sell side. ‘This may create exit challenges at later dates, particularly for private-equity funds,’ he says. He advises that investors think long term. ‘Success will come from being evolutionary, coming in with a thinking cap and an ability to work with local businesses.’

While opportunities abound, prospective investors also need to do their homework. An important consideration for businesses considering M&As has been the establishment of a number of new regulatory regimes, says Chris Charter, director of Cliffe Dekker Hofmeyr’s Competition practice.

‘These have been established both at a national and regional level where the Common Market for Eastern and South Africa [COMESA] Competition Commission has been in operation for more than two years, and has begun to develop a profile within the regulatory landscape.’ He says that COMESA’s goal has been to introduce a federal competition law regime that is similar to the EU’s.

‘Within COMESA, the Competition Commission investigates breaches [anti-competitive conduct and consumer protection] and M&As. In respect of the latter, the zero-thresholds rule has been repealed and replaced with a three-prong test.’

Charter adds that it has ‘become clear that conducting M&As in Africa now requires an increased cognisance of not only local, but also regional competition law’.

By Hanna Barry
Image: Fredrik Broden/reneerhyner.com