African economic growth offers M&A opportunities

By Patrick Ache, Webber Wentzel
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Optimism about high growth rates has made Africa the light at the end of many an investor’s post-2008 tunnel. General confidence in sub-Saharan Africa is particularly strong, and is manifested in increasing merger and acquisitions (M&A) activity in the region.

Africa’s growth is highlighted by the International Monetary Fund’s October 2012 forecast that Africa will have 11 out of 20 of the fastest-growing economies in the world over the next five years. Many African countries are enjoying high growth rates due to their natural resource wealth.

Patrick Ache
Patrick Ache

M&A deals in the mining and energy sectors on the continent ranked first as a percentage of M&A deals in Africa in 2012, fuelled by a surge in activity from Chinese companies. China’s Minmetals, for instance, bought Democratic Republic of Congo-based base-metals miner Anvil Mining for US$1.3 billion last year; and Jinchuan Group and the China-Africa Development Fund (CAD Fund) agreed to pay US$227 million for a 45% stake in South Africa-based Wesizwe Platinum.

Other sectors are also experiencing growth. Several significant M&A deals have occurred in the consumer sector, including the US$2.4 billion purchase of 51% of Massmart in South Africa by Wal-Mart Stores. The financial sector has also seen several significant M&A deals, including Absa Group’s acquisition of nine African subsidiaries from Barclays Bank for US$2 billion.

Positive outlook

Growth in M&A in Africa’s mining and energy sectors is likely to continue as Chinese companies continue buying. Hanlong Africa Mining, Cathay Fortune (together with the CAD Fund), Beijing Haohua Energy and Zhongrun, for instance, have all recently made offers for stakes in mining companies.

East Africa promises to be an active area for M&A deals due to recent oil and gas discoveries. A consortium of investors has acquired a 66% interest in Tullow Oil’s exploration areas in Uganda for US$2.9 billion.

Demands by governments for greater local participation in their resource sectors are likely to result in increased M&A activity. Eritrean National Mining Corp, for instance, is set to acquire 30% of the Asmara gold project from Sunridge Corp.

Certain countries have adopted pro-investor policies aimed at encouraging infrastructure development. For example, Ethiopia is seeking investors to help develop 2,000 kilometres of new railway lines, and Nigeria has put 17 state-owned power companies up for sale.

Key challenges

On the negative side, political uncertainty may be a barrier to some M&A activity on the continent, depending on investors’ appetite for risk. Despite perceptions to the contrary, many African countries, particularly in sub-Saharan Africa, are relatively stable. Investors who postpone M&A deals in countries facing elections, such as Zimbabwe, Tunisia and Libya, may miss out on substantial first-mover advantages.

Regulatory uncertainty, caused by frequent or opportunistic changes to legislation, is another challenge. One example is the August 2012 amendment of Tanzania’s Income Tax Act to impose capital gains tax on the sale of shares and securities. The amendment was said to be aimed at “catching” the proposed acquisition of African Barrick Gold’s assets in the country by China National Gold – a deal that was being negotiated at the time.

Lack of good corporate governance and transparency is another factor that complicates M&A in Africa. Many companies do not keep financial records and information to the level expected by investors. In these situations, extensive due diligence investigation must be conducted on site and in the country.

Finally, obtaining government approvals is difficult in certain African jurisdictions. In Tanzania, for instance, the effect of a proposed merger on employees in the country will be assessed for competition law approval for any merger or acquisition above the notifiable threshold (approximately US$500,000). The term “effect on employees” is not defined in the law and thus requires subjective evaluations.

In some countries, such as Zambia, obtaining merger approval may take over a year for institutional reasons, while other African countries, including Botswana, have clear and expeditious approval processes.

Conclusion

The attractiveness of Africa as an investment destination is clear, with 73% of respondents to a 2012 survey by Ernst & Young anticipating that Africa’s attractiveness will continue to improve over the next three years.

While African governments must continue to do more to encourage investments in their countries, including providing a level playing field for international investors and limiting regulatory uncertainties, companies pursuing M&A opportunities in Africa can minimize their risks by engaging advisers who have on the ground experience, contacts in the destination country and who understand the local business culture.

Patrick Ache is a senior associate at Webber Wentzel, one of the leading corporate law firms in Africa and the South African member of ALN, an established group of Africa’s 12 foremost law firms.

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