The tricky way into African M&A
M&A volumes are on the rise in Africa, but due diligence is a must for a successful partnership in a fragmented region.
Subdued economic growth at home has encouraged South African corporates to expand their businesses into sub-Saharan Africa. Africa, as many know and often recite, is the last frontier: the final destination for investors looking for opportunities in a region with real GDP growth and an expanding middle class that has an appetite for high-quality consumer goods.
Retailers including Woolworths, ShopRite and Pick n Pay, banks such as FirstRand Bank and Nedbank, as well as South African telecoms companies Vodacom and MTN are all active on the continent. Most are intent on growing their businesses in the region.
But how easy is that? Trying to grow your business organically is a lengthy and expensive process, although some decide to take this route. The other alternative is M&A, but that too comes with mixed results.
FirstRand’s plans to acquire a majority stake in Nigeria’s Sterling Bank in 2011 came to nothing after both groups failed to reach agreement over price. In Zambia, FirstRand’s deal with Finance Bank fell through in 2012 when newly elected president Michael Sata fired the central bank governor and ordered the finance minister to cancel the sale. And then in a second foray into west Africa, FirstRand’s attempted takeover of Ghana’s Merchant Bank hit a brick wall when, again, an agreement over price couldn’t be reached. The bank has been forced to rethink its options for growing its business in these countries.
Tiger Brands, a South African packaged goods company, is another cautionary tale. Less than two years after buying a 63.5 % stake in Nigeria’s Dangote Flour for $190 million in 2012, Tiger Brands took the decision to write off nearly half of its investment in the company. The company’s earnings dropped to R631.9 million ($54.1 million) in the six months to end of March 2013, from R1.29 billion a year earlier, after the acquisition. It was Tiger Brands’ third acquisition in Nigeria.
There are many reasons why M&A deals can fall through in Africa. “I think Tiger Brands overpaid for an asset that they didn’t know what to do with,” says one South African analyst. “They’ve paid their school fees.”
Meanwhile M&A volumes in the region are recovering to pre-financial crisis levels, which is a good sign for the development of the capital markets in Africa specifically and the investment banking landscape more generally. And while some transactions are a success, often it is finding suitable assets in countries that are difficult to navigate that can be a challenge.
Due diligence is essential. Political and economic risks still need to be taken into account, despite the spread of democracy throughout the region. Understanding local markets and regulatory frameworks must also be taken much more seriously to avoid failure. Research, especially, needs to be country and sector specific in a region made up of 54 different countries.
Let’s hope others can learn from these mistakes.