Nigeria's Mergers & Acquisition: What's Cooking in 2024?

As we step into 2024 enthusiasm is building up in Mergers & Acquisitions (M&A) amid interesting developments in Nigeria.

The Central Bank of Nigeria (CBN) recently announced plans to raise minimum capital requirements for banks from N25 billion to N100 billion. This looming recapitalization has the potential to catalyze the next wave of banking consolidation. We expect a surge of mergers between mid-sized banks seeking to scale, while larger banks may acquire smaller banks. In 2024, there is likely to be a significant reduction in the total number of banks in Nigeria.

With the privatization of state assets on the cards, deals will heat up in power, infrastructure and transport sectors. The capital market will experience a boost if the privatization is undertaken via the stock exchange.

The oil and gas sector remains compelling as international oil companies (IOCs) pack up their rigs and leave Nigeria's onshore and marginal oil fields, providing a golden opportunity for local players. The Petroleum Industry Act, with its focus on boosting local content, has kicked open the door for indigenous exploration and production (E&P) companies to step up and claim their stake. This shift is likely to trigger a wave of consolidation within the Nigerian E&P space, as smaller companies merge to pool resources, expertise, and capital to compete effectively with established players.

Despite a dip in venture funding in 2023, Nigeria's start-up ecosystem is expected to continue humming along. As founders expand into new markets and new ventures, restructuring into holding structures will pave the way for consolidation, fundraising, and strategic stake sales to new investors. And for startup investors, whether angels or VCs, a buyout may deliver that juicy return they've sweated years for. So, while going the M&A route means sacrificing full control, founders and investors gain partners and resources to reach new heights and corporations receive the secret sauce of renewal through innovation injection. That combo of fresh thinking and exciting talents makes acquisitions a potent recipe for rebirth!

IP: The Unsung Hero

Intellectual property (IP) will be the silent partner in the M&A waltz, its value influencing every step. As sectors like technology and healthcare witnessed increased M&A activity, understanding and protecting IP will be more critical than ever. Thorough due diligence will be crucial to identify and as ses s the IP r ight s being transferred, ensuring value protection f o r b o t h s e l l e r s a n d b u y e r s , post-acquisition. Clear warranties and indemnities regarding ownership, validity, and non-infringement will be key to mitigating risks.

SPAC: The New Kid on the Block?

The Nigerian Securities and Exchange C o m m i s s i o n ( S E C ) l a i d t h e groundwork for Special Purpose Acquisition Companies (SPACs) when it released Regulations on SPACs in 2021 and its proposed New Rule. While it might not be in full swing yet, here's what to expect:

  • A Gradual Start: Don't e x p e c t a S PAC fl o o d i n 2024. The minimum IPO size (₦10 billion) might limit player participation, but the rules could be tweaked to allow smaller SPACs.
  • Foreign Flavor: Foreign investors could be interested in Nigerian SPACs, but ensuring easy access to foreign exchange for repatriation will be crucial.
  • Promoter Power: SPACs need strong sponsors with proven track records and expertise to attract investors.
  • Finding the Right Fit: Can SPACs find suitable a c q u i s i t i o n t a r g e t s w i t h i n t h e i r 2 - y e a r timeframe? Nigeria's growing startup ecosystem might offer some promising options.
  • Listing Dilemma: SPACs will need to decide between the N i g e r i a n S t o c k E x c h a n g e a n d o ff s h o r e exchanges, considering listing requirements and costs. The SEC will have to tread a fine line between regulation and fostering growth.

Overall, SPACs might take some time to truly heat up in Nigeria, but the long-term potential is undeniable. 2024 might be about learning the ropes, but the future could see SPACs playing a bigger role in Nigeria's M&A scene. With regulatory oversight in place and with perks like quicker access to capital, Nigerian investors, companies and other high-growth startups should seriously consider the SPAC route in 2024.

While the M&A momentum looks promising, issues around policy consistency, forex liquidity, and transparent regulations need attention for sustaining deal activity. Overall, M&A looks set to scale new highs in 2024 as investors seek exposure to Nigeria's huge potential.

Do reach out if your plans involve dealmaking - we can help you with expert guidance and advice.

Capital Aggregators: Mobilising Capital to Fund Nigeria's Growth.

The asset management industry in Nigeria is projected to continue on the path of steady growth in 2024, with total assets under management estimated to reach 4 trillion naira by the end of the year. As capital aggregators, fund managers will leverage their expertise to channel funds from institutional and retail investors into productive investment opportunities.

Capital Aggregators can be the brick and mortar firms like banks and pension funds administrators, or digital investment platforms. Funds like mutual funds, hedge funds, private equity funds and venture capital funds pool resources from retail, institutional and accredited investors to invest in money markets, stocks, fixed-income securities, real estate and agriculture. The s e pl a tf o rms a r e no t onl y making investment assets accessible to more Nigerians they are also b r i d g i n g a m u c h - n e e d e d financing gap in the country and may be a great source for startups and companies looking for funds for operating expenditure(OPEX) and capital expenditure (CAPEX).

Growth will rely on maintaining investor confidence through sound governance and adherence to SEC regulations on issues like licensing, risk management, disclosure and fund governance. Strict enforcement of rules and new guidelines aimed at enhancing investor protections is pivotal.

In parallel, we expect crowdfunding platforms to gain relevance as an alternative funding source, especially for creative ventures. Increased broadband penetration and fintech innovation will enable more efficient linkage between fundraisers and interested funders. But proactive regulations will be essential for orderly development of crowdfunding and preventing abuse. SEC rules will need to strike a balance between flexibility and investor protections around areas like fundraiser registration, disclosure r e q u i r e m e n t s a n d p l a t f o r m accountability. Building investor understanding of risks will also be crucial.

If prudently regulated and governed, b o t h a s s e t m a n a g e r s a n d crowdfunding platforms can enhance their position as capital aggregators, funneling Nigeria's expanding pool of funds into productive uses and supporting broader economic growth.

The Road to 2024: Nigeria's Capital Markets Gear Up for a Green Future

With the urgency of climate change underscored by Wthe 2023 UN Climate Summit held in Dubai, UAE, Nigeria's capital markets are poised to play a crucial role in catalysing finance for climate resilience investments in the coming years.

In 2024, we can expect green bonds and other sustainable finance instruments to gain further traction as regulators and companies align with global net zero emissions targets. Initiatives like the FMDQ's Green Exchange project will likely accelerate.

Heightened environmental, social and governance (ESG) awareness among institutional investors and corporate bodies will also drive markets toward more sustainable business practices. More firms will integrate ESG factors into their investment processes and operations.

While the transition will take time, the local markets have demonstrated some commitment to supporting climate-aligned investments. With thoughtful regulations, reporting frameworks and partnerships, Nigeria's capital markets can mobilize the patient long-term capital needed to mitigate climate risks and unlock a greener future.

Green Bonds: Financing a Greener Future

Green bonds have emerged as a powerful tool for financing environmentally friendly projects. From renewable energy initiatives to sustainable infrastructure, these bonds are shaping a pathway toward a greener future. In 2017, the Federal Government of Nigeria issued its first sovereign green bond – making Nigeria the first African country and the fourth country globally to issue a sovereign green bond. This is geared towards making the country compliant with the implementation of the Pa r i s Ag r e ement 2015. Ac cording to the Nigerian Green Bond Market Development Programme Impact Report (2018-2021), N47.82 billion has been raised through the issuance of Green Bonds in Nigeria, and over 500 capital markets professional have been trained and five (5) green issuers have been provided technical assistance to support their issuances.

Green Financing: Aligning Investments with Sustainability

Green Financing, however, goes beyond bonds, encompassing a broader approach to align financial activities with sustainability goals. Bu s ine s s e s and inv e s t o r s a r e integrating green financing into their strategies, promoting eco-friendly practices and responsible investment decisions. An example is Letshego Nigeria Microfinance Bank which drums support for the growth of Nigeria's Green Economy by providing affordable financing for individuals and small businesses. They offer reduced rates to encourage more Nigerians to adopt a sustainable lifestyle.

ESG Awareness: Investing with a Purpose

Environmental, Social, and Governance (ESG) factors now play crucial roles in shaping responsible investment decisions. ESG portfolio advancement has moved from just a moral imperative to the fore of strategic business decisions. The various advantages of advancing an investment portfolio with ESG principles include risk mitigation, improved brand reputation, and attracting socially conscious investors. This sustainability approach can in turn lead to long-t e rm financ ial suc c e s s . ESG awarene s s and implementation of such strategies tend to increase market share, employee retention and increased profitability of ESG compliant companies.

With a new administration in place, Nigeria's sustainable finance landscape looks poised for further growth in 2024. We expect to see more debut green bond issuances as Nigerian entities look to tap into growing investor appetite for sustainable assets.

More companies will likely adopt robust green bond frameworks that adhere to the principles of integrity, transparency and reporting. Regulators may also introduce incentives and guidelines to accelerate innovation in instruments like sustainability-linked bonds. Beyond green bonds, ESG integration will gain further momentum as asset managers increasingly adopt impact investing. Reporting on sustainability metrics and impacts will become more sophisticated across the market.

While in its early days, the roots of sustainable investing have taken hold in Nigeria. With supportive policies and industry commitment, 2024 could see many more green shoots emerge across the nation's capital markets and financial institutions.

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