The experience of South African companies in Africa - like that of other international investors - might be encapsulated in the expression "Africa has great M&A opportunities, but first you have to find them". And finding them is the tricky bit. Most South African companies do not - yet - have significant footprints in the rest of Africa. Without local knowledge, Africa can be a big place, and one which does not offer up its gems easily to those who are not "in the know".
While some investors have reaped bumper profits on the continent, going forth into Africa does require a clear strategy. As the Ernst and Young 2007 Review of Mergers and Acquisition notes, the picture painted for Africa in the World Investment Prospect Survey 2007/2009, was positively gloomy, and Africa is at the bottom of the list for many indicators. Size usually counts in M&A, and that is precisely what makes Africa, consisting of 53 economically modest jurisdictions, more difficult than other emerging markets. As a result, South Africa remains in many respects Africa's most attractive investment destination, with a large number of sizable companies operating in established markets. International reports show that the economies of Egypt, Morocco and Nigeria, are the closest competitors to South Africa, as one might expect from their sizes.
A few South African based fund managers are beginning to show an increasing interest in Africa. Many do not have the resources or staff on the ground to access a sufficient deal flow in Africa's many countries, an element which has arguably been crucial for experienced players like Actis and Aureos, who have regional presences in Africa. For many, expanding into the unknown is all the more difficult to justify, since "sticking to their knitting" in South Africa has generally served them well to date, and they know the market players and its dynamics. However, the mood is changing and many investors are starting to re-examine the possibilities.
Commodities in particular - Africa's fallback asset in many ways - remain highly attractive for investors, and many South African companies are actively exploring and exploiting minerals throughout the continent. Junior miners like Metorex, based in South Africa, are a good example, with exploration and production proceeding in several African countries, including the DRC and Zambia.
Infrastructure generally remains an attractive area both for financiers and sponsors/equity holders. Yet, infrastructure projects often come with long gestation periods, high attrition rates, and many are subject to fairly high risk profiles. Nonetheless, the telecoms sector has boomed and mega-operators like MTN and Celpay/Zain continue to expand. An illustrative recent event was the combination of Quintica and Venture Communications, active in the telecoms sector, to form Q-Venture, with operations in thirteen African countries as well as the Middle East. They have attracted international funding towards their objective of raising EUR400 million to be invested in Africa.
Financial services are also a major area for African M&A, and the sector remains ripe for investment and consolidation in many jurisdictions. Interestingly, the Nigerian consolidation of the banking sector, initiated by the Central Bank, attracted much less Foreign Direct Investment than had been expected, as it turned out the Nigerians had sufficient funds to achieve the consolidation without outside funds. Indeed, Nigerian banks have been hunting the continent for suitable acquisition opportunities ever since. South African banks too have successfully penetrated Africa, and Standard Bank, FirstRand and ABSA/Barclays have acquired operations and/or greenfield operations throughout the continent and are growing their local balance sheets. South African micro lenders, like Blue Financial Services and Real People, are expanding into the continent, and microfinance remains a highly attractive area for investors. Indeed Blue is considering listing on the newly established Africa board of the JSE, and is considering additional listings in Namibia, Kenya and Zambia.
Successes for retailers like Shoprite, whose Africa revenues are increasing every year and which soon expect one half of its revenue from Africa, are further signs of growing enthusiasm among South Africans, and many smaller players are now putting their toes in the water.
We expect that the future trend for M&A in Africa will be a continuation of an existing theme: there will be some cherry-picking of those rare prime assets which become available from time to time, significant activity will continue to be centred around resources and infrastructure projects, while the rest of the activity will largely take place around small and medium sized deals (US$5-50 million) which are the distinctive feature and the bread-and-butter of African M&A markets. South African companies will continue steadily growing their slice of the pie.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
