Mergers and Acquisitions in Africa
Dec 20th 2012
In recent years, mergers and acquisitions (M&A) activities have become an important channel for investment in Africa for both global and local market players. M&A deals have allowed companies to consolidate their positions in African markets, contributing to better market access and competitiveness.
Nevertheless, the African M&A market is still very small compared with other regions in the world. There are also regional disparities within the continent as the market is essentially dominated by deals in Northern and Southern Africa. Despite the impact of the ongoing recession on M&A markets worldwide, M&A activities in emerging markets especially in Africa have showed resilience and their slowdown has been tempered. The attractiveness of the African continent for M&A deals is mainly underpinned by the high economic growth and the buoyant energy, mining and utilities sectors.
Investors and analysts are expecting that the spike in M&A deals across the continent will continue an historic upward trend. In fact, over the past two decades, cross-border M&A transactions rose dramatically from USD485 million in 1990 to USD44 billion in 2010. Africa is becoming very important to major global investment banks and M&A financial advisors such as Goldman Sachs, JP Morgan Chase and Morgan Stanley which are increasing their fees generated from consultations provided to companies and investors during the process of M&A deals.
Recent trends in M&A deals in Africa
M&A is known to be a very cyclical activity. Since the global financial crisis hit the world’s economy, the number of M&A deals in both value and volume has shrank significantly worldwide and has not yet fully recovered. In Africa, despite the marked slowdown of M&A activities in 2011, the market is projected to recover in 2012. M&A deals on the continent totaled USD27 billion in 2011 down from USD44 billion in 2010. During the past year, deals in South Africa accounted for 57% of the overall activity in Africa with total value worth USD12.2 billion. Uganda came in second place, surpassing North African countries, with total value of deals as much as USD3.1 billion including a USD2.9 billion transaction in which Tullow, the global oil and gas company, acquired exploration blocks from Ugandan government. During the first quarter of 2012, a total number of 30 deals worth of USD3.5 billion of M&A activity was recorded.
The drivers of M&A deals in Africa
In spite of its size, no more than 3% of the global M&A market, global and local players are increasingly involved in M&A activities in the continent. This growing interest is mainly driven by the cycle of high economic growth the continent has been experiencing for the recent years. Energy, mining and utilities sectors are expected to remain the main catalysts of takeovers in the continent. In addition, Africa’s market is expected to benefit from the growing interest of companies from emerging partners in the continent potential.
Economic growth and investment climate: Over the past decade, Africa was among the fastest growing regions in the world with an average GDP growth rate exceeding 5%. According to forecasts by major global financial institutions such as the World Bank and the African Development Bank, this growth is set to continue for the coming years. As the economic recovery is still sluggish in developed countries and as M&A activities are essentially procyclical, multinational companies that want to expand their business through M&A activities are now turning towards pro-growth emerging African economies after they had already exposed themselves to Asian markets.
In addition, government efforts in some African countries to promote business-friendly environment have attracted more foreign investors. This is the case of Ethiopia, for example, where government has undertaken efforts to privatize strategic economic sectors and help companies in the start-up phase. The Ethiopian M&A market which was almost non-existent before 2006, has experienced recently the takeover of three previously state-owned breweries companies by international firms such as Heineken, Diageo and Duet Group. The combined total value of these deals reached as much as USD500 million.
Energy, mining and utilities sectors: Of the 236 M&A transactions in Africa tracked by Thomson Reuters between September 2011 and March 2012, energy, mining and utilities sectors registered the highest level of activity. This is not surprising as there is a lot of appetite for African natural resources for foreign investors. For instance, transactions related to natural resources in Sub Saharan Africa rose to USD11.3 billion in 2010 from USD4.7 billion in 2009. The largest M&A deal in Africa announced by the Eurasian Natural Resources group during the first quarter of 2012 was the acquisition of mining and related exploration interests located in the Democratic Republic of Congo, and worth USD1.25 billion.
Emerging partners and non resources-driven industries: M&A activities are becoming increasingly global due to their geographical diversification benefits. For instance, cross-border deals worldwide accounted for about half of all announced deals during the first three quarters of 2012. Likewise, overseas companies from emerging partners, namely China and India, were highly involved on African M&A markets during recent years. In 2010, for example, China and India accounted for 36% of the value of all M&A transactions on the continent.
More interesting is the M&A growth into industries with low penetration rates such as telecommunications, financials, transportations and consumers sectors. In 2010, Africa recorded its biggest M&A deal of all times amounting to USD10.7 billion with the takeover of Zain‘s African operations by the Indian telecommunications group Bharti. Western companies also demonstrated interest in sectors other than natural resources. This was the case of the USD2.4 billion deal in which the U.S. retail giant Wallmart acquired a stake in South African retailer Massmart.
Prospects for African M&A market
African M&A markets are poised to grow for the coming years. In addition to its natural resource potential, the continent is offering to investors a 1 billion consumer market. Africa represents a market opportunity for global M&A players to geographically diversify their capital away from traditional markets such as North America, Europe and more recently Asia. Beyond the benefits of geographical diversification, M&A transactions in Africa could also be boosted by the growing diversification of African economies. Particularly, financial and consumer markets are set to expand with the surge of Africa’s middle class in the near future. In sum, over the short and medium term, diversification will be one of the major motivations behind M&A transactions in the continent.
Professor Mthuli Ncube is the Chief Economist and Vice President of the African Development Bank, and holds a PhD in Mathematical Finance from Cambridge University, UK, on “Pricing Options under Stochastic Volatility”.