FEATURE
EAST AFRICA
The diversified East African M&A markets are becoming increasingly attractive in the face of declining commodity prices which weigh heavily across the continent. A strong culture of entrepreneurship and mature financial markets in the region mean it is catching up fast.
M&A activity in East Africa was stable in 2015, with 32 transactions – only marginally less than the 34 deals in 2014. Deal value also mirrored the previous year’s figures with US$1.14bn, 11% lower than the previous year. It is the year ahead, however, that has dealmakers excited about the region. In Mergermarket's survey, East Africa was ranked as the second most attractive region on the continent for inbound investment after southern Africa, up from fourth last year.
 
Strong economic growth in 2015 is the primary driver for the optimism. East Africa had a projected GDP growth forecast of 5.6% in 2015, compared to 4.6% for Sub-Saharan Africa as a whole, according to the African Development Bank. The forecast for 2016 points to expansion of GDP growth to 6.7% for East Africa. “East Africa is very attractive for investors. Economies in the region are developing rapidly. The region is also known for having a generation of young, well-educated, successful entrepreneurs,” says Stephanie Lhomme, Senior Managing Director, Europe and Africa, at Control Risks.“These are more open than previous generations to accepting outside capital in order to modernise their operations or expand beyond their home market." New horizons Unlike other regions (South Africa aside), where deal activity is dominated by energy, deal flow in East Africa was spread across a range of sectors. In 2015, the largest deals in the region included UK-based banking group Old Mutual’s US$156m acquisition of a 37.7% stake in Kenyan financial services company UAP Holdings; Swiss asset manager Quantum Global Alternative Investments’ acquisition of construction company Savannah Cement; and Indian-owned drug manufacturer Cipla’s purchase of a 51% stake in Ugandan pharmaceutical distributor Quality Chemicals for US$30m. “What draws investors to East Africa is the diversity of opportunities. You have a cluster of countries with similar growth stories but distinct markets. They offer investors everything from growth and impact investment to more established large targets, and that variety plays to the region’s strengths,” says Maria Knapp, Director, Europe and Africa at Control Risks.
 
Lhomme adds that “public-private partnerships (PPP) will rise as they will be critical to development in East Africa. However, they will require a regulatory framework that satisfies both the profit targets of investors and the broader mandate of governments. The first investors engaging in such PPPs will need to be diligent in their risks assessment and mitigation approach to be resilient to the challenges presented by such partnerships."
Private equity (PE) firms are also eyeing East Africa and some have made a strong push into Ethiopia. For example, in 2014, US PE firm KKR invested US$200m in Ethiopian flower business Afriflora. “In Ethiopia, the economy is much more driven by the government, including by channeling investments through its own investment arm. As a consequence, there may be more big-ticket items,” says Knapp.
 
The scarcity of large-cap investments in established PE regions such as South Africa has also forced firms to hunt for deals in East Africa. "Successful medium-sized businesses can be the base for growth investments as they seek to expand outside of the region," says Lhomme. Kenya’s mature financial services sector continued to attract global PE investment as banks are looking to strengthen their capital base. Early in 2015, Norwegian government-owned PE firm Norfund bought a 12.22% stake in Kenyan Equity Group Holding for US$257m. Kenya has kept its position as the leading M&A hotspot in East Africa. “Going forward the insurance sector will remain the likeliest focus area for deals due to its high growth potential as well as the higher capital demands. The other key sectors that will attract PE in East Africa will probably be consumer, manufacturing, technology and telecoms, and healthcare," says Knapp. Work still to do Investment in East Africa is not without its risks. Security issues continue to be a broader concern, and corruption remains a major issue despite efforts to root it out. The state is entrenched in many aspects of business; there are vested interests in many countries and sectors; and there have been elements of populism in economic policy. However, there are steps that investors can take to reduce these risks.“Companies should focus on information and visibility in terms of the people, businesses, government and authorities that they will interface with, and put that information in context” Knapp says. Lhomme feels that a long-term view is absolutely vital. "Beyond the purchase price, successful development of a target is likely to require improving operational capabilities, delivering adequate training to employees and managers, ensuring dynamic security and crisis management plans are in place," she says. Despite these risks, however, the opportunity in East Africa is undeniable. Economies across the region are growing rapidly, there is a generation of entrepreneurs who are open to taking on third-party investment and there is a wide array of businsses in which to invest.