FEATURE
NIGERIA
Nigeria’s rich natural resources, large population and favourable demographics ensured that the country remained one of the busiest and most attractive M&A markets in Africa in 2015 despite currency volatility and a period of uncertainty leading up to the presidential election.
Nigeria, one of the largest and most active M&A markets in Africa in 2015, delivered a year of steady deal flow in 2015 with 25 deals worth US$3.2bn. Deal activity was down 22% from 2014, which saw 32 deals worth US$9.5bn. Investor confidence in the Nigerian M&A market was strengthened by the conclusion of a presidential election in March, which had been postponed in early February. However, this coincided with a weakening oil price – oil accounts for approximately 70% of government revenue – and related currency volatility that resulted in the Naira dropping to more than N200 to the US dollar at official exchange rates.
Afolabi Olorode, Head of Financial Advisory and Equity Capital Markets at FBNQuest, says the country’s size, population and consumer trends make it more resilient to these challenges. “The sheer size of Nigeria’s population and GDP makes it an attractive market compared with every other country in Africa. It is the biggest economy in Africa but most sectors are still underserved, which means there is massive growth potential,” says Olorode. “You would have to invest in a number of different countries to match the scale of opportunity present in Nigeria.” Local content The scope of the opportunity in the country, and the limitations a weakening currency has placed on outbound dealmaking, contributed to an increase in domestic M&A activity in Nigeria, which for over the past two years has accounted for nearly half of M&A volume. “Nigeria has been facing some challenges with exchange rates and clamours for devaluation, so we’re probably not as competitive when it comes to outbound deals. But we feel that there is still a lot of work to do here. The domestic market is underserved as it is, so there is no need to go out and start exploring the region or the continent,” says Olorode.
There were 11 domestic deals in 2015 worth US$1.5bn, with local oil and gas companies such as Seplat Petroleum and FIRST Exploration & Petroleum Development Company dominating the deal flow with the acquisition of Oil Mining Licenses as oil majors such as Shell and Chevron are exiting their Nigerian assets. The country’s rich natural resources mean the energy, mining and utilities sector still delivered more deals than any other sector, 28% of total deal volume and 54% of deal value, and distress among exploration and production and oilfield services companies amid the downturn in oil prices is sure to yield more opportunities in the sector in 2016.
 
Another appealing aspect of the Nigerian deal market is that it has diversified beyond natural resources and has established a firm market for M&A in the TMT, financial services and consumer sectors, which all account for an increasing share of deal volume. Deals such as US-based cereal maker Kellogg’s US$450m acquisition of food distributor Multi-pro Enterprise, and Unilever’s proposed US$215m investment for a 25% stake in Unilever Nigeria, are examples of a deal market that offers opportunities across a variety of industries and demonstrate the strength of Nigeria’s consumer market. The growth in sectors outside of oil and gas has proven to be especially attractive for private equity players, who see Nigeria as offering targets of sufficient size to serve as platforms for regional and pan-African expansion. One example is UK-based private equity firm Actis’s $62m purchase of a majority stake in Sigma Pensions. “Private equity investors who are looking for businesses of a certain scale make a first investment of around US$15m, and then follow up with a rollup strategy where, through the platform, they acquire other smaller players. This enables private equity investors to deploy a more sizable chunk of a fund,” says Olorode. Bumpy road The Nigerian M&A market also poses risks, says Olorode, adding that currency risk remains a primary concern. Uncertainty around regulation is a second concern, especially after MTN, the largest mobile operator in Africa, incurred a US$5.2bn fine from Nigerian authorities (which was subsequently reduced) for failing to cut off unregistered users. The original fine was double MTN’s annual profits. Despite these concerns, however, the outlook for Nigerian M&A in 2016 is positive. The presidential election in 2015 resulted in a smooth handover of power, which will take much uncertainty out of the market. “We closed five deals in 2015 including acting as exclusive adviser to FBN Holdings Plc on the sale of its 100% equity in FBN Microfinance Bank to Letshego Holdings Limited," says Olorode. On his thoughts for 2016, Olorode explains that “compared to 2015, this year should be much better. Last year investors were hesitant due to risks associated with the election and the volatility of the Naira. We could see an increase of as much as 50% in deal volume because last year was quite modest.”