Overview | Deal Drivers Africa 2016

OVERVIEW

M&A ACTIVITY IN AFRICA

M&A activity in Africa was steady in 2015 despite facing numerous obstacles.

A steady increase in African deal flow and interest from overseas investors since the financial crisis points to the increasing maturity of African countries as a destination for M&A. Total African deal volume was buoyant at 290 deals, up 1% from 2014, despite severe headwinds from a slowdown in the Chinese economy and currency woes in South Africa and Nigeria, the continent’s two largest M&A markets. Accordingly, deal value fell by 26% to US$27.3bn in 2015, mostly due to a smaller number of big-ticket transactions on the continent. The mid-market was busiest, as dealmakers focused on smaller investments. Indeed, 88% of transactions were valued up to US$250m. By contrast, there were only five deals worth more than US$500m, compared to 14 in 2014. Nevertheless, deal volume for 2015 was the highest on record since 2007, as both corporates and private equity firms – armed with large cash reserves and access to cheap finance – continued to close in on opportunities, despite the wider uncertainty of globally depressed commodity prices. The rise in inbound investment into Africa, which accounted for 70% of deal value in 2015, proves the attractiveness of the market.

Private equity lessons In particular, private equity (PE) firms, who were sitting on a war chest of some US$1.3 trillion in 2015, saw the potential in the growth forecasts of African economies and concluded a record number of deals (118) over the past two years, amounting to more than US$15bn (see chart on page 7 for more details). Interest was particularly evident in the consumer and financial services sectors with deals such as Norway-based Norfund AS and NorFinance buying a 12.22% stake in Kenyan bank Equity Group Holdings for US$257m, and UK-based PE firm Actis buying South Africa-based consumer retail businesses Fruit & Veg City Group and Coricraft Holdings. Instead of waiting for the handful of large, pan-African businesses to come to market, firms are now actively seeking to do a series of smaller deals with a view to combining these companies into a larger regional portfolio. For example, when a consortium, including PE firm Helios Investment Partners, acquired an 85% stake in Fawry Banking & Payment Technology, a payments processing start-up in Egypt, for US$82m, a major part of the investment rationale was to help the business expand into new countries.

Country and sector watch The muted price of oil and continued depression in mining did not appear to dampen dealmaking enthusiasm in Africa’s natural resources sector, typically the biggest contributor to African M&A activity. The energy, mining and utilities segment accounted for more deals than any other sector, representing 24% of total deal value in 2014/15 and 17% of total deal volume. Despite plummeting oil prices, local investors saw opportunities to buy assets from international oil majors' divestments such as Angola’s national oil company Sonangol’s acquisition in US company Cobalt International Energy-owned blocks worth US$1.8bn, and several acquisitions of Nigerian Oil Mining Licenses by local players Seplat Petroleum Development and Eroton E&P from Chevron and Shell.

Mining M&A also accelerated in 2015 amid a continuing commodities glut and looming debt maturities for many, with an increase in the number of deals and interest from China to Canada and Australia, zoning in on miners across the continent. However, energy, mining and utilities’ (EMU) share of total deal volume and value has shrunk. Between 2008 and 2013 the sector accounted for 38% of overall M&A value and 20% of volume. In 2014/2015, other sectors emerged as investors have recognised the growth opportunities in Africa beyond natural resources. South Africa was once again the busiest M&A market in Africa, making up more than half of total deals on the continent. These were mostly focused on the industrial and chemicals, financial services and EMU sectors.

While 62% of the deal flow stemmed from domestic investors, inbound activity was boosted not only by the US and the UK but also by the UAE. The tie-up between UAE-based Al-Noor Hospitals and South Africa’s Medi-Clinic for US$11.4bn resulted in the continent’s top deal in 2015. The consumer sector’s share of deal volume was up to 13% in 2014/2015 from 7% between 2008 and 2013, with value rising from 13% to 15%. A growing middle class, a young population and huge scope for growth continue to encourage deals in this space. In 2015, deals such as Unilever’s US$215m investment in Unilever Nigeria and UK-based beverage company Diageo’s acquisition of the remaining 50% in South African sorghum beer brewer United National Breweries are examples of how foreign investors have recognised the opportunities that consumer businesses offer in Africa.

Another sector that saw its share of M&A deal flow grow was pharma, medical and biotech (PMB). This sector made up just 2% in value terms between 2008 and 2013, yet it grew to 20% over the past two years.

Although the Medi-clinic deal and Canadian drug developer Valeant Pharmaceuticals move to buy Egypt-based Amoun Pharmaceutical Industries in Egypt for US$800m inflated the deal value figure for the sector in 2015, transactions such as the sale of South African Aspen Pharmacare to Litha Pharma, a subsidiary of Irish group Endo International, for US$130m, shows that there are mid-market deals in the sector too. Although the share of deals and value for TMT and financial services eased in 2014/2015, these segments are expected to remain active in the year ahead. In the case of telecommunications, the sheer volume of customers across the continent and the need to maintain infrastructure will continue to stimulate deals. French telco Orange, for example, increased its market share in North Africa with a 5% stake in the Egyptian Company for Mobile Services (ECMS) for US$184m and a 9% stake in Morocco’s Medi Telecom. With the latter transaction, Orange now holds 49% giving the French company access to 13 million mobile subscribers which represents a 31% market share.

Inbound upside While domestic, regional deals in Africa still outnumber inbound investment, deals originating from overseas saw the highest share of M&A on Mergermarket record. As emerging market currencies struggled in 2015, the strengthened US dollar propped up deal flow and deal value climbed to US$19.2bn in 2015 from US$11.2bn in 2014. Attractive growth prospects and valuations drew foreign buyers, who were looking for alternative places to invest in the face of competitive bidding and high valuations in Europe, falling stock markets in China and economic challenges in other emerging markets such as Brazil. M&A outlook Overall, despite the difficulties posed by volatile currency, commodity price fluctuations and elections in key markets such as Nigeria early in 2015, Africa’s M&A market drew steady investment. The key EMU sector continued to account for most activity, but strong showings from industries such as consumer and PMB demonstrated the diverse range of opportunities in Africa. And the outlook for dealmaking in 2016 is positive. The election in Nigeria, an M&A powerhouse on the continent, has passed smoothly, which will give dealmakers confidence and more certainty. There is a good pipeline for deals that has built up and could now start to flow as investors begin to scout opportunities, including distressed assets in the energy segment. Increasing amounts of capital flowing into the region, through PE funds and overseas investors especially, should also stimulate activity in areas outside of Kenya, Nigeria and South Africa where most activity has taken place historically, as investors move to enter new frontier markets and seek out deals in less competitive M&A environments. Finally, the economic fundamentals point to huge potential for African M&A. The population is young, the middle class is growing and there is huge demand for goods, services, infrastructure and resources in a continent that is still underserved in these respects.