In the fourth quarter of 2015, Mergermarket interviewed 100 investors and advisers who are based in Africa and have been involved in deals on the continent within the past two years – including corporate executives, private equity investors, legal advisers and investment bankers – about their experience in the M&A market and their expectations for the year ahead. All responses are anonymous and results are presented in aggregate.
As global M&A reaches record highs, dealmaking confidence is spilling over into Africa. Propped up by cash-rich international buyers and steadily increasing volumes of inter-African M&A, survey respondents are enthusiastic about deal flow on the continent.
All survey respondents believe deal volumes will increase as investors turn to the continent to find growth. Indeed, 42% anticipate that M&A activity will increase greatly in the year ahead. “The amount of investments in the region have increased and many companies are taking advantage of the availability of capital and the improving business conditions to carry out deals in the region. This will only increase in the coming year and we expect it to risein a big way,” says an Algeria-based director of finance. The dealmakers polled also note that consolidation opportunities across a number of industries and the attractive pricing of high-quality targets will also spur M&A in Africa. “M&A activity will increase greatly as several sectors are ripe for consolidation and the level of growth and opportunity outweighs the risks, given the size and potential of the market,” says a corporate group chief financial officer from South Africa.
The energy, mining and utilities sector is expected to generate the most M&A activity in Africa, according to almost four fifths (79%) of those polled.
Respondents cite the need for technology and the emergence of a distressed asset environment as key drivers, while rising energy demand in Africa will also ensure the return on investment. “The greatest increase in dealmaking in Africa will be seen in the energy sector. Distressed oil and gas assets are gaining demand in the global market with buyers aiming to leverage the undervalued but potentially performing assets in this emerging region,” says a corporate director of finance based in South Africa. Industrial & chemicals (72%) is seen as the second busiest sector in the next 12 months.“The industrial and chemicals sector will experience an increase in dealmaking activity in Africa as the cost of raw materials is low and the possibility of achieving higher cost savings is very likely,” a chief financial officer in South Africa says. In line with a growing middle class and strong domestic consumption in Africa, respondents see the consumer industry (49%) as the third most attractive sector for prospective M&A in 2016. “The consumer sector, especially food and beverages, has been growing in a big way. There has been a rise in the demand for consumer goods across the region,” says a chief strategy officer located in Mauritius.
“Energy prices have hit all-time lows and this has caused valuations in the industry to fall considerably. This is attracting cash-rich players from other regions to take advantage and implement expansion strategies by acquiring businesses and assets in Africa and later making use of its resources to drive business performance.”
Corporate director of strategy, Mauretania
The majority of the dealmakers surveyed say they will finance their next deal from their own cash reserves rather than turning to capital markets or banks. Two thirds of the respondents say cash reserves will be the most important source of finance for their next acquisition.
Some dealmakers favour cash reserves because of the execution advantage it offers in a negotiation, while others have enjoyed rapid organic growth and built strong balance sheets, allowing them to fund theirown deals even when other options are open to them. “I feel all of the financing options are open in Africa, but a higher portion of financing will be through cash as African companies are cash rich and able to spend this cash on M&A,” a managing partner in Sierra Leone says. Apart from cash reserves, respondents most frequently cited bank loans (67%) and debt markets (52%) as sources of funding.
When not using their own cash reserves, 81% of the respondents say they will turn to African institutions for deal finance.“African financial institutions will play a major role in providing capital for M&A in Africa.
Governments are pushing for lending activity through financial institutions, and these are also opening up to the M&A market,” says a finance director in Togo.
“We are planning to gain local financial support as there are significant benefits attached to this approach. The lenders, through their vast network, can give advice ​and refer us to their clients.​”
CFO, private equity firm in Zimbabwe
With cash reserves identified as the major source of M&A funding by most respondents, it comes as no surprise that 86% of the dealmakers expect cash-rich corporate acquirers to be the main driver of M&A in Africa in the next 12 months.
“Cash-rich corporates are definitely occupying a significant share in the deal market using their strong reserves and influence over the capital markets. Meanwhile in-country consolidation has increased over the years, especially in the SME market which is also growing in size,” a South African finance director says. African businesses pursuing pan-African expansion strategies (85%) and companies consolidating their domestic markets (78%) are anticipated to be the other main drivers of buy-side deal activity.