Despite numerous opportunities, the risks and challenges of doing business in Africa remain high with political instability, corruption, regulations and poor infrastructure causing concern among potential investors. Mergers and acquisitions (M&A) are on the rise as investors seek to capitalise on growth opportunities and mitigate against these risks. According to Thomson Reuters, the value of M&A transactions involving sub-Saharan Africa targets reached US$25bn in 2012, an 18% rise from 2011.
South African based Rand Merchant Bank (RMB) recently released its 2013/14 Where to Invest in Africa report in which it identified 10 key considerations for investing in sub-Saharan Africa.
“Understanding the various challenges of doing business in sub-Saharan Africa, together with correctly assessing investment opportunities from the outset, can greatly enhance the likelihood of success and enable investors to better manage their processes so as to capitalise on the wealth of opportunities offered by the continent,” says the report.
1. Achieving control
The report notes that many businesses in Africa are family owned or controlled, making it difficult for a foreign shareholder to acquire outright control. M&A transactions should therefore be structured on a phased-in basis. “An upfront agreement on a clear path to control for the incoming shareholder, indicating timelines and appropriate mechanisms to deal with issues such as pricing, can help to ensure that the ultimate objectives of both parties are achieved,” says the report.
2. Choosing the right local partners
While this is important in most transactions, it is especially critical when the local partner is relied upon to drive local relationships and is likely to have a longer-term involvement in the business. “The right partner can help a new entrant in the market to understand local culture, the business environment and facilitate necessary introductions.”
3. Local ownership requirements
The report notes that many African countries have adopted or are in the process of adopting citizen empowerment laws, which typically require a minimum percentage of local shareholder ownership. The challenge though is that local shareholders are often unable to raise required funds especially in capital intensive projects.
“The transaction is likely to need to be structured to ensure equitable economics and the meaningful participation of local partners over time, with structured funding solutions that ensure that economic returns are based on funding contribution and not solely on shareholding,” advises RMB.
4. Local listing requirements
Large international companies in Africa are under increasing pressure to list on local exchanges as regulators seek to develop in-country stock exchanges. RMB noted that while the historic lack of liquidity in many of these markets can make the commercial advantages of such a listing unclear, some of the larger exchanges, including those in Kenya and Nigeria are making significant investments in improving their trading platforms and compliance requirements.
“Companies should therefore be proactive about managing their contact with regulators to ensure that they comply with regulatory changes in a manner that best suits their corporate structure and requirements, while still satisfying the local regulator,” says the report.
5. Valuation considerations
RMB noted that there is often disconnect between local and international investors’ perceptions of country risk and growth opportunities. This is often likely to result in significant valuation expectation gaps that need to be managed. RMB advises investors to put in enough time in discussing growth expectations and understanding realistic, achievable outcomes.
6. Financial disclosure and due diligence
Generally, there is limited financial disclosure, both for listed and unlisted companies, which means that access to valid, accurate, complete and reliable financial information can fall short of investor expectations. This lack of information, the report says, makes the due diligence process difficult.
RMB advises investors to have a detailed understanding of the strength of the legal system and enforceability of contracts in the relevant jurisdiction and be comfortable with the ultimate jurisdiction of contract.
7. Understanding the political environment
According to the report, it is important to maintain awareness of noteworthy events such as elections and understand their potential effect on the transaction timetable. RMB says investors ought to have an understanding of the political association of the major stakeholders involved in the transaction, both business partners and regulators that may need to approve the transaction.
8. Staff considerations
RMB explains that a trend of restricting staff rationalisation is developing in sub-Saharan Africa. Investors should therefore understand these requirements upfront and price for them accordingly.
RMB also notes that transactions should ideally be designed with maximum pricing and structuring flexibility to minimise the effect of changes in market conditions.
10. Choose the right advisors
The report explains that while firms typically prefer to work with advisors they know and trust, local knowledge and an on-the-ground presence are vital for navigating local nuances. “A combination of trusted and resident advisors has worked well for companies implementing transactions in sub-Saharan Africa in the past and it is important to establish who the pre-eminent advisors are that can unlock a transaction in the relevant markets.”