Increased African regulation has important consequences for M&A

Africa is poised to grow at levels far exceeding those anticipated for developed economies. “This means an increasing number of companies, foreign and South African, seeking to grow their global footprint and profits through mergers and acquisitions (M&A) in Africa” says Tertius van Dijk, PricewaterhouseCoopers (PwC) SA Transaction Services Director.

As Africa opens itself up to international businesses, many of its countries are introducing increased regulation to provide improved corporate governance and providing a more stable business environment. Van Dijk notes that while this is a positive trend, at times these regulations may present some difficulties for those looking to acquire businesses on the continent.

He cautions that regulatory regimes in African countries require special consideration from companies seeking M&A activity north of South Africa‘s borders. “A foreign buyer would ideally obtain warranties and indemnities from the seller of the business in order to mitigate historical regulatory compliance risks and exposures to potential penalties relating to the pre-acquisition period. However, these measures would not address or safeguard against post-acquisition regulatory issues and changes. Further pre-deal due diligence may be required from the buyer to tackle the consequences that new regulations may have after the sale is completed.”

Van Dijk notes that special care should be taken when regulations are being phased in or have recently been introduced. “Compliance with the new regulations as part of the annual audit process may not yet have been assessed – or its internal processes may not be robust enough to ensure that adequate compliance levels exist. Further down the line, a business may then face fines or licence losses as a result of any non-compliance. This would be for the account of the foreign purchaser and the consequences could be severe. Buyers should be aware of these risks, ideally identify these weaknesses pre-purchase, adjust the purchase price accordingly and develop a plan to address them as soon as they take control of the acquired company.”

Acquirers should ensure that their pre-acquisition due diligence procedures include obtaining an understanding of the existing and pending regulatory environment of the relevant country and its impact on the target company – from legal, financial and operational perspectives.

Ryan Rodkin, PwC’s SA Transaction Services Senior Manager highlights that there have been several instances when post-acquisition, some highly profitable businesses have faced significant margin reductions due to increased regulation. “The potential for erosion in deal value can be avoided if buyers undertake adequate pre-acquisition due diligence in this regard. Evaluating the impact of pending legislation is especially crucial in the more regulated sectors such as financial services, telecoms and utilities.”

Rodkin says buyers should consider including a condition precedent in the sale and purchase agreement. “The completion of the transaction could be made subject to the buyer (and seller if appropriate) having discussions with the relevant regulators in order to understand the intention, implementation and impact of current regulations and prospective changes on the business under consideration. This would allow for continuation of the transaction negotiations, including agreement on price, within the agreed timeframes and exclusivity period. Yet it would provide the buyer with the option to either terminate the transaction, or re-open price negotiations, should an adverse outcome arise from this regulatory due diligence work.”

Van Dijk concludes that buyers frequently fail to adequately consider the financial and commercial impacts of regulatory changes on businesses they acquire. “This is often seen in cross-border transactions, in which the approach to regulation in the target company jurisdiction may be significantly different to that in the buyer’s home country.”