M&A: Opportunities for SA companies in rest of continent, but challenges remain

The value of merger and acquisition (M&A) activity in South Africa has been hard hit by the lack of mega deals seen last year.

The R64bn (US$7.8bn) worth of M&A deals recorded at the halfway stage this year compares poorly with the R136bn ($16.6bn) worth of deals at the same time last year, according to DealMakers.

However, the value for the second quarter, including deals executed overseas by firms listed on the Johannesburg Stock Exchange, was estimated by DealMakers at R32bn ($3.9bn) – only marginally less than the R35bn ($4.3bn) recorded in the second quarter last year. The number of deals involved also remained much the same.

Nick Matthews, head of M&A in South Africa at professional services firm KPMG, says the result of this drop will be an even greater focus on deals into Africa by corporate finance teams.

Matthews says statistics of dealflow within Africa are not readily available, “but our intuition is that there is still a fair amount of interest in Africa by both South African corporates and foreign multinationals”.

“While we are still receiving a lot of interest in African acquisitions, often there are no substantial assets to acquire.” He explains, for instance, that outside of South Africa, Nigeria is the biggest market in sub-Saharan Africa, and one which Shoprite has targeted to have as many stores as South Africa but currently has only four stores compared to the 700 locally, with limited opportunity for acquisitive growth,” he says.

“The challenge with acquisitions in African countries is that the formal economies are underdeveloped and so acquisitions are feasible only on a piecemeal basis. Purely acquisitive growth is very difficult: the only viable strategy in Africa is to make an acquisition, invest and grow it organically,” says Matthews. The other important feature of expansion within Africa is the need for local partners and advisers with a local presence.

Nonetheless, the explosive growth of the telecoms industry has opened up some interesting opportunities in financial services, such as banking and insurance, retail and fast moving consumer goods (FMCGs).

Following the lead of Nigeria, and to adhere to Basel 2 requirements (they’re not onto Basel 3 yet), banks in countries such as Kenya and Zambia are having to increase their minimum capital requirements. When this happened in Nigeria, it opened doors to considerable M&A activity and investment in its banking sector. Matthews expects the same to happen in these two markets, and others in time.

Michael Combrinck, manager in KPMG’s Africa M&A and transaction advisory team, says: “To unlock such opportunities, an investor would ideally need an advisor with a presence on the ground. Furthermore, Africa is not the sort of market where a company should expect to move in and find immediate success.”

The colonial legacy still casts a long shadow, and the continent is highly fragmented culturally and in terms of legal framework. Each country requires its own learning curve. The approach of most companies has been to set up operations in Kenya as a hub for East Africa, and Nigeria as a hub for West Africa. South Africa, of course, is already a hub for Southern and Central Africa.

Combrinck is uncertain whether South Africa will succeed in establishing itself further as ‘the (sole) Gateway to Africa’ – notwithstanding its far superior capital markets and infrastructure. “We already see the professional services industry throughout the continent becoming more mature and sophisticated, and this will inevitably result in investors going directly to location, rather than via South Africa. You cannot run a Nigerian business from South Africa.”

Nonetheless, South African corporates do have a ‘first mover’ advantage, with companies such as Standard Bank, SABMiller and Shoprite already having almost 20 years’ experience north of the border.

In addition to banking, Combrinck sees insurance as another massive opportunity that South African and foreign insurers are already actively pursuing. Many of these opportunities have been facilitated by the expansion of mobile telephony throughout the continent.

A decade ago, mobile operators grew at 10% a month. That has now slowed to 10%–20% a year, but even that rate of growth is unsustainable into the future. “Traditional voice and data transmission has a limited outlook, but it has facilitated a lot of the other opportunities we’re currently seeing, whether in banking or insurance.”

“Other consumer-facing industries, such as retail and FMCGs, still display a massive gap in per capita consumption volumes compared to other regions, and this gap will close over time as the wealth of African consumers grows,” says Combrinck.

Mining will remain a perennial favourite for some time to come, but the rapid growth of the middle class means the major new driver of opportunity in the continent will be consumer-facing businesses.

“Innovation in funding deals will be fundamental to success, as investors cannot expect to do deals in the same manner as in more sophisticated markets. There are massive infrastructure and mining projects which are viable on the continent – success will come from the ability to innovate in structuring deals and in working closely with governments and regulators. This differs markedly from traditional M&A,” he adds.