This joint venture represents a remarkable step for Kellogg; the deal, priced at 15 times Multipro’s 2015 earnings before interest, taxes, depreciation, and amortisation (EBITDA), is designed to give Kellogg access to Africa’s fast-growing 1 billion person consumer market. Think instant noodles, snacks, and breakfast foods: Kellogg is now one of the powerhouses behind a product whose name “Indomie” is to “noodles” what “Xerox” has become to “copy” the world over.
The Kellogg-Tolaram deal is just one of an increasing number of global acquisitions of African companies. The average African customer is on the rise with a rapidly growing willingness to spend. Naturally, global brand leaders want in. Take, for example, Wal-Mart’s 2011 $2.4bn acquisition of South Africa’s Massmart, the owner of retail stores such as Game and Makro; Diageo’s 2012 $225m acquisition of Ethiopia’s Meta Abo Brewery; and Marriott’s $200m acquisition of South Africa’s Protea hotel chain in 2013, to name a few.
Global investors from the US to China have been increasingly deploying cash to Africa-focused targets over the past five years at the same time as household incomes in Africa have been rising. While commodity-led growth linked to China has been an important driver of the rise in African incomes, improvements linked to privatisation, technology upgrades, regulatory reform, economic diversification into services, trade reform, financial sector liberalisation, etc. are among key structural catalysts improving consumer affordability across the continent.
Put differently, Africa’s economies are more resilient to external shocks such as a Chinese slow down. At the same time, smart companies across Africa such as Ethiopian Airlines, Agrica, Zambeef, Capitec, Konga.com, EthioChicken and Discovery are starting to assemble the right platforms to compete in this more prosperous Africa, integrating talent, technology insight, and execution effectively. For example, Ethiopian Airlines’ growing dominance of Africa’s skies is an example of the type of nimble, emerging company that will reshape the continent’s competitive dynamics in the coming decade; a company that builds on its local market advantages to become an attractive takeover target, as well as an effective competitor to established global brands such as Delta or Emirates.
As a result, doing deals in Africa is likely to accelerate in volume, size, and transaction complexity. The reasoning is clear: both African companies and foreign investors need each other but for different reasons. For example, a deal appealing to foreign buyers will provide access to proven market channels, a clear handle on customer behaviours, field execution experience, and local regulatory relationships. For African sellers or partners, gaining access to lower-cost capital, global operating experience, process leadership, and a skilled middle management bench or the mechanism to rapidly create one, are all good reasons to consider a deal. That would invariably tilt transactions towards joint ventures.
Africa’s coming deal flow: What does it mean for those involved?
The Kellogg deal and its peer transactions are signaling to global investors that Africa has well-run companies, with strong brands, attractive cash flow, and significant long-term potential. While the sums involved are still relatively small, they signal a set of important shifts:
- Broader options: Africa’s best run companies such as KCB Bank, GT Bank, and Azam will have a broader set of strategic choices, such as structuring partnerships, sales of companies, and potentially, becoming acquirers themselves; as exit options grow, CEOs and boards of often family-dominated companies will start to push for restructuring and professionalisation to ensure survival in a more open market.
- Growing pool of players: A small pool of the best African companies and brands, such as Zambeef, TGI, Absa, Dangote, MTN, and Shoprite will initially dominate deal flow and activity but as the vast pipeline of growth companies become better known, and venture financing ramps up, Africa’s transaction landscape will become more robust and complex.
- Shifting mix of buyers: The pool of buyers focused on Africa will broaden from an initial mix of global strategic buyers and private equity firms to include African buyers, resulting in more intra-Africa deals; we are seeing South African and Nigerian buyers starting to do cross-border deals. A subset of transactions will be joint ventures designed to leverage the expertise of global operators alongside the local knowledge, relationships, and networks of Africans; real estate is one such key area. E.g. African real estate developers will seek partnerships with experienced US builders like Lennar and Toll Brothers.
- Management of Africa business: As African assets and cash flows become important parts of Global 1000 portfolios, a subtle shift will occur in how these companies view Africa, organise themselves to serve Africa, and in return are shaped by African market lessons and innovations. Facebook, Heineken, Samsung, and GE are trail blazing in this regard in explicitly preparing for how to win in Africa by employing strategies like partnering with local partners and moving their Africa HQ to Africa rather than London or Dubai.
- Changing role of advisors: As foreign buyers and investors start to parse Africa risks differently, and understand the nuances of specific countries versus the pan-African narrative, the role of investment advisors with deep local networks, insight, transaction expertise, and the balance sheet to finance deals will grow. This will likely lead to closer ties between global investment banks, financing pools, and African advisors.
The coming decade will be one of critical choice-making for Africa’s firms, investors, and potential partners. Irrespective of what choice African CEOs and boards make, what is critical is that such choices be made explicitly, and not forced on them.
Choosing to prepare for the global marketplace
Kellogg’s market entry is both an affirmation of the future of African investment and a wake-up call. As African brands and markets become more attractive to outside investors, Africa’s CEOs, boards, and institutional investors need to understand how ready their companies are for the competition ahead so they can prepare accordingly to either compete head-to-head with global firms or join forces as Tolaram did with Kellogg. It’s these choices, their implications, and the strategies implemented that will determine the success of African businesses – no matter who actually owns them – in Africa and around the world in our increasingly global marketplace.
Jude Uzonwanne is an associate partner at Dalberg.