Mergers and acquisitions are on the rise in sub-Saharan Africa as investors seek to capitalize on growth and mitigate against the risks and challenges of doing business there.
Despite numerous opportunities, the risks and challenges of doing business in Africa remain high, according to a report in HowWeMadeItInAfrica. These include political instability, corruption, regulations and poor infrastructure.
The value of mergers and acquisitions transactions involving sub-Saharan Africa businesses reached $25 billion in 2012, up 18 percent from 2011, Reuters reported.
“Where to Invest in Africa 2013-2014,” a report by South Africa-based Rand Merchant Bank, identified 10 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,” the report said.
Here’s a synopsis of those 10 points:
1. Achieving control: The report said many African businesses are family owned or controlled, making it difficult for a foreign shareholder to get outright control. mergers and acquisitions transactions should therefore be structured on a phase-in basis. An upfront agreement on a clear path to control for the incoming shareholder, with timelines and appropriate mechanisms to deal with issues such as pricing, can help ensure the objectives of both parties are achieved, the report said
2. Choosing the right local partners: This is important in most transactions but especially critical when the local partner is relied upon to drive local relationships and 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,” the report said.
3. Local ownership requirements: Many African countries have adopted or are adopting citizen empowerment laws, which typically require a minimum percentage of local shareholder ownership. The challenge is that local shareholders are often unable to raise required funds. The transaction should be structured to ensure that economic returns are based on funding contribution and not solely on shareholding, the report said.
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. 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.
5. Valuation considerations: There is often a disconnect between local and international investors’ perceptions of country risk and growth opportunities, the report said. This can often result in significant valuation expectation gaps. The bank advises investors to put in enough time 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 expectations. This lack of information, the report says, makes the due diligence process difficult. The bank advises investors to have a detailed understanding of the strength of the legal system, 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 be aware of noteworthy events such as elections and their potential effect on the transaction timetable. Investors should understand the political associations of major stakeholders – both business partners and regulators – that may need to approve the transaction.
8. Staff considerations: A trend of restricting staff rationalization is developing in sub-Saharan Africa, the report said. Investors should therefore understand these requirements up front and price for them accordingly.
9. Timing: Transactions should be designed with pricing and structuring flexibility to minimize the effect of changes in market conditions, the report said.
10. Choose the right advisors: While companies typically prefer to work with advisors they know and trust, local knowledge and an on-the-ground presence are vital for navigating local nuances, the report said. “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.”
