The African mergers and acquisitions (M&A) market is growing, and it seems that a wave of activity is taking hold.
For example, the Rothschild Group recently announced a targeted expansion of its business into the African continent. The firm is seeking opportunities across Nigeria, Kenya, Angola, Tanzania, Mozambique, and Cote d’Ivoire, and recently recruited Trevor Manual, South Africa’s former Finance Minister, as a non-executive senior advisor with a focus on Sub-Saharan Expansion.
Some might argue that the timing is strange, considering evidence of weakened deal volumes this year. However, the real fascinating trends might not involve the volume-drivers like extractives and infrastructure at all.
Instead, we might soon be seeing an unprecedented rise in consumer-facing M&A.
The region is ripening, according to Vinjeru Mkandawire, M&A reporter for Mergermarket. “The increasing number of businesses approaching their inflection point of growth presents huge opportunities for investors both at home and abroad.”
“Intra-African investment is increasing, consumer-facing industries are increasing, and I would say that those are driving volumes in M&A,” Graham Stokoe, Africa private equity leader at Ernst & Young said. Stokoe listsed the number of industries generating more activity, all consumer-facing: banking, insurance, fast-moving consumer goods, healthcare, and the education sector are all growing.
Why now? According to Nonnie Wanjihia, executive director of the East Africa Venture Capital Association, international firms are beginning to take notice of the African market. She said that “international trade buyers and regional expansion acquisitions financed by local capital raising” are fueling the rise in activity across the region.
For example, French food company Danone recently acquired a 40 percent stake in Brookside Dairy, East Africa’s largest dairy manufacturer. Last year, cosmetics giant L’Oréal took over the health and beauty division of Interconsumer Products Limited, an enormous personal care company based in Kenya. In a statement about the deal, Geoff Skingsley, executive vice president for Africa and the Middle East at L’Oréal, described it as “an important milestone for L’Oréal in Kenya,” as the company hopes to expand its footprint and market share in East Africa.
Both acquisitions demonstrate the rising attractiveness of the fast-growing African consumer base.
With both African and global firms showing a continued appetite for new African acquisitions, this is a trend that is likely to continue. However, even for local players, expansion does not come without risk.
For example, South Africa’s Tiger Brands were forced to write-off $82 million this year, or roughly half of its investment into Nigeria’s Dangote Flour. With the write-off occurring less than two years after the takeover, Tiger Brand’s CEO, Peter Matlare, acknowledged that company leaders had simply not recognized how complex the management of their new operation would be.
It’s an illustration of how difficult such expansions can be, even for a massive and well-established African firm.
“It’s very dangerous to replicate a South African [business] model in Nigeria, same as you can’t replicate a Nigerian model in Kenya,” says Stokoe, who notes that the widely differing conditions and business environments across countries makes it impossible to expand successfully without a careful consideration of local strategy.
“I’m speaking generally, but you have to be very wary about applying the same approach and the same business model throughout [the continent],” he said.
How can companies looking to grow or acquire new businesses mitigate these risks?
“It’s complicated,” Stokoe added, “there’s no one solution and you have to tailor [your strategy] to your company, your sector — and take a fairly step-by-step approach.” This involves being very aware of the opportunities a particular market presents, and understanding the implications of a given expansion strategy. Knowing what to change and what to keep across regions is a key part of this; for example, adjusting distribution practices while maintaining uniform corporate governance practices.
Even within a single market, there are huge differences between regions, which adds complexity.
For example, transport infrastructure can pose significant barriers for firms used to operating in urban areas. “[The] absence of a localization strategy for the continent poses significant limitations for potential investors,” says Mkandawire, due to “the huge discrepancies between countries and between rural and urban communities.”
“It has therefore become increasingly vital for advisory firms without boots on the ground to partner with local firms that have a grassroots understanding of local markets,” Mkandawire said.
Wanjihia and Stokoe also emphasized the importance of local partnerships, which can help growing firms develop vital market intelligence and know-how. Wanjihia said:
“Having partners on the ground is essential. They provide, among other things, access to personal and professional networks, as well as crucial on-the-ground expertise and knowledge of the operating environments in the various regions.”
Unfortunately, this too isn’t always a simple task, as a lack of skilled managers in a particular place can hamper efforts to recruit local talent. “One of the key obstacles facing businesses that are seeking expansion across the continent include a significant skills shortage, particularly of management and specialized skills,” Mkandawire said.
“Again, it’s the challenge of 54 countries,” Stokoe added. “Local experience is important, but it depends on how you get it.” He recommends flexibility, a focus on bigger markets, and a realization that “you can’t get local experience economically in 50-odd countries.”
That said, for companies looking to grow, the momentum and the appetite is there. Despite the hurdles and softening deal volumes this year, fortune has seemed to favor the brave; after all, said Mkandawire, despite short term risks, “historical data suggests that investors with long-term strategic interests [remain] largely undeterred.”
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