AFTER several years of steady increase in mergers and acquisitions activity, African dealmaking has made the final step to firmly entrench itself into the global marketplace.
Despite political turmoil in many countries, a prolonged downturn in the commodities cycle and related currency risk, Africa’s top economies have maintained investor interest with strong momentum in M&A across the majority of sectors.
This is one of the key findings of the fourth edition of “Deal Drivers Africa”, published by Mergermarket in collaboration with Control Risks, the leading business risk consultancy.
“M&A activity in Africa is currently driven by many factors; downturns in more established markets make international buyers look out for new targets; capital is more easily available and high-quality targets are offered at very attractive prices,” says Mr George Nicholls, senior managing director for Southern Africa at Control Risks.
“While most actors (88 percent) acknowledge the fact that external advisers are crucial to the success of a deal, still only 19 percent use external support for due diligence assessments.
“Hence, many deals fail at the step of the very initial due diligence, as lack of transparency and local knowledge leads to lack of clarity in the ownership structures.”
South Africa, Nigeria and Kenya are seen as the most attractive target countries for M&A activity on the continent.
The report says all respondents believe that cross-border deal making between African countries will continue to increase with most foreign buyers of African companies in 2016 coming from Europe, Asia-Pacific and North America.
Energy, mining and utilities are expected to generate the most M&A activity in Africa while industrial and chemicals are being viewed as the second busiest sector this year.
However, regulatory uncertainty, particularly compliance and integrity issues, are highlighted as the principal obstacle to M&A activity in Africa, followed by operational and security risks.
Cyber security is given highest importance by about 60 percent of respondents when doing an M&A deal in Africa, according to the report.
“Despite all the enthusiasm over this positive development, major obstacles remain.
Regulatory, operational, security and increasingly cyber risks are major risks that should be considered when undertaking M&A activity on the continent,” said Mr Nicholls.
African businesses pursuing pan-African expansion strategies and companies consolidating their domestic markets are anticipated to be main drivers of buy-side deal activity.
With regards to the main drivers of sell-side activity, the bulk of respondents expect that most vendors will use M&A strategically to fund expansion in more profitable business.
Some say the sell-side deals will be influenced by a focus on core business.
“African companies are aggressively targeting high yielding markets and reviewing their business models to carve-out non-core assets to ensure more focus on the core areas and to build the operational quality and value for a competitive position,” the report says, citing a chief financial officer at a Kenyan corporate.
As was the case in previous study, private equity exits are again expected to be the second biggest driver of sell-side M&A, as buyout firms move to realise their portfolios at a time when valuations are deemed attractive.
“Private equity firms are exiting their investments in the African market with high valuations and building capital for new investments.
The return on investments will be higher due to the rapid economic growth and the easing of regulatory requirements,” a finance director based in Zimbabwe says.