Emerging markets in Africa

Turning African investment opportunities into successful mergers and acquisitions

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The International Monetary Fund predicts that Africa will be the world’s second-fastest growing region in the period leading to 2020. This ensures that the continent will remain squarely on the radar of foreign companies and investors. South African companies, too, are eyeing opportunities across our borders in light of this country’s uncertain economic growth.

While challenges persist on the continent, these are more recently being viewed as investment opportunities. For example, Africa’s infrastructure deficit provides a compelling case for investment in sectors such as transportation, energy, agriculture, telecoms and housing, which remain critical to enabling economic growth and driving productivity for Africa, yet can offer investors attractive returns.

An initiative that concretises investor interest and opportunity is the G20 Compact with Africa (CwA), which was launched last year under the German G20 presidency to promote private investment in Africa for companies within the European Union (EU). The compact seeks to support coordination between African countries, international organisations and bilateral G20 partners to support economic, business and financial sector reforms that will attract private investment. EU countries invested US$22 billion in Africa in 2017 and the UN World Investment Report of 2018 anticipates foreign direct investment (FDI) into Africa to grow to around US$50 billion.

From an investment perspective, Kishan Govan, an Associate within the corporate finance team at Bravura, an independent investment banking firm specialising in corporate finance and structured solutions, says that companies seeking acquisition opportunities in Africa require experienced corporate finance partners that can guide them through often complex transactions.

“Attractive investment opportunities may not be as straightforward as anticipated. The reality is that there any number of complications that may emerge in African deals. This ranges from a technical perspective, where deal structuring might have to take into account different legal jurisdictions, to relationship management that necessitates an understanding of the local markets and business cultures on which the success of the transaction could ultimately rest,” he explains.

Govan recalls the example in which a family-run business based in a UK territory needed to raise capital in order to fund the acquisition of a majority share in a Malawian business.

“This was expected to be a straightforward transaction. However, an indecisive minority shareholder and an inherently risky investment jurisdiction resulted in a more complex, protracted transaction that included three parallel processes. There was one process with the seller, one with the funder and one with the minority shareholder who had certain pre-emptive rights. A pre-emptive right gives a shareholder the right to acquire shares of a disposing shareholder, on the same terms and conditions, as those accepted by the disposing shareholder from a third party. To manage all three aspects required a consistently strong set of technical skills combined with the development of good relationships with the client and other stakeholders in order to ensure that everyone remained invested throughout the process,” he explains.

Funding challenges

Undertaking two separate transactions was necessary for this transaction, outlines Govan. One which was the merger and acquisition transaction itself and the other to source and secure the funding timeously.

“It was imperative to work with the client to understand their requirements and then to settle on the most appropriate funding instrument,” he says.

While equity is dilutive, given that the partner will take shares, the benefit over (senior) debt is that there are no mandatory fixed payment terms or security criteria. However, says Govan, as their client was a family-run business with long-term goals, it was clear that the equity route would be too dilutive for their liking.

Debt funding, says Govan, can prove difficult in certain jurisdictions and this was true for this transaction.

“There are few banks in Malawi that can undertake debt funding and it was difficult to find the right security parameters for a Malawian transaction of the required amount. The banks were also uncomfortable with the tight timelines the parties were required to meet,” he explains.

Since the characteristics of equity and senior debt did not suit the requirements of the client and other stakeholders in this deal, mezzanine debt funding was proposed. After discussions with equity, debt and mezzanine providers in Malawi, South Africa and multiple other jurisdictions, it became apparent that mezzanine providers were also the most interested parties in pursuing the transaction.

Mezzanine funding in Africa

Mezzanine funding is a flexible instrument in that it contains certain characteristics from both equity and debt instruments. The main advantage for the client is that it is less dilutive than equity but also less restrictive than senior debt.

Mezzanine is typically structured as cashflow funding and can be structured to follow the company’s lifecycle and liquidity events such as an exit after a certain number of years. There were no apparent mezzanine funders in Malawi, so the funding had to be sought from international funds from South Africa, the United Kingdom or the Middle East. However, Malawi as a jurisdiction poses certain risks for these foreign funders such as currency, macroeconomic, political and security exposure. Where there is a debt component, the issue of how to enforce security in a jurisdiction like Malawi becomes challenging.

“Mezzanine in Africa is largely unchartered territory. While some funders do provide this, it is concentrated to a few funds, which have a specific mandate to provide mezzanine funding in Africa.

“In securing funding for this transaction, we spoke to everybody and investigated all available instruments. We were finally able to secure mezzanine funding from a South African financier and structured it according to our client’s needs that included a strong debt-like component,” Govan says.

Transaction complexities

This is one of the most complex structures that people will see in an acquisition, says Govan. The transaction needed to be structured through multiple jurisdictions, comply with legal, tax and exchange control requirements, and the process with the seller, funder, minority partner and regulatory bodies had to be carefully managed.

“Both our client and the minority shareholder needed to be comfortable with the financier. For the financier—given that there was an equity component to their investment—they needed to be sure the deal was being managed correctly to ensure a suitable return on their investment,” he says.

Concluding the deal was a lengthy process and took several months from signing to closure. “

From a technical point of view, structuring the deal, meeting the legal and tax requirements, which are all inter-conditional, and obtaining regulatory approvals did extend the timeline, given that we had stakeholders and agreements spanning multiple jurisdictions,” states Govan.

But it was the complexity of managing all the parties and aligning everyone that took the most time. Govan says, “This is where personal skills and relationships cannot be underestimated. There were times when each party was poised to walk away from the negotiating table. We needed to encourage constructive discussion and ensure that everyone was comfortable with the projected outcome Our team views the technical work as a non-negotiable commodity but it is the role of the trusted advisor—who is able to successfully guide the client and other stakeholders through the process to conclusion—that is paramount.”

Govan concludes, “Although there are ample opportunities in Africa, cognisance must be taken of the complexities that could hinder investment. Having an experienced team with knowledge of and experience in diverse African jurisdictions to facilitate investment opportunities can assist in realising significant investment potential.” 

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