Charting the route to successful mergers and acquisitions in Africa
Rob Bergman, a principal in corporate finance at Bravura, shares his expert insights.
The International Monetary Fund predicts that Africa will be the world’s second-fastest growing region in the period to 2020. This ensures that the continent will remain squarely on the radar of foreign companies and investors. South African companies are also eyeing opportunities across our borders in light of this country’s stagnant economic growth.
Despite the after-effects of the commodity bust and weak oil prices, the United Nations World Investment Report of 2018 states that foreign direct investment inflows to Africa are forecast to increase this year by around 20 percent to $50 billion (R733 billion) as a result of a mild recovery in commodity prices and strengthened inter-regional economic cooperation.
Companies seeking acquisition opportunities in Africa require experienced corporate finance partners that can guide them through often complex transactions. While many deals initially can appear to be straightforward, complications can emerge in African deals. This ranges from a technical perspective where deal structuring might have to consider different legal jurisdictions, to relationship management that necessitates an understanding of local markets and business cultures on which the success of the transaction might ultimately rest.
For example, 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 Malawi-based business. This was anticipated as a straightforward transaction. However, an indecisive minority shareholder and a risky investment jurisdiction resulted in a more complex, protracted transaction that included three parallel processes; one with the seller, one with the minority shareholder (who enjoyed certain pre-emptive rights) and one with the funder. This 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 in the process.
Project introductions and clients often come through the corporate finance specialist’s networks and the work that the company and the principal have done prior. This deal was no different. The client and I were introduced through a mutual acquaintance. They soon found that I was familiar with the African markets in which they operated. Being able to support the client and quickly win their trust was critical, but it was important to have demonstrable credentials underpinning this.
Undertaking two separate transactions were necessary for this deal. One was the mergers & acquisitions (M&A) transaction itself and the other was 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.
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, as our client was a family-run business with long-term goals, it was clear that the equity route was too dilutive for their liking.
Debt funding proved to be difficult for a number of reasons. 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 aiming at.
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 cash flow funding and can be structured to follow the company’s lifecycle and liquidity events such as an exit after a certain number of years. Currently, there are no mezzanine funders in Malawi, so the funding would be sourced from international funds from South Africa, the UK 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 component.
This is one of the most complex structures that people will see in an acquisition. 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 that the deal was being managed correctly to ensure a suitable return on their investment.
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 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.
But it was the complexity of managing all the parties and aligning everyone that took the most time. This is where personal skills and relationships cannot be underestimated. There were times that each party was poised to walk away from the negotiation table. We needed to encourage discussion and ensure that everyone was comfortable with the projected outcome. I view the technical work as a necessary commodity, but it is the role of the trusted advisor - who was able to successfully guide the client and other stakeholders through the process of concluding a deal – that is paramount.
Bravura is an independent investment banking firm specialising in corporate finance and structured solutions.