Navigating Africa's complex but rewarding investment landscape
Webber Wentzel's Senior Partner Christo Els shares his tips.
It is a turbulent time in the world’s markets and economies.
Between the UK’s on-going Brexit talks, rising interest rates globally, President Donald Trump’s unpredictable actions in the US, political and economic crises in South Africa, it is probably fair to say that the year 2018 has posed more risks for dealmakers.
At a time when Europe, the US, and South Africa are increasingly volatile and pose political and economic risks, more dealmakers – foreign and local – are now taking a fresh bet on the rest of African continent.
As other African countries have become a lot more stable and democratic in their politics and public policies, dealmakers are increasingly looking at markets outside South Africa for opportunities and tapping into the region’s growth story.
This is a trend that Webber Wentzel's senior partner Christo Els (pictured) is seeing. “In the neighbouring countries, the East Africa region is receiving a lot of interest, and investment from foreign and local investors,” Christo told Mergers and Acquisitions (M&A) Africa.
Lending credence to Christo’s views is that he is close to the M&A community as he has been involved in many large and cross-border deals in recent years.
Among the deals are AB InBev’s more than $70 billion takeover of SABMiller in 2016; Woolworths’ R23 billion takeover of Australian retailer David Jones to become the largest retailer on the southern hemisphere; Mercer Africa's acquisition of a 34 percent interest in the Alexander Forbes Group; Walmart’s purchase of a majority stake in Massmart; and Vodafone’s acquisition of a majority interest in Vodacom.
Although Webber Wentzel doesn't have physical offices outside of South Africa, it holds strong, deep and long-standing relationships with the leading law firms across sub-Saharan Africa. The firm regularly works on Africa-wide transactions and country specific matters initiated by South African, regional and international corporates, banks, private equity houses and institutions.
Asked which markets across East Africa have piqued the interest of M&A investors so far this year, Christo mainly singles out Kenya and Ethiopia.
Kenya is seen as a stable and diversified economy, not dependent on any particular commodity, which makes its risk profile attractive. Kenya is also seen to have a stable society, with good structures, active civil society, providing investors' confidence about the country. Meanwhile, dealmakers are attracted to Ethiopia's rising population, annual economic growth that ranges between eight and ten percent, developed energy, road and technology infrastructure, and suitable investment policies - just to mention a few.
"We have also seen a lot of activity in Mozambique. The country has seen a lot of gas and oil opportunities - mainly exploration transactions off the coast. Another country which is attracting attention is Angola. There have been a number of inquiries from investors in the market," said Christo. Closer to home, even Zimbabwe is starting to pique investors interest with cautious optimism returning.
Africa is both geographically enormous and highly diverse. And deal making in the continent with 54 diverse countries can be complex. Investors often have to navigate complicated legislation that prolongs the duration of concluding deals, different business cultures, systemic corruption, and bad governance, not enough sizable companies to acquire, markets and currency volatility, political uncertainty and unpredictability.
“Investors are interested in stability. They want to know that the money they are investing will be safe and that they won’t be bogged down by unnecessarily regulatory restraints in particular in relation to the movement of money.”
Christo said investors must have a smart entry strategy into Africa and be clear about their objectives for wanting exposure to the continent.
“The first thing to be clear about is where to invest. For example, North Africa has a reasonably mature market and is closer to Europe, but there can be a lot of political instability in the region. Many countries in Sub-Saharan Africa are economically mature and politically stable. It is important for investors to understand the market and familiarise themselves with the market before they move in more aggressively.”
And if dealmakers find a suitable company, Christo said it is important to look at the strength of the company in relation to its management and “whether there is a fit for the company to make the acquisition.”
“Most acquirers would not know the market, so they would seek a local partner to assist with that. A good partner will help to pinpoint the unique requirements of the specific region, identify the target opportunity, and create a smooth entry into African markets,” he said.
“It’s no different than the decisions investors make in any market around the world. There might be greater uncertainty because they may not know the market. So, there has to be a greater focus on local partners, understanding political stability and corruption prevention.”
“In many cases, we find that our key relationship firms in country and our own partners who regularly do work in a particular jurisdiction are best placed to guide potential investors and give them pointers on key opportunities and/or potential red flags.”
Like any investment, Christo said a vital element about dealmakers entering the African continent is that they need to take a long-term view into the continent.