Economic growth in sub-Saharan Africa continues at a pace that is impressive in comparison with global averages. While the more mature markets in the United States and Europe continue to struggle with the consequences of the financial crisis of 2008, the outlook for business in Africa is very different.
Some of the outstanding performers— Angola, Nigeria and Chad—owe their progress to oil, but what has helped fuel sustained growth across this region is the effect of a marked transition away from subsistence farming to employment in the wider commercial sector. Analysis from the McKinsey Global Institute suggests that just 32 per cent of Africa’s GDP growth from 2000 through 2008 was generated from natural resources and related government spending. The remainder came from the wholesale and retail, transportation, telecommunications and manufacturing sectors. This highlights a fundamental demographic change that is characterised by Africa’s increasing urbanisation and its rising consumer-led middle class, leading to new potential investment opportunities in the region in food production, fast moving consumer goods, financial services/consumer finance, manufacturing and technology.
Merger & acquisition activity in the region ranges from auction sales of long-held family businesses that are now run by professional managers because the younger generation is either too disparate to present a manageable shareholder base or simply not interested in carrying on the business, to auction sales of African subsidiaries of family-owned international groups where the African components are now valued at higher multiples than the group as a whole. Exits also are being precipitated by the comparatively prohibitive cost of local bank finance in Africa, which is forcing business owners to sell or to seek alternative sources of finance such as from strategic foreign equity investors.
First time international investors are most likely to make strategic alliances with local, well-established groups, for example Danone SA’s US$686 million (or 37.8 per cent) stake in the Moroccan dairy business, Centrale Laitiere. Other investors are making strategic acquisitions as part of a “buy and build” strategy to embed themselves into the region within a sector. Examples include Singapore-based Olam International’s acquisitions of Crown Flour Mills, OK Foods and Ranona, which together benefit from integrated scale and synergies.
Restructuring of the Target Business
Target businesses, particularly the ones established over generations, are rarely single purpose vehicles and can include a wide range of unrelated and undocumented activities and trading relationships both within the group and with counterparties. As a condition to closing, the target group should be required to undergo a restructuring to formalise third-party trading relationships, formalise or discharge related-party agreements and intra-group debt, discharge local debt (as the buyer will often want to refinance using international bank debt without prior security granted to local banks), divest non-core assets and put any arrangement with any member of the selling shareholder group that is to remain in place post-closing on fully documented, arm’s length terms. More often than not, the pre-sale restructuring is as complex as the transaction itself, but if carried out effectively, it can reduce significantly the transaction risk associated with the acquisition.
Companies in Africa very often include minority shareholders unrelated to the controlling family group. These should be bought out by the principal controlling shareholder prior to sale at a fair and transparent price on arm’s length terms, or effectively bound into the sale process. Ideally, a buyer should seek a cohesive seller group with aligned interests as a counterparty to the purchase agreement.
Sellers often create an offshore holding company structure pre-sale. It is essential to ensure the structure does not infringe local laws that restrict foreign ownership (normally restricted to minerals, defence, media and the banking industries) or foreign investment controls, for example, requiring central bank approval. This applies to both share ownership and shareholder debt.
Local exchange controls and other regulations may limit the ability of the buyer to repatriate profits or otherwise leverage the investment. A buyer should therefore seek advice as to its intended method of revenue repatriation before acquisition. Some jurisdictions also require technology, licensing and royalty remittance arrangements to be approved by local regulatory authorities, and impose financial and practical constraints on inbound investors to ensure local technology is not exploited to the detriment of the local economy.
Management and Employees
Most jurisdictions impose quotas on expatriate employees and many require social infrastructure as a condition of investment, in addition to national insurance and social fund contributions.
Effective Due Diligence and Disclosure
This area is critical. Even though buyers typically encounter undocumented business arrangements, significantly lower standards of corporate governance and vague and inaccurate data disclosure and explanation through the due diligence process, it is still vital to conduct as great a degree of due diligence as the transaction timetable provides. Interpreting and clarifying disclosure against the warranties in the purchase agreement, and the consequences of that disclosure, are important given that local lawyers, local accounting firms and local management typically will be involved in the initial diligence exercise, and they may not fully understand the absolute requirement for certainty of expression. Unless the timetable is critical to the transaction (in which case any curtailment of due diligence must be balanced by enhanced contractual protections), the benefits to a buyer of a thorough, drawn out due diligence and disclosure process to mitigate diminution of value post-closing cannot be over-emphasised.
The existence of the US Foreign Corrupt Practices Act and the UK Bribery Act imposes a heightened risk on investors. As part of the due diligence process, buyers should determine the risk level of potential corruption involved in the transaction and target group and allocate resources accordingly, identify any “red flag” activities that may signal corrupt practices, record all incidents, consider voluntary self-disclosure (early disclosure can mitigate or eliminate successor liability for violations uncovered pre-acquisition), seek warranty and indemnity protection in the purchase agreement, and audit and strengthen internal controls immediately after closing. Concentrated due diligence, self-reporting, contractual protection and post-closing implementation of robust controls are key to eliminating or mitigating liability for pre-closing corrupt practices within the target group.
A buyer should check to see whether the country concerned is a party to any bilateral investment treaty protecting foreign investment. If there is a real risk of expropriation, methods to mitigate the risk include securing co-investment from an international development corporation and/or obtaining political risk insurance.
Transaction Governing Law
Owing to uncertainty about enforcement of contracts and the reliability of the local courts, transactions in Africa are typically governed by English or French law, depending on the jurisdiction. Occasionally minority shareholders will seek to challenge these provisions, but generally the courts in most African jurisdictions recognise offshore governing law and dispute resolution in relation to contracts involving local assets. One form of additional protection is to have an English law irrevocable power of attorney from the minority shareholders in favour of one controlling shareholder, pursuant to which they expressly waive their rights to challenge subsequently the purchase agreement’s governing law and jurisdiction.