Investors keep an eye on the big picture in Africa
Concerns about the Ebola crisis and plunging commodity prices would have had investors fleeing Africa not that long ago.But dealmaking in the sub-Saharan region is buoyant as most investors set aside short-term worries and bet big on growth.
“Africa is on the radar,” said Miguel Azevedo, head of sub-Saharan Africa investment banking at Citigroup in London. “Companies are developing strategies to go into the region, and mergers and acquisitions are naturally following up.”
Recently, a host of multinationals announced almost $8-billion (about R93-billion) in deals across several sectors, demonstrating the appetite that exists to tap the region’s growing consumer markets.
Philip Lindop, head of investment banking for Africa at Barclays in Johannesburg, said: “In Lagos, you see 170 million people wanting a better life, a Coca-Cola at the end of the day … It’s just fabulously exciting.”
Until early December 2014 the sub-Saharan region had seen 631 mergers and acquisitions, the most for a comparable period since 1995 and up nearly 10% from 2013, according to Dealogic.
The International Monetary Fund has forecast that Africa will be the second fastest growing region next year, expanding 5.75%, behind the developing Asia region that includes India and China. And although a rout in oil and other commodity prices would dampen growth in 2015, optimism still prevails.
Joseph Rohm, of Investec in Johannesburg, said an important trend was the renewed interest of the Middle East. In 2014, the Investment Corporation of Dubai poured $200-million into Dangote Cement and the Qatar National Bank paid $500-million for a stake in pan-African lender Ecobank.
Another driver is the arrival of global private equity groups, joining smaller Africa-focused firms. “Private equity activity, both exits and entries, is driving M&A,” said Rohm.
Bankers say the interest of South African companies, which face lacklustre domestic growth, is fuelling deals. The number of deals supports the ‘Africa rising’ narrative of a virtuous circle of growth in the continent’s economies – supported by high commodity prices and cheap Chinese loans – and improved governance.
Colin Coleman, head of investment banking at Goldman Sachs in Johannesburg, said: “There is a great enthusiasm about Africa – particularly as other emerging markets’ economic growth disappoints.”
Nonetheless, there are signs of caution. Although more deals have been done, they are worth less than in 2013. During 2014, mergers and acquisitions worth $34-billion have been announced, down from $35-billion in 2013, and almost $49-billion for the whole of 2007.
This reflects two trends. First, investor focus is on deals outside South Africa, particularly Nigeria, where transactions are smaller. Second, valuations in the natural resources sector are down from the boom days of 2005-07.
In banking, retail and food sectors, valuations are higher than they were five years ago.
Martin Kingston, chief executive of Rothschild South Africa, said: “The deal size is relatively small, but people are paying significant multiples to secure toeholds built on existing franchises.”
Will it last?
The industry consensus is a categorical yes. But with mounting economic headwinds – and presidential elections in Nigeria early in 2015 – some investors are bracing for a slowdown in mergers and acquisitions.