SHINE Webinar Series:

M&A in Africa

Boris Martor, Eversheds LLP, Africa Group

borismartor@eversheds.com

Grant Williams, Eversheds (SA) Inc, Africa Group

grantwilliams@eversheds.co.za

25 September 2014

1

1. It is difficult to give a global description of the M&A market on the African continent because of regional disparities.

2. The market is currently dominated by deals in Northern and Southern Africa.

3. Compared with other regions, the African market is still very small and immature.

4. However, in recent years, M&A activities have become an important channel for investment into Africa, allowing investors and international business better market access.

5. The dynamics of the region is mainly underpinned by high rates of growth (according to the IMF, GDP growth for Sub-Saharan Africa came in at just under 5% in 2012 compared to just 2.1% in the world’s advanced economies).

Introduction

2 2

Agenda

1. Overview of the M&A market in Africa

2. Motivating factors in M&A deals in Africa

3. Main risks and difficulties for M&A in Africa

4. Sourcing deals in Africa

5. Private equity in Africa

6. Creating value and assisting management

7. Exit Strategies

8. Prospects

1.1. Deal volumes & transactions

1. Since 2006, US$276bn worth of M&A transactions have taken place in Africa, over a total of 1,647 deals.

2. M&A activity has remained relatively steady, after a peak in 2007, with 188 deals taking place in 2012, at a combined value of US$33bn.

3. 115 deals took place in the first three quarters of 2013, at a total value of US$26.6bn.

Source: Mergermarket

1. Overview of the M&A market in Africa

4 4

1. Overview of the M&A market in Africa

5 5

Source: Mergermarket

1. Overview of the M&A market in Africa

6 6

Source: Mergermarket

1.2 Most acquisitive nations

Between 1992 and 2002 half of the total value of acquisitions in Africa were divided between:

• the US (18%)

• the UK (17%)

• France (15%)

Source: Thomson Reuters

1. Overview of the M&A market in Africa

7 7

Between 2003 and 2013 the US dropped into fourth place, as a result of increased activity from China :

• the UK (18%)

• France (16%)

• China (13%)

• the US (7%)

18% 16% 13%

1.2 Most acquisitive nations

1. Emerging partners are becoming actively involved in African M&A markets.

2. In 2010, China and India accounted for 36% of the value of all M&A transactions on the continent.

Source: the African Development Bank.

1. Overview of the M&A market in Africa

8 8

1.3 Most targeted regions

1. Mergermarket surveyed 100 investors in 2013 about whether they have been involved in a M&A activities in Africa in the past three years – 99% answered yes.

2. The diagram below shows a breakdown of the regions in which the deals took place.

1. Overview of the M&A market in Africa

9 9

1.4 Most targeted sectors

1. The metals and mining sector, and oil and gas sector, remain the most targeted sectors.

2. In 2013, Africa recorded about 17% of the major global deals in the oil and gas sector amounting to more than US$12bn.

3. Between 2012 and 2013 the number of deals in the energy, mining and utilities sector accounted for 21% of the total deals.

4. The consumer goods market is now beginning to rival natural resources with US$58bn invested across 569 deals between 2003 and 2012. It was the second most active area in terms of deal volume (14% share between 2012 and 2013).

Source: Mergermarket

1. Overview of the M&A market in Africa

10 10

1.4 Most targeted sectors

1. According to EY, the power and infrastructure sector has also become a key investment sector, with over 800 infrastructure projects under way in Africa, amounting to over US$700bn in 2012.

2. A recent emergence of new businesses in financial services, telecommunications, hotels and lodging, marked a real shift in terms of sectors of economic activity on the continent.

1. Overview of the M&A market in Africa

11 11

1.4 Most targeted sectors – Recent deals (2013-2014)

1. Telecommunication: acquisition by Emirates Telecommunications Corporation (also known as Etisalat) of Vivendi’s 53% stake in Itissalat Al Maghrib (Maroc Telecom) for a final amount US$5.8bm.

2. Oil and gas: acquisition by China National Petroleum Corporation (CNPC) of a 28.57% stake in Eni East Africa Spa for US$4.2bn.

3. Consumer good market : acquisition in Nigeria of the aluminium beverage can manufacturer Alucan by Nampak Ltd, Africa’s largest packaging company, for US$301m.

1. Overview of the M&A market in Africa

12 12

1.4 Most targeted sectors – Recent deals (2013-2014)

1. Mining: acquisition by Gold Fields Limited of the Granny Smith, Lawlers and Darlot gold mines (collectively the Yilgarn South Assets) in Western Australia, from Barrick Gold Corporation (Barrick), for a total net consideration of US$270m.

2. Banks: acquisition by Attijariwafa Bank of a 55% stake in the Togolese branch of the International Bank for Africa.

3. Health: acquisition by Cipla Ltd of Cipla Medpro South Africa Ltd, its distribution partner in South Africa, for more than US$500m.

1. Overview of the M&A market in Africa

13 13

1. Overview of the M&A market in Africa

14 14

Source: Mergermarket

1. Overview of the M&A market in Africa

15 15

Source: Mergermarket

Five significant motivating factors can be identified in M&A transactions in Africa, in descending order :

1. Access to customers

2. Access to natural resources

3. Access to industrial assets

4. Access to intellectual property

5. Access to human capital

2. Motivating factors in M&A deals in Africa

16 16

1. The political risk is still present even though Africa is considerably more stable than it has ever been.

2. Some jurisdictions are over-regulated, for example: • in Algeria and Tunisia, a foreign investor cannot hold more than

49.9% of the share capital of the local entity; • there are employment equity considerations and regulations to

consider, such in South Africa investors need to consider the broad-based black economic empowerment (B-BBEE) requirements and the onerous labour legislation and regulations.

3. In other jurisdictions, the regulations are:

• inappropriate / obsolete / not detailed enough; • non-existent : no regulations / lack of rules (PPPs).

4. Foreign exchange regulations and foreign investment regulations are restrictive.

3. Main risks and difficulties for M&A in Africa

17 17

5. M&A transactions in Africa are particularly exposed to risks relating to

bribery and corruption.

6. The administrative processes are quite random, and in some jurisdictions it can be quite tricky:

• to register a company / to carry out formalities;

• to obtain a trading licence;

• to buy a plot of land or lease premises;

• to understand and comply with tax controls, which can be arbitrary.

7. The time is not the same : things take longer in Africa...

3. Main risks and difficulties for M&A in Africa

18 18

8. Local law firms are not usually up to date with the market practice of the operations or the requirements of the global investors.

9. The merger control regimes are set out in national laws and supra-national regional rules (for example COMESA), which complicate the filing processes and conclusion of deals, especially where there are multi-national groups involved.

10. Some practical issues are to be taken into account:

• generally poor infrastructure: access to premises problematic

• weak IT environment: access to internet, telephone, new technologies

• poor data quality: data and information in respect of the target is not always reliable or accurate

3. Main risks and difficulties for M&A in Africa

19 19

• Target: mid-sized businesses that exhibit significant potential for improvement and growth: o more than 95% of companies in the region have revenues of less than

€70m; o significant untapped potential for enhanced performance and growth; o attractive entry valuations relative to growth potential; o increasing deal flow.

• Pan-regional approach. Some countries (eg Mauritius) have put favourable

tax regimes in place to encourage the establishment of holding companies in their jurisdictions.

• Duplication of successful business models and strategies from one region to another and cross-regional development initiatives. However, investors need to be careful as a particular

business model will not necessarily work in all jurisdictions.

4. Sourcing deals in Africa

20 20

• Network: it is important that the investor puts together a group of

recognised and credible professionals including industrial families, lawyers, accountants, professional advisors, investment banks, commercial banks, merger and acquisition specialists, consultants and development agencies.

• Co-investment: bringing in fund investors and other private equity players to co-invest in many transactions. These relationships constitute a significant sourcing channel.

• Private Equity is expected to increase in the coming years in Africa.

4. Sourcing deals in Africa

21 21

5. Private equity in Africa

22 22

• There are now over 120 private equity firms headquartered in Africa,

with around 100 of those based in sub-Saharan Africa (mainly South Africa).

• Private equity funds have invested approximately US$15.3bn in sub-Saharan African countries between 2002 and 2012.

• Private Equity transactions stand apart from wider M&A transactions: • PE investors prefer longer term investments in sectors such as

consumer, financial services and pharma, medical and biotech, rather than the energy and mining industries.

• Taking a look at the top 10 deals in 2013, the biggest PE deal was

valued at US$481m, compared with the largest overall M&A deal of the year of US$1.2bn.

Source: Market data specialists Preqin / Emerging Markets Private Equity Association.

Recent Private equity deals Africa has attracted funds from Middle East investors. • Recently, the UAE-based private equity firm Abraaj Group and Danone

announced the acquisition of Fan Milk International, a diary manufacturer based in West Africa.

• Fajr Capital, an investment firm in which Abu Dhabi Investment Council holds a share, also acquired a substantial minority stake in a GCC-based manufacturing company.

5. Private equity in Africa

23 23

6. Creating value and assisting the management

24

It is important to ensure that the management team is strong and aligned:

• Highly motivated and experienced management teams.

• Invest in IT and Enterprise Resource Planning (“ERP”) systems to optimize

monitoring.

• Develop and implement a coherent growth strategy.

• Identify and exploit domestic and international market opportunities.

• Management to invest a significant amount of their personal resources as evidence of their commitment.

24

6. Creating value and assisting the management

25

Implementing modern management practices and governance measures: • Strengthen corporate governance structures.

• Professionalization of financial accounting and reporting.

• Standardization of procedures and policies.

• Recruitment of independent members with industry expertise.

• Establishment of various committees that meet frequently (including

strategic, audit, ESG, and remuneration).

25

6. Creating value and assisting the management

26

Restructuring and/or consolidating operations:

• Typically, family-owned groups are heavily diversified into numerous and unrelated, business interests.

• Focus resources and capital most effectively. Improving profitability: • Performance targets and milestones in order to measure progress. • Drive improved margins through a variety of initiatives including:

• changing the product mix and pricing strategies; • optimizing working capital management; • improving production efficiency/capacity; • improving supply chain management; • outsourcing non-core functions; • negotiating more favorable contracts with suppliers and vendors; • increasing labour productivity.

26

7. Exit Strategies

27

There are a number of ways for investors to exit their investments in African companies, such as Sale to strategic buyers: • These types of sales remain the most likely source of exits in Africa.

Potential strategic buyers are, depending on the size and the markets, firms from Africa, Europe, the Middle East and America, and increasingly, Asia.

Stock exchanges: • The Casablanca, Lagos, Johannesburg, Cairo and Nairobi stock

exchanges present excellent routes for exit. Algeria is also encouraging listings.

• These stock exchanges have shown strong growth and liquidity during the last few years. The current high multiples should provide good returns to investors in companies seeking to float their shares. A listing on local or international stock markets is now possible given the growing economies and the increasing interest of local and foreign investors in public securities.

27

7. Exit Strategies

28

Sale to financial buyer: • These types of sales will also become a more likely source of

exits for “regional champions”, as late-stage funds and buyout funds become more common in Africa.

• Additionally, Arab and South African financial holding companies are increasingly seeking to gain exposure to the Region. The size and scope of “regional champions” makes them more attractive targets for these financial players.

Innovative schemes for the Region, such as leveraged management buyouts:

• With the availability of larger cash flows and more substantial

asset bases, “regional champions” are better candidates for exits through leveraged management buyouts (“LMBOs”).

28

8. Prospects

29 29

1. According to Mergermarket, sentiment among African firms is optimistic regarding M&A prospects over the coming years, with over 52% expecting an increase in activity.

2. The African Development Bank echoes this sentiment and notes that African M&A markets are poised to grow in the coming years due to:

• the natural resource potential

• a 1bn people strong consumer market

• an opportunity for global M&A investors to diversify their capital away from traditional markets

8. Prospects

30 30

1. An increasing level of M&A activity as new investors are attracted to the continent.

2. Investors and analysts’ expectations: increase in M&A transactions in Africa due to the expansion of the financial and consumer markets with the surge of Africa’s middle class in the near future.

Eversheds in Africa – largest legal network

36 offices on the ground in 32 countries

Eversheds in Africa – 32 EALI members

32