Everything seems to be going Africa’s way. Its economy is growing faster than anyone expected post-depression, its civil unrests are winding down and foreign investments in the continent are hitting record heights. Africa is enjoying its best spell of M&A activity and it is about to get better. It was only a matter of time until this happened, but this change was spurred on by the financial stagnation in other regions. Even the ever buoyant business of Mergers and Acquisitions has struggled to find its footing in the shifting landscape of the present global economic upheaval. As gross uncertainty hit the market, financial powerhouses had to find new places to pitch their tents. Africa became the obvious choice for many investors as its small economic size and financial separation from the rest of the world served as a shock absorber from the global collapse. As economic activity has picked up quicker than at the usual hubs of M&A activity (USA and Europe), attention has shifted to this long-maligned continent. The United Kingdom it seems, however, never took its eyes off it. In the past decade, no country has done more M&A transactions in Africa either by value or quantity, than the United Kingdom.
Long before the economic collapse, the United Kingdom had been slowly acquiring stakes in Africa, knowing full well that the dividends may not pay off for another few years. The UK is the main reason why M&A activity in Africa was up 65% over the first nine months of 2013. Over the same period, there was an 8% decrease in announced global deals. Neither of these changes were surprising as the economy of Europe shrank last year, while that of Africa saw a respectable rise, and it is poised to grow even more in 2014. It is pretty clear to observers why the UK and other countries are showing mounting interest. What no one seems to know is how the UK became so dominant and if it can be surpassed.
The British Are Here
The $30.5 billion the UK spent on M&A in Africa between 2003 and 2012 was the most by any nation, though only $120 million more than the next country, France. In terms of the number of deals, however, the 437 transactions the UK made were more than the next three countries combined. It has shored up stakes in countries in all corners of the continent with no signs of slowing down. Its interests also vary from energy to consumer goods and even waste disposal.
Many advisers and industry analysts believe the reason for the UK’s success is its commonwealth ties. The UK has maintained a good working relationship with most of its former colonies, and was even on good working terms with Zimbabwe up until a few years ago. It has persevered in keeping diplomatic relations pleasant, partly through generous aid packages. But M&A is not about financial aid, it is about business, and business is no respecter of ancient relations. It is all about the end result and the Africans have had nothing to complain about. The country that hosts the financial capital of the world certainly knows how to do business right. The UK’s transparency and hands-on involvement set it apart from nations that have more cash but less longevity.
The UK’s style of investment is also a contributing factor. As mentioned earlier, the UK and France have spent almost the same amount of money on M&A, but the French have only carried out 141 deals. The money spent by the British has largely been invested by private equity firms targeting SMEs. As a result, they have faced less government bureaucracy and more success. Unlike China and India whose interests are in the billion-dollar energy sectors, the UK’s are more widespread. In order for the UK to succeed in this approach, a good working relationship with the government is beneficial but not necessary. It is, after all, dealing with companies whose activities are not a matter of national security unlike the oil industry for example, and so the private companies are all it has to worry about. Unlike the African businesses that are relatively new to global finance and multinational business, the UK’s financial juggernauts have been at it a long time, and it can teach a thing or two to its eager-to-learn counterparts. When it comes to the finance industry, very few countries can come close to the UK’s ability, let alone surpass it.
However, it would be wishful thinking to assume that the UK’s pole position will be maintained indefinitely. Its up and coming rivals may not have the same history or financial aptitude, but they have the money, and money talks.
Competition in Full Swing
There is much speculation that US interest in the continent’s M&A scene will pick up in the years to come. The assumption is that this will be done for both the economic and the political benefits. As America’s fiercest competitor intensifies its purchases and seeks to establish itself as the go-to-country for African trade talks, the US is certain to try and reassert its position. The $12 billion America spent between 2003 and 2012 was $8 billion short of what China spent. China further broadened that gap by splashing out $8.8 billion in its top three oil M&A deals in Africa last year. The pressure from India is also mounting up, as its 1.1 billion citizens need energy supplies large enough to support their numbers. With new oil and gas discoveries in Mozambique, Sudan and a few other African countries, there should be plenty of bidding going on this year too.
France’s M&A appetite also cannot be ignored. Its economy is certainly large enough to support more acquisitions in the years to come. It also has the historical and language connections that the UK enjoys with a good number of African countries. The economic revival happening in the francophone countries as well as the conclusion of several civil wars will make those countries more accommodating. More likely than not, those countries will want to continue their relationship with the country that has always been there for them.
The key determinant, however, of which country is going to take over the number one spot, is what Africa is offering. The most active industry by value and number of deals is metals and mining. The continent has almost half of the world’s diamond reserves, besides generous quantities of gold, platinum-group metals, chromite, cobalt and other metals. Most of these remain underground or unrefined. For this to be rectified, foreign expertise is needed and welcome. This industry will, therefore, continue to provide plenty of fodder for M&A dealings in the years to come. Between 2010 and 2012, the UK’s M&A bill in the sector was approximately $4.1 billion, just a little more than China’s. Australia, India, USA and Canada were next in that order. With rising operating costs in Australia, mining companies are being forced to expand their activities elsewhere, with Africa being the most promising destination. China’s increasing consumption and production demands for raw materials could make it intensify its efforts on the continent. It is unlikely that the UK will willingly concede defeat in this very profitable industry. It has been in the market for a long time and so understands the continent more than most.
The second leading area has been oil and gas with close to $30 billion spent between 2003 and 2012. This sector saw a huge leap last year, with the five largest deals in the industry coming in at close to $14 billion. Chinese and Indian demand for these products cannot be overemphasized; neither can their ability to outbid almost any competitor. This sector is also of much interest to the USA, UK, France, Australia and almost every country in the world with more oil demand than supply. Oil regulation in the producing African countries has improved, thus allowing for greater activity last year and in the years to come.
The third industry sector of major importance is consumer goods. Telecoms, retail, food and drink, and transport and infrastructure have gained major traction in recent years, with foreign investors acknowledging their weighty potential. The rise of the African middle-class makes consumption a key focus area for all parties involved. The telecommunications industry for one has seen a rapid upsurge. From only two million mobile phone users on the continent in 1998, there are now more than 650 million users, with 100 million of these being smartphone owners. Emirates Telecommunications Corporation’s acquisition of a 53% stake in Maroc Telecom was the largest M&A deal in Africa last year, at a cost of $6 billion. Though this was only a fraction of the largest deal of the year – Verizon’s $130 billion buyout of Vodafone’s stake in Verizon Wireless – it is a good indication of things to come. Britain’s Vodafone is a major contender in this market, as Vodacom, its African subsidiary, is one of the largest operators on the continent. China is keen to capitalize on the consumer market as its products have been well received all over the region and it is now looking to set up factories in key distribution areas. This will more than likely encourage it to also invest heavily in the transportation and infrastructure sector to ensure its products reach the market.
There Can Be Only One
As the United Kingdom has maintained a strong presence in the major sectors, it appears it will continue to be a major M&A force in Africa. It is unlikely that any country will surpass the UK in the number of deals made any time soon. By value, however, China is poised for a takeover. China and India are expected to continue making billion dollar acquisitions each year in the oil and gas sector alone, while also shelling out hundreds of millions of dollars in the consumer sector, metals and mining, and construction materials sectors. Construction materials are in high demand locally as war-torn countries are looking to rebuild their capital cities quickly, while the growing economies are experiencing a real-estate boom. The local market provides an incentive for foreign investors, but China’s demand for these goods is also very high. Those looking to get in on the action will have a strong contender in China.
The reign of the UK and France as the number one and number two of Africa’s M&A frontrunners and the dominance of Europe as a whole are all but over. Since 2003, the share of Asian economies in the continent’s M&A has almost tripled, pushing aside the EU and the US. It won’t be long before the US makes its move as President Obama has already announced, but dethroning the new champions, China, will not be easy. The United Kingdom will be outspent in the next few years, but if it can hold on to its winning strategy, all will work out for it in the long run. The Middle East and its strong ties to North Africa will also make a big push in the upcoming seasons.
One thing is certain, that the African M&A market is just entering into its best days and the competition for its vast resources is about to heat up. No one knows who will dominate the next decade, but it certainly won’t be the patient dog, because there won’t be any bones left.