The first half of the year 2019, saw a surge in the value of Mergers and Acquisition (M&A) deals in the African continent despite a decline in the number of these deals.
The total deal value increased by 32 per cent in H1 2019 to $21 billion from the $16 billion that was raked in the same period in the previous year, according to an analysis by Baker Mckenzie of Refinitiv M&A data for Africa. On the other hand, the number of deals within the period declined by 10 per cent, from 405 in H1 2018 to 365 in H1 2019.
Based on the data, the real jump in deal values came from domestic activity, which recorded a substantial rise of 276 per cent in deal values from $1.8bn in H1 2018 to $6.7bn in H1 2019. A Deal is considered domestic when the target company is in the same country as the acquirer parent company.
However, the values of cross-border deals within the period remained largely the same, with only a 1 per cent increase within the period. In H1 2018, deal value for cross border deals was Us$13.7bn, rising to Us$13.8bn in H 1 2019.
Morne van der Merwe, Managing Partner of Baker Mckenzie in Johannesburg, said While market sentiments regarding large transactions in Africa tend to focus on the risks of transacting in the African region mainly due to the large scale political and economic uncertainty on the continent, the data could be beginning to tell a different story, showing a trend towards an increase in high value M&A transactions in the region, but at a lower volume.
He noted that investors in Africa have had to consider extensive geopolitical and economic uncertainty on the continent as well as a plethora of country and region-specific governance, compliance and regulatory challenges when investing in the region.
“Those transacting on the continent have also had to contend with a critical lack of infrastructure and poor integration when transacting across borders in Africa. Yet despite this, the data shows that the value of investments on the continent is growing. This could be an indication of the investment potential in Africa for investors who are willing to manage the risks. The rise in domestic M&A value in 2019 points to domestic investors in Africa appearing more comfortable to engage in high-value transactions and manage the risks of investing in environments that are generally known to be politically and economically uncertain, but that is familiar to them,” he says.
According to him, additional good news for investors in Africa is the recent launch of the operational phase of the African Continental Free Trade Area (AFCFTA), which should provide an additional boost deal activity in the coming years. “The AFCFTA is the first continent-wide African trade agreement, with the potential to facilitate and harmonise trade and infrastructure development in Africa,” he notes.
Van der Merwe explained that the key to boosting this investment potential, and enabling African economies to make the most of their opportunities – is developing its infrastructure. “An important part of this is the creation of cohesive regional economic hubs by developing infrastructure that links countries together. This will increase the ease of crossborder transactions and grow investment across African regions organically,” adds van der Merwe.
On the flip side, the data showed that the Capital raised by African issuers declined by 28 per cent year on year to USD 341 million in the first half of 2019 (H1 2019), compared with USD 472 million in H1 2018.
The decline is attributed to the 80 per cent drop in domestic capital raising in Africa – standing at only USD 85 million from four IPOS, compared with USD 419 million from the same number of IPOS in H1 2018, noted in Baker Mckenzie’s latest Cross-border IPO Index for H1 2019, using data sourced from Refinitiv.
According to the Index, the largest IPO to come out of the region so far in 2019 is Carbon Holdings Ltd, which is expected to raise as much as USD 250 million in London and Egypt sometime in June. Egypt is generating buzz around its pipeline of IPOS with some speculating this could be the busiest year for listings in Cairo since the uprising in 2011. Growing confidence in economic policies introduced since the currency float has boosted the EGX and is prompting companies to consider share sales. One large pipeline IPO is expected from Banque du Caire SAE in Q3 2019.
“The drop in African IPO values in H12019 was mostly because of political and economic uncertainty on the continent. Investors wanting to raise capital in Africa are thinking twice and waiting for political and economic stability to return before going ahead. Also eroding investor confidence in Africa are the escalating global trade tensions, which have culminated in, for example, the so-called United States (US) China trade wars and the possibility of a “no-deal Brexit” – both have the potential to impact African economies significantly,” says Wildu du Plessis, Head of Capital Markets at Baker Mckenzie in Johannesburg
The top cross-border IPOS by African issuers were South African company Renergen Limited’s listing in Australia, which raised USD 7 million; and Egyptian company Carbon Holding’s pipeline dual listing in London and Egypt, which is expected to raise USD 250 million. Both of these cross-border IPOS are in the energy and power sector. In terms of domestic IPOS, technology company BMIT Technologies PLC raised USD 55 million when it listed in Malta, real estate company ICON Properties PLC’S listing in Malawi raised USD 20 million, industrial company Skyway Aviation Handling Co raised USD 6 million when it listed in Nigeria and healthcare company Speed Medical SAE raised USD 3 million in a domestic IPO in Egypt.
A major deal that was excluded from African figures is Jumia Technologies’ debut on the NYSE, which raised USD 225 million in April. Jumia is a pan-african e-commerce start-up but its parent company, Jumia Group, is incorporated in Germany, so it is not included in the Africa report.
Du Plessis explained that in South Africa, capital raising has decreased substantially in recent years, due to economic and political uncertainty. “Political stability will hopefully begin to return now that country’s elections are over, but there is still a lot of work to do to stabilise the economy. The World Bank recently downgraded South Africa’s growth rates and I think there is at least another year of hard work before the economy starts to recuperate and capital markets in South Africa recover,”
There is however good news in other jurisdictions in Africa. In addition to the healthy pipeline of IPOS in Egypt, there were also signs of life returning to Nigeria’s capital markets.
Political instability was also to blame for a big collapse in capital raising in Nigeria in recent years, but the country looks to be recovering and, according to Baker Mckenzie’s recent Global Transactions Forecast, there is a predicted return of IPOS in Nigeria in the next three years.
“A case in point, we saw the listing of Airtel Africa in both the London and the Nigerian market. Hopefully, this is the start of a long upswing in capital raising activity in the country,”
On a global outlook, the data noted that capital raising in global IPO markets fell by 37 per cent, with volume dipping 34 per cent in the first half of the year compared to the same period in 2018.
A total of USD 69.8 billion was raised across 514 IPOS, which is the lowest for value and volume since 2016. The US Federal government shutdown, continuing trade tensions between the US and Beijing, the on-going Brexit saga and the decline of mega IPOS all contributed to slower market performance. With fewer IPOS in the market, competition amongst exchanges is growing, as some listing locations make strategic changes to entice public offerings. The introduction of China’s Science and Technology Innovation Board looks set to shake up the market and challenge New York and Hong Kong for tech listings.
