Buyers Enticed by Africa’s Blossoming M&A Market: A land that once attracted only the most intrepid investors now offers a more stable business climate

South Africa has been a fixture in the global M&A arena for some years now, racking up a decent number of deals as well as being a home to ample foreign investment and acquisitions. Perception that the rest of Africa is quite underdeveloped persists, even though on many parts of the continent, there are companies with substantial size and scale, situated in resource-rich lands, that are beginning to attract the attention of savvy investors and would-be buyers. Until relatively recently, most countries in Africa had not been very successful in enticing foreign investors. When they were able to lure multinational companies, it was largely due to their abundance of mineral and natural resources. A number of Sub-Saharan African countries have piqued investor interest by removing investment hurdles and improving their business and political climates, notes Tom McDonald, a Partner in the Washington, D.C. office of Baker Hostetler and a former U.S. Ambassador to Zimbabwe. Although ethnic unrest and political instability endure in many regions on the continent, a number of countries are touting their reform-oriented governments, indicating that they can now attract foreign investment on a continued basis, he adds. “When I started doing Sub-Saharan work eight to 10 years ago, there was no one else in business class going to Africa and no one else coming back. Now you have trouble getting a flight to Lagos, for example, in any class unless you book well ahead,” notes Alexander Msimang, a London-based Partner at Vinson & Elkins and a member of the firm’s worldwide Project Finance and Development Practice Group. Africa’s oil and gas sector has seen the most investment activity thus far, says McDonald. Spurred by oil price pressures and diminishing oil reserves in more-developed nations, major energy players such as Exxon Mobil, Chevron, and BP have poured billions into the continent, particularly in West Africa, a growing deep-water and sub-sea drilling market. And industry followers say that acquisitions and assets swaps will play an increasing role on the continent among mid-sized companies as they try to target exploration opportunities. Substantial investment is flowing into offshore Angola, for example. In investment circles, the nation is being called “the new Kuwait.” Angola’s government predicts that $50 billion will be invested in the country’s oil industry and related sectors over the next five to six years. Investment that began as Greenfield projects and securing of oil and gas exploration licenses and oil/and gas exploration production-sharing contracts is morphing into M&A, notes Msimang. “The next phase in this dash to Africa’ is sell-offs. Five to 10 years ago there was less M&A because there were fewer assets to buy and sell. Now companies have upstream assets and are starting to sell them to recover some of their development costs and to help fund the cost of development going forward,” he says. While Africa accounts for a mere 4% of worldwide dealmaking activity, difficulty in finding new areas with good growth potential may motivate reticent companies to consider acquisitions in the region. According to Msimang, there is also growing interest on the part of oil and gas companies in East Africa, which had been a less-attractive locale for the upstream business. Now players are seeping into Sudan, Kenya, Tanzania, and Mozambique. Africa is truly benefiting from its newly formed relationship with China, whose key driver of investment is its growing demand for natural resources, notes McDonald. In its biggest deal to date, Hong Kong-based CNOOC Ltd. announced early this year its $2.3 billion acquisition of a 45% stake in the Akpo field, a Nigerian offshore oil and gas field. Industry experts note that the biggest target for Chinese investment in Africa is oil-producing Sudan. China’s investments in Africa have been mainly in the manufacturing, resource, and construction sectors, but investments in oil projects in countries such as Angola and Sudan have been among it highest-priced purchases. China’s Sinochem recently decided against making a bid for Devon Energy Corp.’s oil and gas fields in Egypt, and analysts suspect that its back-down was due to intense competition for the fields. Reportedly, the company is now mulling over an acquisition of Devon’s oil/gas fields in West Africa. In domestic M&A activity in other sectors, Africa’s banking and finance and telecommunications industries are lively. Mobile communications was robust in the last couple of years, but industry followers expect M&A activity this year to be focused on the fixed-line space, as operators use their unified licenses and try to reduce their dependence on major fixed-line players. In some notable deals early this year, South African mobile giant MTN Group acquired VGC Communications, a Nigerian private fixed-line company, for an estimated $65 million. And in a $280 million deal, Telkom SA acquired 75% of Nigerian Multi-Links Telecommunications – a consolation prize for its failed bid to control Uganda Telecom. Additionally, Nigeria’s financial services industry has been undergoing significant changes, including regulator-driven consolidation and capital raising. Following their frenzied consolidation phase, financial services firms are now raising funds for, among other purposes, making forays into the financial markets of the West African sub-region. PE Firms Increasingly Tap Turnaround Expertise As PE firms and hedge funds increasingly eye distressed companies, they’re starting to rely more on turnaround management firms for help with everything from due diligence to operational improvement. A number of turnaround specialists that Mergers & Acquisitions talked with report a spike in financial buyers and hedge funds inquiring about their services. The uptick in business from these types of buyers, sources say, stems from the fact that PE shops and hedge funds are controlling a larger number of mid-market businesses, and the acquirers are beginning to shed their reluctance to work with outside consultants, recognizing the benefits of turning to distressed-situation pros to help them manage the complexities of distressed-company acquisitions or to assist them when an existing portfolio company has gotten itself into trouble. Tim Connolly, CEO of Turnaround Partners, says that his firm is not only seeing a pick-up in hedge fund turnaround situations, but is actually devoting 100% of its team’s time to such situations. As hedge funds come under more pressure to deliver greater returns to their investors, he says, many fund managers have been forced to invest in companies that promise high returns but involve great risk. Inevitably, he adds, some high risk/high reward companies suffer from crippling problems. “Without an influx of business professionals experienced in fixing micro- and small-cap public companies, hedge funds risk losing millions of dollars in assets,” he states. His firm’s focus, Connolly notes, is currently on the funds that originally made investments in healthy companies and that want to salvage those investments after troubles strike, but says he’s beginning to get inquiries from funds that invest solely in distressed companies. Nick Alvarez, a Managing Director and National Practice Leader of Alvarez & Marsal Transaction Advisory Group, has had similar experiences, noting that financial buyers increasingly are asking for assistance with due diligence and management of turnarounds. Some of his clients, he adds, are PE firms that have built a platform of healthy companies in a sector and now feel comfortable bolting on a distressed property to the platform. Others are distressed-investing neophytes who lack a platform and require help with everything from diligence to the actual turnaround, he says. The private equity community has matured and grown more comfortable with working alongside consultants to improve portfolio companies, notes Timothy Lewis, a Principal at TRG, a turnaround, performance improvement, and financial advisory services firm. “Earlier in my career, PE firms were more likely to think that they didn’t need our help. Now they’re starting to consider relying on us to help improve performance.” Lewis, who leads TRG’s performance improvement practice, which targets PE firms and hedge funds with underperforming portfolio companies, adds that particularly among funds that invest in healthy businesses, there’s reticence to force a management team to work with a turnaround specialist. “Funds tend to acquire businesses with a sound management team, or they instill one soon after closing a deal. So we essentially have to sell ourselves to management and establish the credibility that we can add value.” (c) 2007 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com