Managing business risk is key to Africa M&A

Author: Amélie Labbé | Published: 31 May 2017
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Even though M&A deal flow in Africa has remained steady in the past few years, there are still some obstacles parties need to overcome to close a transaction, according to panellists at IFLR’s Africa Forum in London last week.

An estimated $100 billion is needed to spearhead growth on the continent, but just under half of that amount has been spent so far. And while participation of local finance and banks in financing projects and infrastructure is key, international companies and capital also need to be mobilised. This opens a host of issues that corporates and financial institutions alike need to consider when carrying out African deals.2

"Buyers and sellers need to think about the human risk first – who do we have on the ground that knows the market – and about the potential for developing long-term relationships," Simon Nasta, general counsel at FBN Bank told delegates. "A key issue to bear in mind is also the exit strategy, and matters such as credit risk, portfolio risk and economic risk."Africa forum

According to Mark Storrie, senior underwriter for emerging markets M&A at AIG, Africa should not be seen as a single territory but as 54 different markets, each with their own specific risks and legal/regulatory landscape to navigate. In addition, in areas such as anti-bribery and corruption (ABC), it will be necessary to consider extra-territorial legislation such as the US FCPA and the UK Bribery Act.

As such, there are many acquisitions and infrastructure projects that fail because the parties cannot agree on the allocation of risk in the relevant jurisdiction, particularly where a buyer is entering into an unfamiliar territory.

KEY TAKEAWAYS

  • M&A activity in Africa has risen steadily but obstacles remain – issues outlined at IFLR’s Africa forum last week include the human risk, credit risk, portfolio risk and economic risk;
  • Resource nationalism is also a problem with local governments unilaterally gaining additional control over a country’s resources, to the detriment of foreign buyers or investors;
  • But the private insurance market has stepped in to provide an alternative third party to have a recourse against in the event a transaction goes off the rails.

One of those risks is so-called natural resource nationalism – whereby a government implements a strategy to gain additional control over a country’s resources - which can manifest itself in several ways: changes in codes overseeing a specific sector (mining for example), changes in tax regimes or in equity stakes in a project or company, all to the benefit of the government. The insurance market has had to adapt to this growing transactional risk.

It’s now also possible to get cover for political risk (terrorism or strikes for instance) in most African countries. But the requirement in many francophone countries that have adopted the Conférence Interafricaine des Marchés d'Assurances (Cima) code to have 50% of the insurance cover sourced onshore can be problematic.

The Cima code may have been implemented to develop the local African insurance market, but concerns remain as to the creditworthiness of some insurers, as well as to their ability to pay in the event a claim is lodged. 

"As a party to a transaction, you can get some stability provisions included in contracts," noted Norton Rose Fulbright partner Christophe Asselineau. "Or more commonly you can now find compensation-based mechanisms in the event something happens."

He added that in some cases, the private insurance market has stepped in to provide an alternative third party to have a recourse against in the event a transaction goes off the rails. While 10 years ago the range of products available and risks covered were both quite narrow, they have evolved to cover a range of transactional risks which have emerged when doing business in Africa.


"While participation of local finance and banks in financing projects and infrastructure is key, international companies and capital also need to be mobilised"


According to figures provided by Storrie, nearly 20% of deals that AIG has insured globally between 2011 and 2015 have resulted in a claim, up from 14% for the period to 2014. Of those, discounting small claims, more than half involved a claim in excess of $1 million.

"This may be due to a greater willingness to claim against a third party insurer than another transaction party," he said, noting that "private equity clients in particular may be unwilling to claim against the management warrantors, who they are relying upon to run the target business".

However, amid growing due diligence and ongoing formalisation of best practices, there is still a sense that business standards aren’t necessarily as high in some African jurisdictions than in other countries. Nasta said: "In most of what we do, we take practices in London as the highest standard and apply them across all the jurisdictions we operate in."

According to Asselineau, it’s sometimes difficult to ascertain what the law is in some countries. "For instance, it may be the case that in some jurisdictions, the Official Journal outlining new legislation is not published," he said. "So you have to carry out extensive research to find out what the legal framework is as it’s not readily available."   

See also 

IFLR Africa forum 2017 - key takeaways
Africa needs creative finance solutions  

 


 

 

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