Africa SuperReturn Briefing Note

Top issues we uncover in pre-transactional due diligence

Corruption

Low-level corruption. The use of low-level corruption to facilitate the target company’s day-to-day operations. This can be especially prevalent in companies that rely upon regular interactions with public authorities, such as customs agencies.
Political connections. The reliance on a potentially illicit relationship with a politician or political party. This exposes the target company to bribery and corruption risks, and potential operational difficulties in the event of a transfer of power.
Ownership structure. Multi-tiered shareholding structures that make use of low-disclosure jurisdictions. These can be used to anonymise the ultimate beneficial owners of the target company or its subsidiaries, or to hide corruptly held interests held in the company.

Governance

Management expertise. Concerns about the competence of the target company’s senior management. These often relate to a lack of proven managerial experience, or the absence of adequate technical knowledge required post-transaction.
Proxy management. Proxy control of management by an external actor can occur when a founder or former significant shareholder continues to exert influence over the operations of the target company.
Company culture. The corporate culture of a target company may impact on post-transaction integration of new management, or labour conditions may contribute to a poor reputation.

legal & regulatory

Regulatory change. Unanticipated regulatory or political changes may hamper or even entirely alter the company’s operating model.
Litigation. The target company may be involved in upcoming or ongoing litigation which could have a future financial impact. Board members who are anticipated to remain post-transaction may not have disclosed historical legal issues.
Compliance. The target company may have an underdeveloped compliance function. This can occur with smaller businesses which have expanded rapidly, or in jurisdictions with lower regulatory requirements.

Five potential business disruption threats in Africa

Nigeria – Regulatory volatility

In August, MTN Group, a South Africa-headquartered telecommunications company, was ordered by Nigeria’s central bank to refund USD 8.13 billion in dividends allegedly repatriated without obtaining the necessary approvals. This is the second time MTN Group has become the target of Nigeria’s regulators, which first fined the company USD 5.2 billion in 2015 for failing to disconnect unregistered SIM cards on its network. The central bank’s latest demands have concerned international investors, who are wary of further regulatory intervention as the Nigerian government looks to bolster its finances ahead of the country’s election early next year.

Kenya – Cyber security threats

Kenya’s central bank recently requested that third party providers in the country’s banking sector urgently submit cyber security policies as part of the government’s wider efforts to tighten financial security in the wake of an increasing number of cyber-attacks. Weeks prior to this, Kenyan banks reported to have lost close to USD 1 million through vulnerabilities on platforms used by third party payment providers. Kenya’s financial sector has increasingly become the target of cybercrime, with recent reports indicating that the country lost approximately USD 210 million to cybercrime in 2017. It remains to be seen whether Kenya’s Computer Misuse and Cybercrimes Bill, signed into law in May of this year, will help to contain this growing threat.

South Africa – Land reform uncertainty

South African president Cyril Ramaphosa announced in August that the African National Congress will amend the national constitution to allow for the expropriation of land without compensation. This announcement represents the latest in efforts by the ANC to effect an equitable distribution of land in South Africa, an unrealised promise since the party first came into power in 1994. However, despite reassurances from the president that land reform won’t damage the economy, significant uncertainty remains as to the form this process will take and the impact it will have on land and property rights. It is unlikely that any clarity will be reached on the issue before South Africa’s 2019 election, likely to be held mid-year.

Tanzania – Anti-foreign investor sentiment

Tanzanian government officials are reportedly becoming reluctant to sign off on major investment deals amidst fears that the contracts may become the next target of Tanzanian president John Magufuli’s campaign against allegedly exploitative foreign companies. This marks a new level of concern associated with Magufuli’s presidency, which began in 2015, and the economic consequences of his crackdown, which are expected to worsen over the next year. The most prominent target of Magufuli’s campaign has been Acacia Mining, a Tanzania-based gold miner, which has been involved in a dispute with Tanzania’s government since it was first handed a USD 190 billion tax demand by the country’s revenue authority in 2017. Acacia Mining has recently noted an increase in governmental pressure on the company after one of its senior managers was arrested and charged with corruption.

Angola – Competition legislation

In April, Angola’s government passed the Competition Act, the country’s first competition legislation. The act established the Competition Regulatory Authority (CRA), the purpose of which is principally to provide protections against anti-competitive behaviour, introduce concentration controls and regulate against abuses of dominance. Although these reforms have broadly been welcomed by the international community, it is expected that new merger and acquisition approvals, the thresholds of which have yet to be published, will add to the regulatory burden. There also remain concerns over the CRA’s power to enforce penalties of up to 10 percent of a company’s annual turnover and to what extent these decisions will be made independently.

The Nigerian investment climate: Opportunities amid headwinds

After nearly four years in office, the government of President Muhammudu Buhari has disappointed an electorate who were promised better security and a stronger and more diverse economy. A prolonged recession is over but economic recovery has been weak despite high oil prices; insecurity and sectarian violence have spread further across the country, and high inflation eats into living standards. This government’s stated priority has been to support domestic and international investment in the non-oil sectors where the scope for growth and job-creation is greatest and to reduce Nigeria’s dependence on the oil and gas industry which provides nearly all its exports and government revenue. The results are so far limited and restructuring the economy in this way will take years, but the government’s recent punitive action against the telecommunications market leader, South Africa’s MTN, has had a chilling effect on investor sentiment. From now until February 2019 the focus for the governing All Progressives’ Congress will be on raising funds and winning close-fought elections as defections and internal splits threaten to derail its campaign.

The recovery in the oil market last year has stabilised the economy. The oil price recently hit a four and a half year high of $85 a barrel. Output is still below capacity as a result of disruption by restive communities in the Niger delta, but has risen above 1.7 million barrels of oil a day. This has replenished foreign currency reserves, allowing the Central Bank of Nigeria to sell dollars to prop up the value of the naira, which President Buhari sees as a priority. The main constraints to doing business in Nigeria remain its harmful regulation, poor infrastructure and high levels of corruption and insecurity. The current government’s over-regulated foreign exchange system has added to these difficulties. Economic recovery has also been slowed by the government’s tight monetary policy with high interest rates and low availability of credit depriving all but the biggest local companies of the capital they need. Some investors are holding back capital because pressure on the naira exchange rate makes another devaluation likely, even if this is delayed until after the elections. Devaluation is likely to spur on inflation, which peaked at nearly 20% last year and remains in double figures, squeezing margins and weakening consumer demand.

Technology deals and regulatory aggression

Nigeria is Africa’s largest economy and investment prospects in Nigeria’s technology-driven financial services and telecommunications sectors are good. This is reflected in recent deals completed in the country: according to the Emerging Markets Private Equity Association, financial and technology sector deals have accounted for 39% of all private equity investments in Nigeria from 2017 to H1 2018. The country’s IT and technology sector has had a recent boost from a modest but high-profile investment into the pan-African coding school Andela, which is backed by Facebook co-founder Mark Zuckerberg, among others. Teleology Holdings Limited, a Nigerian investment firm, is completing a $450 million takeover of 9mobile, a large Nigerian mobile network operator, and Nigerian e-commerce company Konga has revealed its plans to invest N2.9bn (USD 8 million) in its logistics division K-Xpress. The company says it will develop software aimed at solving logistics problems that are crippling e-commerce in Nigeria.

However, sustainable growth depends on political and macroeconomic stability and a curb on the arbitrary government intervention that has marked its recent dealings with South Africa’s MTN. The demand on 28th August that mobile phone market leader MTN repay $8 billion in remittances to its South African parent deemed illegal by the central bank has shaken investor confidence. The local subsidiaries of Citibank, Standard Chartered and Standard Bank of South Africa are being heavily fined for their role in the transactions. The MTN issue has been a big setback for those seeking to raise capital in the technology sector. MTN’s proposed listing on the Nigerian Stock Exchange, making it the largest stock, promised to be a turning point, but is now in doubt according to the company.

“MTN is the poster child for IT and telecoms in Nigeria and its listing would have put Nigeria on the map for technology investors, in the same way that Dangote has done for industrial commodities. A lot of other capital raising is planned once MTN has listed in Nigeria”

— says the director of a leading fintech company based in Lagos

Prominent among these is Interswitch, which would be Nigeria’s first technology unicorn (a start-up being sold for $1 billion). Interswitch is an Africa-focused integrated digital payments and commerce company. The company, which built Nigeria’s ATM network from 2002 in partnership with the banks, dominates the local market in transaction switching and electronic payments processing and is backed by international private equity firms TA Associates and Helios.

Nigerian authorities made a more forward-looking move in October this year when the Central Bank of Nigeria relaxed its previously restrictive controls on telecoms companies’ provision of banking services. Mobile money in this format has seen great success in many other sub-Saharan African markets, notably by M-Pesa in East Africa. The proven success of the model combined with Nigeria’s relatively high mobile penetration (c.80%) and low banking penetration (c.40%) suggests that this regulatory shift marks a significant shift both short-term in the potential of Nigeria’s financial technology market and long-term in the growth of consumer spending by the country’s middle class.

Further encouraging signs for investors are presented by an intervention by Okey Enelamah, Minister of Industry, Trade and Investment, to refine laws for Nigeria’s existing free trade zones to create six new Special Economic Zones across Nigeria targeted at specific industries. These zones offer tax breaks, preferential foreign exchange and capital repatriation rules, exemption from import and export licences and incentives. The intervention is expected to attract foreign investment in manufacturing and processing using local raw materials. The ministry also recently signed a memorandum of understanding with Volkswagen to create an automotive service and training hub in Nigeria.

Looking ahead to 2019

The presidential election in February 2019 will be a hard contest between the APC’s Buhari who is running for a second term and the main opposition PDP candidate, Atiku Abubakar, an astute politician and former vice president. Recent high-level defections have cost the APC its majority in both houses of the National Assembly and raised speculation that the wealthy south-western states will break away from the APC and back the main opposition People’s Democratic Party, which lost power in 2015. The implications for Nigeria’s business environment after February are largely unclear; Nigerian presidential candidates rarely differ significantly in terms of economic policy whilst campaigning. A greater immediate impact will be had by the nature of the election itself. Although the elections in 2015 were the first won by an opposition party and the first lost by an incumbent president, the transition to Buhari was managed smoothly. A successive peaceful election will lend further credence to Nigeria’s strength as a democracy, and as an attractive destination for investment.

S-RM has a dedicated Africa-focused due diligence team based in our office in Cape Town, who provide transactional due diligence to support private equity and venture capital ahead of deals. Please contact Natalie Thomas Stafford if you would like to discuss our approach and how we can help you.

Natalie Thomas Stafford

Head of Deal Advisory

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