The outlook for M&A in Africa: risks and rewards

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2017 was a slow year for M&A deals across Africa. Instability, lack of regulatory clarity and weak economic fundamentals in the continent’s biggest markets in particular worked to limit investor confidence. Meanwhile, increasing concerns over ethical and compliance considerations have delayed major investment decisions.

The impact of political risk in Africa

These political risk factors have been particularly notable in Nigeria and South Africa, where M&A activity fell by around 25% on the previous year. In Nigeria, political uncertainty following the prolonged medical leave of President Muhammadu Buhari significantly undermined investor confidence. Reputational concerns following a series of high-profile scandals involving companies in South Africa reminded business of the extent to which political exposure and integrity issues can affect large investments.

2018 is likely to be a different story. Recovery in business activity will be seen in sub-Saharan Africa this year, irrespective of challenges in the two largest markets over the past year. While policymaking in Nigeria is expected to slow ahead of the 2019 elections, a boost in public spending will create new business opportunities for private sector companies, notably in large construction projects. Similarly, greater political stability and a more favourable economic and business environment in other markets and regions on the continent are expected to boost M&A activity in the coming year.

South Africa: Ramaphosa’s re-engagement

Investors have welcomed Cyril Ramaphosa’s ascension to the presidency following the early resignation of Jacob Zuma, whose tenure was dominated by corruption scandals. The private sector is now looking to Ramaphosa to provide the much-needed policy clarity that was lacking under Zuma. Ramaphosa’s State of the Nation address may not have laid out the detailed policy stance hoped for by investors, but his willingness to re-engage with stakeholders on the controversial Broad-Based Black Economic Empowerment Charter for the South African Mining and Minerals Industry indicates a more consultative and pro-business approach.

Angola: The decline of dos Santos’s business empire

Political shifts and more pro-business regulatory reforms will provide new opportunities for business deals in the year ahead. In Angola, President João Lourenço – who was inaugurated in September 2017 – is expected to continue efforts to open opportunities for private sector investors by reducing the commercial reach of former president José Eduardo dos Santos and his family. The trend of new leaders turning the tide on longstanding approaches to business may be replicated in other markets, including Zimbabwe, where governments are seeking fresh investment to kick-start economic growth in high-potential sectors.

Ghana: Growth and consolidation

In 2017 Ghana recorded the biggest gain in economic growth for five years, driven by a boost in activity in the extractive and service sectors. Against this backdrop, the country is expected to consolidate its position as one of the “big three” in Africa’s M&A, with a renewed focus on the energy and manufacturing sectors.

East Africa: Strength in diversification

In Kenya, a modest economic recovery is expected following challenges related to a severe drought and a prolonged election period in 2017. Further public investment will also improve the business environment in the coming year. However, investors will remain cautious about the prospects for the Kenyan economy in the long term, as the country attempts to balance the need for further external borrowing with hefty debt repayments from maturing Eurobonds.

Prospects for deals in 2018 are expected to remain strong in Ethiopia, where established manufacturing and construction industries will ensure that investors remain sheltered from commodity price shocks. This is likely to be replicated across the wider East African region, for example in Uganda, where a budding oil and gas industry has resulted in a number of high-profile deals over the past year.

Will 2018 allow for fresh opportunities in M&A?

Political risk will continue to pose a major challenge to M&A activity on the continent as several large markets prepare to undertake difficult elections and unpopular reforms to improve their economic outlooks. However, the political uncertainty and weak macroeconomic situation that accounted for fewer deals in Africa’s largest markets in 2017 look set to ease over the coming year.

Elsewhere, change and consolidation will provide investors with fresh opportunities to do business, as has been seen in Angola and Zimbabwe with the gradual liberalisation of sectors previously under tight state control. Smaller markets that have exhibited robust growth and development in recent years are expected to consolidate these gains in the form of bigger deals in strategic sectors, as investors look to expand in to markets where strong institutions and clear legislative frameworks promise the best returns.