DealMakers Africa Q2 2018
From the editor's desk
Ease of doing business remains key to economic growth in the economies of Africa and those such as Kenya, Tanzania and Ethiopia are leading examples of this narrative. The realisation of the need and benefits associated with private partnership has taken a leap forward in Ethiopia with its government now open to selling off a host of state-owned firms either partially or entirely, as part of major economic reforms designed to ‘unleash the potential of the private sector’. This is one in a number of shake-ups instituted by newly elected Prime Minister Abiy Ahmed who, since his election in April, has turned the country on its head with bold plans not only to reshape politics but also the economy.
At the time of going to print, Zimbabwe's ruling Zanu-PF party had taken an early lead, winning the majority (73) of the 102 National Assembly seats followed by the MDC Alliance with 28 seats. Economic observers are wary of Mnangagwa’s ability to bring real change to the country with infighting and a party divided within Zanu-PF not creating a conducive environment for investment. The chronic cash shortages in Zimbabwe continue to stifle business and investment, however interested they may be, with the situation predicted to get worse.
South Africa has joined almost 50 other African states in signing an agreement that would lead to free trade on the continent. South Africa, Namibia, Sierra Leone, Lesotho and Burundi have joined the 44 countries that signed the agreement in Kigali three months ago. Nigeria is yet to sign. But signing the agreement is only the beginning. For it to come into force, 22 countries must ratify it. Six countries have done so, so far, with 16 more to go before the continental free trade area becomes a reality. The agreement will cover a market of 1.2 billion people and gross domestic product (GDP) of $2.5trn, across all 55 member states of the African Union. It will be the world’s largest free-trade area since the formation of the World Trade Organisation.
DealMakers Africa’s regional M&A analysis (excluding South Africa) for H1 2018 (page 9) shows the value of activity for the period at $6,06bn, with North Africa taking the lion’s share of 43.8%, followed by West Africa at 32%. Egypt and Nigeria were the two most active countries in their respective regions. In terms of M&A deal flow, DealMakers Africa recorded 204 deals for the six months to end-June, with West Africa recording 66 deals followed by Southern Africa with 59. East Africa ranked third by value and flow, recording 54 deals valued at $947,7m.
The three largest deals recorded in Q2 2018 were the acquisition by Milost Global of a stake in Ibeto Cement ($500m), GE Power’s acquisition of a stake in Amu Power ($498,8m) and Kellogg’s exercise of an option for a stake in Tolaram Africa Foods ($420m).
During the past six months DealMakers Africa has, at last, taken on a life of its own. The number of submissions by advisory firms in sub-Saharan Africa has, and continues to, increase. The intention is to expand on the current M&A rankings for the rest of Africa to include league tables for other general corporate finance transactions. The aim is to highlight the work undertaken by the local firms in each country and within the broader region. With this in mind, DealMakers Africa will hold its African awards ceremony in Nairobi, Kenya at the end of February 2019 to recognise and celebrate these achievements.
More options for Kenyan companies in financial distress
By Anthony Njogu and Joyce Mbui
Kenyan companies in financial distress now have more options than before. Previously, going into bankruptcy was not an uncommon fate for failing firms.
New possibilities for the rescue of ailing companies have opened up as a result of the successful corporate restructuring of Kenya Airways and a related court ruling that schemes of arrangement are binding on all creditors if 75% are in agreement.
The Kenya Airways restructuring has shown that schemes of arrangement have significant potential as a method of conducting debt restructuring. Where previously some large corporate entities have gone into bankruptcy under their debt obligations, schemes of arrangement have emerged as a viable option for obtaining relief from creditors and gaining some much-needed breathing space.
An important lesson learnt in this restructuring is that banks in Kenya are not excluded from the binding effect of schemes of arrangement where a creditor successfully rallies 75% of creditors to accept the scheme.
In the Kenya Airways case, some local banks had argued that they were not the same type of creditor as the Government of Kenya. However, both the Court of Appeal and the High Court of Kenya ruled that the banks were in fact in the same class (i.e. financial creditors) and so were bound by the scheme of arrangement.
Schemes of arrangement likely to become more common
Schemes of arrangement are provided for in the Companies Act, 2015, and are a legal mechanism to effect structural change within a company or to significantly affect the rights and obligations between a company and its shareholders. Although schemes were provided for under the previous Companies Act, they were not commonly used.
As it is likely that other Kenyan companies may, in future, be interested in exploring the possibilities that schemes of arrangement offer, it is useful to have a working understanding of their legal standing and how they function.
The primary advantages of using a scheme of arrangement are to:
avoid the need to conclude the many individual agreements that would otherwise be unavoidable;
provide greater certainty around the timing and outcome of the proposal; and
make the scheme binding on any creditors or members who voted against it, provided it has the approval of 75% of the relevant creditors or members and is sanctioned by the court.
How a scheme of arrangement works
Any scheme of arrangement may be proposed by either the company or any creditor or member (or the liquidator or administrator, if that is the situation). To start the process, the company (or other proposer of the scheme) defines the creditors or members that the scheme will affect. Thereafter, an application is made to the court to convene a meeting with the affected creditors or members.
Once the court has directed where and how the meeting will be convened, the company gives notice of the meeting, either directly to each creditor or member, or by way of an advertisement.
If sent directly to each creditor or member, the notice must be accompanied by a statement that explains the effect of the proposed arrangement or compromise and specifies any material interests of the directors. If the material effect on the directors is different from the effect of the arrangement on others, then this must be explained.
Similarly, if the arrangement affects the rights of debenture holders of the company, the statement must also explain how they are affected.
Companies should note that it is mandatory to provide enough information to allow the creditors or members to make an informed decision about the scheme.
The creditors or members must be given at least 14 days’ notice of the meeting.
For a scheme to be considered as passed at the meeting, it needs the approval of a simple majority in number, representing 75% of the creditors or members in value.
Challengers need convincing evidence
After the scheme meeting, any creditor or member of the same class is entitled to apply to court to sanction the scheme of arrangement. By the same token, any creditor or member may challenge the outcome of a scheme meeting in court, but this challenge must be supported by convincing evidence that there has been a failure to comply with the statutory requirements.
There are a number of English cases, which state that a court must consider a host of factors before sanctioning a scheme. For instance, the members or creditors of the relevant class must have been fairly represented at the meeting, and the statutory majority must have acted in good faith and in the best interest of the class to which they belong.
While English cases are not binding on Kenyan courts, they do have persuasive value when a case is being argued.
Once the court sanctions a scheme, however, it is binding on all the affected members or creditors, whether they voted for the scheme or not. The final step required to make the scheme effective is to immediately lodge the court sanction order for registration with the Registrar of Companies, otherwise it will have no effect.
Potential hurdles may be encountered
Companies contemplating a scheme of arrangement should be aware of the hurdles that can be encountered. For example:
there may be objections to the way creditors or members are classified (as happened in the Kenya Airways case);
publicity around the court proceedings may attract non-affected parties to try and join the proceedings;
other court proceedings might also be launched in an attempt to hold up the process and ensure the applying parties’ views are heard;
a creditor may successfully file a petition for the winding up of the company before the court issues an order sanctioning the scheme of arrangement;
a creditor may apply to the court for conservatory orders based on alleged breach of the right to property under Article 40 of the Constitution of Kenya. The petitioner is likely to allege that section 926(3) of the Companies Act, which provides for the scheme as binding, is unconstitutional. The potential argument here would be that the scheme denies the creditor the right to property (being the debt owed);
court availability, especially if judges have heavy caseloads and time is of the essence for the company concerned.
All in all, the road to a successful scheme of arrangement is not necessarily smooth but may be well worth the effort if it saves the company.
Njogu and Mbui are Partners at Bowmans
Africa's contrasts - (re) emerging trends of mining in Africa
By Deepa Vallabh, Maud Hill and Mamello Thulare
It has been said that "the greater the contrast, the greater the potential. Great energy only comes from a corresponding great tension of opposites" (Carl Jung). While this was not said in connection with Africa, it certainly finds apt application in the African mining industry, given that the majority of African countries' exports and gross domestic product (GDP) indicators relate to their natural resources; contrasted with various factors that result in untapped potential. In this article we wish to highlight the trends in the mining industry that have been developing throughout Africa, and the impact that this can have on M&A deals in this industry.
Increases in international commodity prices have been noted as a sign for potential improving profit margins and, as a consequence, a predicted rise in African M&A deals in this industry.
The rise in commodity prices has, amongst social, economic and political uncertainty, been identified as a trigger for many governments on the continent to attempt to appease voters and to claim a larger portion of the revenues generated from the exploitation of natural resources. Notably, this has resulted in the (re)emergence of controversial nationalisation measures as trends in Africa. In this regard, the Democratic Republic of Congo has implemented amendments to raise the taxes, royalties and other obligations of mining companies. Tanzania has also recently implemented restrictions on foreign banking, legal and insurance entities from working in the mining industry such that, amongst others, the foreign-held mining companies will be forced to offer shares to qualifying local persons (with heavily punitive fines being imposed for non-compliance). A further interesting development is that, due to the implemented restrictions, mining companies will be required to retain legal
services in relation to their activities and transactions from a firm whose principal office is in Tanzania.
South Africa is no exception to the nationalisation trend. On 15 June 2018, the draft Mining Charter III ("Draft Charter") was released for public comment. The Draft Charter which, if implemented, will apply to both existing and new mining rights, calls for an increase in local ownership to a 30% shareholding by Broad-Based Black Economic Empowerment qualifying persons, as well as a hike in the social contribution and tax obligations of mining companies. This increase in local ownership requirements and obligations has not been met with overwhelming support, in that the Draft Charter is viewed as a document which does not balance local initiatives and sustainability of the industry. The increased cost obligations of mining companies in South Africa will result in a consequential increase in overheads and thus a potential for investment withdrawal (and deterrent), and the shutting down or scaling down of mines. The closing of mines, or at the very least, certain shafts, will likely impact the economic landscape of the country greatly, and such impact will be felt more heavily by the mine workers and mining communities whom the legislation is seeking to uplift, with negative implications for the long-term growth of the mining industry.
This trend is accompanied by either increased discussions between large mining companies and African governments (leading to investor uncertainty) or disinvestment of certain local operations such as the disposal by Anglo American of some of its mines in South Africa in recent years, and the potential withdrawal from Tanzania by Acacia Mining, if the talks with the Tanzanian government are unsuccessful.
A further risk to the efficiency of the mining industry is the growing illegal mining trade (including the use of child labour), which is likely to be boosted by the recovery of the commodity prices. The overall impact on investors will, in all likelihood, not only impact revenue streams but also triple the bottom line of mining companies in that, together with the economic implications, there are social (including reputational) and environmental downsides for companies operating in a country that is plagued by an illegal mining trade. Tanzania has been reported as making strides in combatting the illegal trade; the Minerals Minister of Tanzania is quoted as claiming that the growth in GDP (approximately 1.3%) is attributed to the greater efficiencies deployed in the combatting of illegal mining, and the more stringent regulatory regime referred to above. However, this positive outcome was accompanied by the statement that the "aim [is] for a larger piece of the pie" and thus the intention to continue to strengthen the favour of the Tanzanian legal regime towards local incentives, as opposed to boosting investment in general is clear.
It has been reported that a major contributor to the growth in Tanzania was the productivity of Acacia Mining in-country which, as noted above, will potentially disinvest from Tanzania as a result of the regulatory overhaul. Therefore, the growth in GDP recorded may be a short-term phenomenon, if the engagement between Acacia Mining and the government does not result in an agreement on the way forward.
Although not a new concept, the lack of adequate infrastructure remains problematic in the mining industry. A report published by BMI Research confirmed that a key restriction on investment in the mining industry remains the lack of infrastructure, which is a long-term issue. However, there are indications that projects are being implemented to increase the infrastructure capability of Africa in order to better support the mining industry and attract more investments to the continent. For example, Botswana is investing in developing its power infrastructure to address a shortage in electricity; South Africa is planning to improve its railway network.
Strong trends in the African mining industry are therefore an aggressive overhaul of regulatory frameworks in the sub-Saharan region, to attempt to improve the local benefits reaped from mining operations, a lack of infrastructure and illegal mining. This is contrasted with the reported recovery of commodity prices, long-term projects for the improvement of infrastructure and strides in the illegal mining trade. Thus, while the benefits of an upswing in commodity prices may allow for M&A deals to be on the rise, due to a seemingly more attractive profit margin, the downswing of the commodity price recovery will need to be considered in relation to the connected negative impact on local incentive legislation and illegal mining. However, a recent analysis by Deloitte indicates that the potential of a mining market (including the quality of the relevant deposit) still strongly influences investment decisions.
The overall cost of doing business in Africa, and in particular, the mining industry appears to be on the rise and the level of legislative change has given strength to the adage that only death (or in this case potential disinvestment) and taxes are certain. The mining industry is on a revolving circuit, as the higher commodities price rise, the greater the possibility that more African countries will seek to impose restrictive local incentive requirements and the more likely the cost for large mining companies will increase, with a resultant potential for disinvestment. Any disinvestment is likely to have a knock-on effect on any planned infrastructure developments, as revenue streams are removed. The social and economic impact of this will inevitably have disproportionate effects on the very persons that the local incentive requirements are seeking to benefit.
The point made in this article is not that local incentive requirements be removed, but that governments introduce these in a manner which (i) is balanced with the economic reality of carrying out mining operations and (ii) is certain, so that investors have a level of predictability in terms of costs. Disinvestment is not often as a result of the introduction of local benefits, as most mining companies understand the need for social upliftment and local participation requirements. Rather, it is often as a result of the uncertainty of an ever-changing regulatory landscape which makes investment decisions, which require a long-term horizon, difficult.
Therefore, whether the predicted rise in M&A deals in Africa will bear fruit is dependent on:
(i) investors' abilities to adapt to the rapid changes in legislation and to make use of structures that take into account increased local incentive legislation; and
(ii) on governments providing greater political and legislative certainty.
Whether a middle road between these contrasting objectives can be found remains to be seen. However, one thing remains certain, the opportunities in the mining industry in Africa remain a great potential still to be unlocked. •
Vallabh is a Director in the Corporate and Commercial practice and Head of Cross-Border Mergers and Acquisitions: Africa and Asia, Hill is an Associate and Thulare is a Candidate Attorney in the Corporate and Commercial practice of Cliffe Dekker Hofmeyr.
Capital raising in Africa set to improve
By Wildu du Plessis
Domestic and cross-border Initial Public Offering (IPO) capital raising by African issuers in the first half (H1) of 2018 increased by 33% year-on-year to $396m, while volume grew by 25% to 5 IPOs. This is according to Baker McKenzie’s Cross- Border Index for H1, released in June.
However, the Index also shows that when compared with the same period in previous years, IPO activity in H1 2018 is low. Compared with H1 2016, capital raising is lower by 35%; compared with H1 2015 and H1 2014, value is down by around 70%.
During the first half of 2018, the largest IPO deal in Africa was Libstar’s launch on the Johannesburg Stock Exchange (JSE), raising $243,8m in early May 2018. One of the most anticipated IPOs in the region is MTN Group's Ghana offering, which could raise as much as $500m when it closes by 31 July 2018. One of the most talked about IPOs, duallisted on the London Stock Exchange and the JSE, was Vivo Energy's floatation, which raised over $740m in May. This was the largest listing of an Africa-focused business since 2005.
We have noted an increase in enquiries from our clients around listings and IPOs on the Johannesburg Stock Exchange, as well as interest in listing in other jurisdictions in Africa. African issuers have stepped up their IPO volumes and the amounts they have raised in the last six months, partly because they need to raise capital but also because they have come off a low base over the last two years and things are now beginning to improve. In addition, cross border capital raising, where companies also raise capital in markets other than their own, is seen as a good way for investors to raise money in Africa as it allows them to hedge their bets if their domestic markets are unstable.
A number of African companies are planning to list in the near future. In fact, it looks as though the coming years could be the best for capital raising in Africa since the global financial crisis. In particular, Lagos, in Nigeria, has been identified as a must-watch market for 2018. More companies are lining up to list on the Lagos stock exchange, kick-starting Nigeria’s IPO market after a long drought.
Sources familiar with the matter said two companies – Skyway Aviation Handling Company (SAHCOL) and Nigerian Reinsurance Corporation – were preparing for initial public offerings this year, while Singapore-owned Indorama Eleme Petrochemicals planned a public float in Lagos next year.
IPOs dried up in Nigeria after a 2008 crash, aggravated by the global financial crisis, wiped more than 60% off the stock market’s capitalisation. The benchmark share index has since recovered, gaining 42% last year but IPOs have yet to resume, apart from oil company Seplat’s dual-listing in Lagos and London in 2014.
In general, investors are beginning to delve deeper into African markets than they have before and are making sure they know and understand each specific target market. They are looking at a target country’s approach to governance and corruption; is there rule of law? The Gross Domestic Product number and how that impacts population and economic growth, and the interplay between them. Policy and regulation, location, infrastructure and pricing are all considered. Investors are aware that no two countries are the same in Africa, that each market is unique and that they have to be nimble and adaptable in their approach.
Global IPO activity
Globally, political concerns and market volatility have dampened the IPO market in the first half of 2018, mainly as a result of lower capital raising in Asia Pacific and EMEA. A total of 676 listings have taken place so far in H1 2018, down 19% on the comparable period last year. The value of listings has also fallen 15% to $90bn.
Worries around geopolitics – in particular US President Trump’s protectionist policies, as well as a lack of progress around Brexit negotiations and prolonged political uncertainty in Italy – weighed on investors’ minds and dented the headline numbers. Market volatility peaked early in the year to levels not seen in 2017, adding to the challenge of finding the right time to launch an IPO.
However, cross-border IPOs significantly outperformed. A surge in capital-raising in North America's deep capital markets led
the charge, with foreign issuers seemingly perfectly happy to list in the US despite protectionist rhetoric and just under half of the billion-dollar IPOs successfully launched in the US.
Issuers raised more than $16,6bn, an increase of around 15% on the same time last year. The number of cross-border deals also climbed, up 18% to 85, with three of the top ten cross-border IPOs debuting on North American exchanges. While the US proved attractive to 13 Chinese cross-border issuers, Hong Kong continues to be favoured with 18 deals. This resulted in Baker McKenzie's Cross-border Index value rising to 17.4 from 13.2 in H1 2017, just below the highest recorded of 18.7 in H1 2014.
"While domestic issuers are adopting a ‘wait and see’ approach in light of various political issues, fears over globalisation going backwards and economic nationalism haven't reached the cross-border market," said Koen Vanhaerents, global head of capital markets at Baker McKenzie. "To see cross-border activity going up shows a good degree of health in global equity markets, despite quieter domestic markets."
The dip in Asia Pacific and EMEA is slightly offset by stronger crossborder capital-raising in North America and higher domestic listings in Latin America. EMEA lost the top spot for billion-dollar listings to North America, with only two recorded in the first half of the year. However, markets in EMEA remain active and the volume of cross-border deals remains consistent.
The number of withdrawn IPOs in the first half of the year also more than halved to 11 compared with 23 in H1 2017, as potential issuers and their advisers have become more skilled at navigating uncertainty.
Dealmakers will, however, be hoping for a less turbulent second half to get more deals away, as economic fundamentals remain reasonably strong with a decline in the global economy not forecast to impact until 2020.
Du Plessis is Head of the Capital Markets Group at Baker McKenzie in Johannesburg.