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DealMakers AFRICA Q3 2020

M&A trends to expect in Ethiopia

by Robert Appelbaum and Leigh Lambrechts

The Grand Ethiopian Renaissance Dam (also known as GERD) – which will go a long way towards helping Ethiopia solve its energy-generation problems – has attracted a great deal of media attention in recent times. But there is much more than this going on in Ethiopia at present. The country is starting to open up and liberalise previously-closed sectors to foreign investment after the COVID-19 lockdown protocols.    

Through our own experience, from market analysis and discussions with key individuals in Ethiopia, it seems that the country is likely to be the next powerhouse, or at least one of the powerhouses, in Africa. With a growing population of approximately 109 million, the percentage of middle-income households is likely to increase. Ethiopia has a few key sectors that will certainly need investment to meet demands in the not-too-distant future. This means that investments into businesses and industries are expected to rise.

There are also certain tax incentives in Ethiopia which are focused on specific sectors of the economy. These include electricity generation, transmission and distribution; manufacturing; information and communication technology (ICT); industrial park development; exports; tourism and hospitality; pharmaceuticals; and agriculture. These incentives include, for example, income tax exemptions for certain categories of manufacturing for up to six years, and exemptions for as long as ten years in the agricultural sector.

Combining the COVID-19 pandemic, the GERD and the policy reforms employed through the Ethiopian privatisation programme creates a melting pot which may have the right ingredients to ensure Ethiopia is ripe with opportunities for foreign investment. The privatisation programme will allow both domestic and foreign investors to purchase shares in previously publicly-owned entities. The Public Enterprises Holding Administration Agency in Ethiopia recently said that, within the current budget year, eleven public enterprises will be tabled for privatisation, although not all of the entities to be tabled have yet been disclosed.

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The logistics sector, which was previously closed to foreign investors, will soon see some reform. Through the application of a more open multimodal scheme, the sector will be opened to foreign investors and Ethiopian-born foreign nationals, as well as domestic investors impartially, with local companies being limited to a maximum percentage share of 51%.

The cement sector, which has been closed to new entrants for the last five years through a prohibition on the issue of licences, will be impacted by the investment regulations, which are expected to encourage new investors. In the power sector, foreign investors will be permitted to undertake operations involving the generation and distribution of electricity. Only the export of electricity will be restricted: foreign investors will be obliged to partner with the state if they plan to operate in this area.  The transport and entertainment sectors will also permit foreign investment under the new regulations.

The Ethiopian Government recently announced plans to open up the ICT sector by offering the government-owned and operated telecommunications provider's shares to foreign investors and local Ethiopians. The government will retain 55%, with 40% being offered to foreign operators and 5% to local Ethiopians. Towards the end of last month, Ethiopia's Minister of Finance announced that international telecommunication operators would be invited to bid for 40% of the shares in Ethio Telecom. Twelve international telecommunication companies have indicated that they intend to bid, including MTN, Saudi Telecom Company and Telkom SA.

The Minister has also said that two new international telecom operators will be invited into Ethiopia, with the offer of two new telecommunication licences, opening the industry up to competition. There is, however, some speculation that the partial privatisation of Ethio Telecom does not have the support of all key stakeholders and that finalisation may be delayed until early 2021.  

Ethiopian Airlines is also a key contender for investment and expansion. It is arguably the largest airline in Africa and is well placed to become a regional airline carrier, after a number of national airlines in Africa were decimated by lockdowns which brought airline operations to a halt. Ethiopian Airlines is already increasing capacity on flights. It rode out six months of the COVID-19 crisis by maximising operations as a cargo carrier, capitalising on the boom in demand during the height of the pandemic. Tourism Ethiopia confirmed in early October that the tourism sector would be fully re-opened by the end of October, further supporting Ethiopian Airlines. Hotels, tourist attractions and other leisure services will now have the opportunity to innovate to recover from the past few months. Visitors to Ethiopia will have noticed that, except for a handful of international hotels in Addis Ababa, the country lacks top-class tourism venues.

According to the regulations published on the Ethiopian Investment Commission’s website, foreign investment will not be permitted in the financial sector, insurance, brokerage services, security, media services or legal consultancy, and will all remain reserved solely for local investors. Although, according to investment advisors in Ethiopia, financial services will be opened to foreign investors in the future. 

Another industry where a renewed interest is being observed is in the healthcare sector. Ethiopia is currently in third place on the list of the top six African countries, in terms of the import of medical supplies. It desperately needs its medical sector to be modernised, making this industry, as well as local manufacturing, a prime opportunity for investment and growth.

The industries that are likely to continue prospering after the COVID-19 pandemic overlap with the sectors that the Ethiopian Government has earmarked for investment, which should benefit the implementation of the new regulations. Private equity firms with surplus cash may well look to invest in sectors such as ICT, energy, healthcare and the hospitality industry. 

Appelbaum is a Partner and Lambrechts a Senior Associate in Corporate and Commercial at Webber Wentzel.

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