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Acquirers tend to view European markets as being more seller-friendly than African markets.
Although the underlying fundamentals of M&A transactions in Africa and Europe are essentially similar, significant differences exist. These reflect how the respective markets have developed and continue to develop, as well as investors' risk appetites in light of where they source funds.
Acquirers tend to view European markets as more seller-friendly than African markets. A range of geo-economic and socio-political factors underpin this perception, including that a wider variety of purchaser protections are typically open to negotiation in African markets. This applies to both public and private investments but can be especially significant to private equity (PE) investors.
One of the key drivers behind the development of a more seller-friendly market in Europe is the impact that PE has had on the broader European market. A longer track record of PE transactions exists in Europe, and PE sellers have taken more aggressive stances to minimize deal conditionality and transaction tail risk. This has influenced non-PE sellers, who have begun adopting PE's approach to exits. Access to cheap credit and significant amounts of available dry powder have also contributed to a seller-friendly market for private investors in Europe. This stands in marked contrast to African markets, where exits have been difficult to achieve, particularly in the PE space.
European M&A and PE investments dwarf those of African markets. Still, Africa represents good opportunities for investors that understand the market realities and can mitigate risks. PE deal value for targets in Africa contracted sharply following the end of the commodity boom, from a record US$12.02 billion in 2014 to US$1.44 billion in 2017. With the onset of COVID-19 pandemic, 2020 saw such transactions contract further, to just US$1.25 billion.1
History teaches that when deal activity is depressed through external influences, and those influences dissipate, then a period of buoyant deal flow typically follows. In Africa, even though emerging from the COVID-19 pandemic is taking longer than in Europe, a recovery in deal flow is expected soon, hopefully persisting into 2022 and 2023.2
This article outlines some of the key differences between M&A transactions that are implemented in Africa and those that are implemented in Europe.
It is common in both Africa and Europe to offer a broad range of substantive warranties
In European deals, the only conditions typically included in transaction documents are for mandatory regulatory filings (such as those relating to antitrust).
In Africa, conversely, deals tend to be far more conditional. Provisions frequently include:
- Material adverse change clauses, which allow the buyer (but also sometimes the sellers) to walk away from the deal upon the occurrence of certain specified future events that would have a material impact on the business and/or its valuation
- The ability of buyers to walk away from a deal in the event of the breach of material terms, including gap controls or warranties given on the signature date
- Change-of-control conditions, where counterparties to key contracts are required to consent to the implementation of the deal as required in terms of the underlying agreements
In addition, in African markets, obtaining regulatory approvals is far more unpredictable in terms of timing and, to a lesser extent, outcome. For example, ministerial consents are often required to implement mining transactions. In South Africa, it can take three to 12 months (or even longer) to receive this consent.
Antitrust approvals in a number of African jurisdictions can take similarly long periods to be granted. The parties should bear this in mind when drafting transaction documentation, and ensure that a sufficiently long time period is provided to obtain these approvals. Otherwise, they run the risk that the deal will fail due to not obtaining approvals within the prescribed time period.
The M&A market in Africa is generally more buyer-friendly than the market in Europe
LOCKED BOX VS. COMPLETION ACCOUNTS
Locked box mechanisms—where there is a fixed price based on financial accounts prepared prior to completion, with no post-completion adjustment—are standard in European deals.
In African deals, though, the picture is much more mixed. These deals use both completion accounts—where an estimated price is agreed pre-completion, with post-completion accounts prepared and the transaction consideration adjusted accordingly—and locked box mechanisms.
SCOPE OF WARRANTIES
The scope of warranties provided differs from deal to deal, regardless of where transactions take place. They are also affected by risk appetite of the parties involved. Still, the warranty protections offered by sellers to purchasers does differ between Africa and Europe.
Generally, it is common in both Africa and Europe for a broad range of substantive warranties to be offered across most relevant business areas.
However, African deals between parties based on the continent focus less on anti-money laundering (AML) and anti-bribery and corruption (ABC) issues, whereas foreign investors investing into the continent usually seek strong warranty protection in these areas, as well as general compliance with law warranties. This is usually a result of foreign investors' fund requirements and well-established internal compliance teams.
In European deals, it is rare that PE sellers offer any warranties other than those relating to title and capacity, with the sellers who are also members of management giving broader, business-related warranties. The typical rationale is that PE investors are not involved in the day-to-day running of businesses and therefore are not in a position to give substantive, business-related warranties. However, in African deals, it is not uncommon for PE investors to offer limited business warranties in addition to basic title and capacity warranties.
LIMITATIONS ON LIABILITY AND WARRANTY, AND INDEMNITY INSURANCE
In Europe, a seller's financial liability with respect to warranties is usually capped at 10 to 25 percent of the total transaction consideration.
However, this is far from standard in African deals, where a seller's financial liability with respect to warranties is typically far more extensive. The applicable financial cap is usually 50 percent or more of the total transaction consideration and, in some occasions, is even 100 percent of the total transaction consideration.
A similarity in both African and European deals are the financial thresholds before a purchaser can bring a claim with respect to warranties. Generally, the de minimis and basket thresholds are 0.1 percent and 1 percent of transaction consideration. In addition, the time periods within which a claim can be brought are similar: 12 to 24 months for breaches of business warranties or other claims under a sale, and purchase agreement and seven years for breaches of tax warranties.
Warranty and indemnity (W&I) insurance is commonly used in European deals, particularly in PE. W&I insurance allows sellers to exit divestments cleanly with limited tail liability and allows purchasers to claim against insurers.
W&I insurance is less common in African deals, but it is becoming increasingly more prevalent for PE sellers, particularly in South Africa. However, insurers typically charge higher premiums with African deals (2 to 3 percent of consideration compared to approximately 1 percent in European deals), and they exclude ABC from the scope of the W&I policies.
In the African and European markets, exits most commonly take place through auction processes, resulting in sales to either trade buyers or financial sponsors. Exits occasionally also take place through bilateral negotiations between two parties. However, exits in the form of a listing or initial public offering are rare in Africa, while public M&A markets are more active in Europe.
On the whole, the M&A market in Africa is generally more buyer-friendly than the market in Europe, particularly in the PE space.
In Africa, unlike Europe, PE sellers are often expected to provide general business warranties, and the limit on the financial liability of sellers for breach of warranty is far higher. This makes it more difficult for PE sellers to make a "clean exit" from an African deal, although it is becoming easier to do so with the increasing prevalence of W&I insurance on the continent. In addition, unlike in Europe where seller-friendly locked box mechanisms are the norm, African deals frequently use completion account mechanisms as well.
At the same time, there is less deal certainty with African deals, compared to deals in Europe. Some of this conditionality works to the benefit of buyers, such as material adverse change conditions and walkaway rights.
IN H1 2021, AFRICAN TELECOMMUNICATIONS, MEDIA AND TECHNOLOGY (TMT) DEAL FLOW BY VALUE OVERTOOK ENERGY, MINING AND UTILITIES, MEASURED BY DEAL VALUE
Global M&A deal value targeting African investments expanded by 131 percent during 2009 – 2015, but then contracted by 19 percent during 2016 – 2020.3 In 2020, investments in technology-enabled companies accounted for 55 percent of the overall deal volume recorded in Africa, overtaking the energy, mining, utilities and consumer sectors.4 US$16.06 billion was invested in TMT deals in Africa from 2016 to 2021 (YTD).5 While technology-focused funds represented 2 percent of the total value of final closed PE and venture capital funds in Africa in 2015-2017, this had increased to 7 percent by 2018-2020.6
Factors that have proved important to attract deal flow over the years include natural resources, gross domestic product size and growth, financial market maturity, urban agglomeration and regulatory considerations. This has tended to concentrate deal flows in South Africa, Kenya, Nigeria and North Africa.
Interestingly, though, recent M&A in the TMT sector involves a wider spectrum of countries. Ethiopia stands out, following Prime Minister Abiy Ahmed's initiatives to liberalize various sectors of the economy, including the telecommunications sector. Rwanda is also noteworthy for its Kigali Innovation City, a multi-purpose knowledge and innovation hub established in the country's capital. The number of technology hubs in Africa is growing rapidly, from 442 in 2018 to 643 in 2020.7
Mobile tower networks are also expanding rapidly across the continent. Africa reached 33.1 active mobile broadband subscriptions per 100 inhabitants in 2019, far behind the world average of 75 per 100 inhabitants. On the other hand, active mobile broadband subscription rates per 100 inhabitants in South Africa, Ghana, Gabon, Seychelles, Botswana, Mauritius and Cabo Verde exceed the global average. Twelve African countries already have greater mobile telephone penetration than the global average, and in some of the lagging countries, subscriptions are growing rapidly.
Global technology giants are investing in African digital infrastructure assets, especially data centers and cloud projects.8
Investment into a wide range of digital sub-sectors is likely to continue as Africa's digital transformation unfolds. This expansion of the TMT sector across Africa creates potential for digital dividends in other industries, too, in turn creating further attractive investment opportunities.
1 See White & Case Merger Explorer.
2 El Fihri, S., Omary, O., Nielsen, J., Dupoux, P. and Bour, A. (2021) What’s new and next for M&A in Africa. Boston Consulting Group at https://www.bcg.com/en-gb/publications/2021/five-merger-and-acquisition-trends-in-africa.
3 See White & Case Merger Explorer.
4 AVCA's 2020 Annual African Private Equity Data Tracker.
5 See White & Case Merger Explorer.
6 African Private Equity and Venture Capital Association (2021) Sector Snapshot: Technology.
7 The Africa Report, 2020. Tech Hubs Across Africa to Incubate the Next Generation.
8 Based on the ITU WTI Database, December 2020 edition.
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