In 2021, the total value of merger and acquisitions (M&A) deals in Africa was about USD 58 billion. This fades in comparison with the global M&A deals value of USD 5.9 trillion the same year. With a GDP of USD 3.4 trillion, Africa has not yet attracted super huge M&A deal sizes. However, as specific countries across the continent accelerate their growth in pursuit of joining the developed economies league, we expect the M&A activity in the continent to grow in tandem. The Africa Continental Free Trade Area (AfCFTA) also provides an opportunity for M&A deals for local companies who would like to scale their operations across borders.
The M&A concept is however not very common among most businesses in Africa. This is partly due to lack of awareness of the channel as an alternative source of growth capital. Large corporates and multinationals dominate the local M&A activity in the continent; leaving out local mature and sustainably run mid-market businesses off the table. To stimulate the M&A activity across the continent, the perceived complexity of M&A deals structuring need to be demystified.
Mergers and Acquisitions refer to transactions where two companies combine their ownership and operations in some form. In a merger transaction, two companies of similar size combine to form a new company. On 30th September 2019, the merger between NIC Group PLC and Commercial Bank of Africa Ltd was completed; to form the new larger entity – NCBA Bank Kenya PLC. On the other hand, an acquisition transaction involves the larger company taking over a smaller company in terms of ownership and operations. This was the case when KCB Group PLC acquired National Bank of Kenya Ltd (NBK) on 2nd September 2019. In the KCB acquisition deal, NBK retained its identity after the transaction; even as it operates as a wholly owned subsidiary of the acquirer.
M&A deals are premised on different expected benefits from the companies involved. In most cases, the goal is to enable the acquirer to get a larger market share or control a key component in its value chain. When an M&A deal involves companies that operate in similar industries, then it is referred to as a horizontal merger. The most common objective with this type of M&A deal is to increase the market share for the acquirer or use the merger as a market entry strategy into new geographies. The acquisition of Kenol Kobil PLC by Rubies Energie SAS on March 2019 falls in this category. Rubis acquired 100% shares in Kenol Kobil to enter into the East African market.
In a situation where the merger involves another player along the supply chain of the acquirer; either a supplier or a customer, then it is referred to as a vertical merger. The objective here is usually to consolidate the position of the acquirer in the market and give it more control over core elements in its value chain from the inputs or outputs side. In 2020, Fie-Consult was contracted by ACRE Africa as transaction advisors from a financial due diligence perspective in their acquisition deal with ZEP RE. The acquirer (ZEP RE) is a regional institution whose shareholders include COMESA member states and other institutions and it offers reinsurance services. On the other hand, ACRE Africa is an insurance surveyor offering agri-insurance products and services for farmers across East Africa and beyond. ZEP RE acquisition of 56% shares in ACRE Africa was a vertical acquisition deal; whereby the acquirer needed to integrate the insurance surveyor services offered by the target into its larger business model.
For conglomerate M&A deals, the objective of the acquirer is usually to diversify their portfolio by investing in unrelated industries. In 2019, Adenia Partners (a private equity firm investing in Africa) acquired a majority stake in Quickmart Limited which operates a chain of supermarkets across the country. Adenia Partners invests in different sectors to build a balanced portfolio; hence its private equity deals fall under the conglomerate category.
The other way to classify M&A deals is through their forms of integration. Through this lens, M&A deals are classified as statutory, subsidiary and consolidation deals. A statutory merger occurs when the acquirer is much larger than the target and they acquire all the assets and liabilities of the target. The target ceases to exist after the transaction is completed. In 2017, I&M Bank Ltd acquired Giro Commercial Bank Ltd; and the latter ceased to exist after the deal, since all its operations were merged with those of the acquirer.
In a subsidiary merger, the acquired target continues to do business under its name as a subsidiary of the acquirer who becomes the parent company. The KCB acquisition of NBK in 2019 is one such case where the target has maintained its separate business without being swallowed into the parent company brand and operations. Finally, in a consolidation M&A deal, both companies involved in the deal cease to exist after the transaction and a new company is formed. The NIC Bank PLC merger with Commercial Bank of Africa Ltd led to a creation of NCBA Bank Kenya PLC; which is new merged legal entity different from the previous two companies.
Author: Jeremy Riro