Mergers and Acquisitions (M&A) have increasingly become the means through which investors, both foreign and domestic, gain access to markets in Africa. Despite Africa’s market constituting a small percentage of the world’s M&A activity, relative to other global regions, Africa is regarded as a viable target for investment and is among the fastest growing and evolving parts of the world. Africa’s M&A market activity, over the years, has been sensitive to global economic phenomena. Movement in deal values over the years have been in congruence with global M&A trends, with dips influenced by global economic factors including 2008’sFinancial Crisis, the 2016 Macroeconomic Shocks and the Covid-19 Pandemic.
M&A in Africa grew at a compound annual growth rate of 15% from 2000 to 2015 but declined by 21% between 2015 and 2019. In 2021, like global M&A trends, the African markets rebounded with massive growth in both volumes and values. The continent’s M&A activity, from a regional focal point over the past decade, shows domination by its Sub-Saharan region, however, Northern African region experienced significant growth of 84% in deal volumes in 2020. The energy, mining & utilities sectors have been the most targeted over the years. This is anticipated due to the historic attractiveness of Africa’s natural resource deposits to foreign investors. In 2021, however, an accelerated increase in technology sector investments, took the first place of the most targeted sectors in Africa, consistent with global trends in the period.
Over the last decade, the main drivers influencing the trends in M&A on the continent include Africa’s economic growth and investment climate, thriving non-resource sectors such as the technology sector, growing diversity of bidders and increased private capital.
M&A activity on the continent is expected to continue in its growth over the medium to long term, mainly influenced by increased economic integration from the African Continental Free Trade Area (AfCFTA) agreement, continued growth in private investments, growth in digital trade resulting in increased visibility and prospects in Africa’s consumer markets.
However, activities in the market are expected to slowdown in the short term due to two main factors; the spike in deal values in 2021 partly due to the execution, and completion, of deals originally put on hold in 2020 due to the pandemic, and the disruption of the post-COVID recovery by the Russia-Ukraine war and supply shortage due to lockdown in China.
Recent trends in M&A in Africa
Following its post-Financial Crisis resurgence, the market’s deal values took a downturn in 2017 (US$22bn) and further in 2018 (US$20bn) due to the 2016 Macroeconomic Shocks. The market’s subsequent prospect of gaining momentum was short lived as the slender growth in 2019 (US$23bn) was dashed by the Covid-19 pandemic. Covid, in comparison to preceding economic phenomena, had a more significant adverse impact on the African M&A market, with an all-time low of US$9.93bnin deal values recorded in 2020. In the ensuing year, however, as the world recovered after being hit by the pandemic, Africa’s M&A market saw a significant spike in activity, recording an all-time high ofUS$91bn in deal values. Consistent with global trends, the most significant factors driving this leap included: the execution and completion of deals suspended in 2020 due to the pandemic, and growth in the technology sector particularly in financial solutions and fintech.
South Africa, Nigeria, Mauritius, and Sudan were among the most targeted countries in Africa in the period 2019-2020. South African deals constituted 51% of regional deals in 2020 and a further 80% in 2021, while Nigerian deals constituted 5%and 7% of total deals in the same period. The most targeted sector of the region has been the energy, mining & utilities sector. Africa’s deposit of natural resources has historically been attractive to foreign investors. The sector remained the most targeted, constituting over 22%, till 2021 when it fell second to the technology sector which constituted 56% as post-Covid investments accelerated.
Deal drivers of M&A in Africa
Economic growth and investment climate
Despite recording a 3.8% fall in GDP in 2020 as a result of the pandemic, Africa has been among the fastest growing regions in the world with an average GDP growth rate of about 4% over the last five years to 2021. South Africa and Nigeria have topped the charts of the largest economies in Africa, with each having the services sector, particularly finance, real estate, and business services, contributing over 50%of reported annual GDP. Rwanda, Egypt, and Cape Verde are among African countries with high GDP growth rates as of 2021. These economies, among several other good-performing countries such as Ghana, have recorded significant foreign investments. This is consistent with efforts by the governments of these countries toward creating business- and investment-friendly environments.
Thriving non-resources sectors
Africa’s M&A activity has historically been driven by activities in the energy, mining & utilities sector, driven by foreign interest in Africa’s natural resources. Deals in the sector constituted over 22% of total deals year-on-year, with the exception of 2012 when its proportion fell to about 17%. However, in less than a decade, the Technology sector, has consistently seen increased participation as innovation in the sector grew led by fintech solutions.
Over the period 2015 to 2019, fundraising in the technology, media and telecommunications sector increased by 66% per annum, largely driven by transactions in South Africa, Nigeria and Kenya which had a total share of 80%of total investments in the sector in that period. The sector’s share of M&A deals grew by 250% in 2021 with a total deal value ofUS$55.69bn. South Africa and Nigeria recorded the highest sector deal values ofUS$58.62 and US$22.28 respectively.
Growing diversity of bidders
Activities in the African M&A market has been typically driven by bidders in developed markets targeting domestic enterprises. Over the last decade, there has been increasing activity involving bidders from emerging markets such as China, India, Russia, Thailand, and Australia. In this period, there have been significant deals driven by emerging market bidders such as the US$10.7bntakeover of Zain Africa by Bharti Telecom. In 2010 alone, China and India accounted for 36% of the value of all M&A transactions in Africa.
In recent years, there has also been an upturn in the tally of domestic activity as fast-growing local enterprises increase competition against multinationals. African acquirers’ share of deal value grew by about 5% per year in the period 2012 to2019, although the value of African led deals averaged half of that of foreign investors' deals ($60 million for non-African versus $30 million for African). A significant driver of the growth in African led M&A activity, is the Africa Continental Free Trade (AfCFTA) agreement which has reduced restrictions and encouraged trade across African jurisdictions.
Increased Private Capital Investments
Africa has benefited from increased private capital as investors turn to the continent to capitalise on opportunities for higher returns in growing markets. Both Private Equity (PE) firms and Venture Capital companies have increased the volume of transactions on the continent across various industries and countries. In 2016, there were over 200 PE funds in Africa with more than US$30 billion funds undermanagement while Venture capital deals totaled US$10.2bn (2021: 650 deals worthUS$5.2bn) over the period of 2014 to 2021, demonstrating an increased confidence of investors.
Prospects for African M&A Market
In view of recent trends, and drivers thereof, M&A activities on the continent are expected to increase, both in volume and value in the medium to long term, but slightly decline in value in the short term due to global economic challenges.
There is the prospect of increased Private Equity (PE) activity on the continent, owing to the growth in Africa-based PE Funds over the years. The continent has recorded increasing Venture Capital (VC) activity over the years. Reported by the Africa Venture Capital Association, from 2014 to 2021, there have been a total of 1,583 VC deals recorded in Africa, summing up to a value of US$10.2bn. Of this total, 2021 alone recorded 650 deals worth US$5.2bn, with an increased concentration in the financial solutions and fintech space. Unlike the norm in other global regions such as Europe and the Americas, VCs are less likely to sell mature ventures on Africa’s relatively less buoyant capital markets. This, coupled with the growth in Africa-based PE Funds, raises the expectation of increased private equity acquisitions.
The increasing trend of digitization of commerce in Africa driven by the continent’s youthful population, internet and mobile penetration, consistent with the global shift toward ecommerce, has driven TMT sector investments on the continent, resulting in the establishment of digital markets such as Jumia and Hubtel, on which local enterprises have increasingly enlisted. E-commerce platforms such as the afore mentioned are likely to become targets of larger global entities such as Amazon, eBay and Alibaba. In addition, SMEs enlisting on these e-commerce platforms become increasingly scalable and more visible targets to larger enterprises.
According to the IMF, Africa is expected to grow at an average growth rate of about 5.5%over the next five years. This is expected to further widen Africa’s growing middle class, attracting investments in the consumer market as global companies seek to capitalize on increasing demand of consumer goods.
The expected significant reduction in trade limitations across the continent through advancement of AfCFTA, will drive M&A activity as markets widen, increasing scalability of businesses. Competition is also expected to increase due to AfCFTA’s role in fostering regional integration, resulting in the merger of weaker firms or their acquisition by larger firms in domestic or cross-border transactions.
