East Africa is becoming a hotspot for fair value consolidation deals as international private equity firms scour the continent for high return opportunities.

Mergermarket Group, a UK-based financial news analyst, says in a new report that deal-making in Africa is set to improve this year due to increased expansion interest from foreign and African investors.

The report cites improved global economic conditions, rapid middle-class consumer growth in sub-Saharan Africa and good valuations of the continent’s assets as key factors likely to impact positively on mergers and acquisitions.

The report, Deal Drivers Africa, a Comprehensive Review of African M&A (2014), says, “Interest in Africa’s abundant natural resources continues to be a crucial feature of mergers and acquisitions on the continent, although in 2014 activity declined 25 per cent year-on-year in volume to 30 deals, and 79 per cent year-on-year in value to $4 billion.

This could be explained by a number of factors including heavy dependence on natural resource imports, particularly from China and India, which are experiencing sluggish economic growth.

While East Africa has received a major boost from improving investor interest, several West African countries, which were showing promise, were affected by the Ebola crisis.

“This has inevitably caused a downturn in investor sentiment,” says the report.

READ: Region’s growing GDP attracts global private equity funds

Among the acquisitions in the EAC is the French food giant Danone’s acquisition of a 40 per cent stake in the Kenyan company Brookside Dairy. The purchase is expected to help the company expand to Uganda and Tanzania.

According to the survey, Nigeria — Africa’s largest economy — was rated as the most attractive target for African acquirers, followed by Kenya at 37 per cent and South Africa at 34 per cent.

Respondents also favoured Tanzania (28 per cent) and Mozambique (20 per cent), which are both rich in natural gas resources but still have large infrastructure gaps to fill.

The report notes that deal-making remains a source of growth for global businesses. Africa is rich in natural resources, and many large corporates have acquired divisions on the continent in preparation for more investments in the sector, either through mergers or buyouts.

According to the report, energy, mining and utilities are the dominant sectors in terms of deal volumes. Buyers from the Asia-Pacific region, specifically China, will feature prominently in African markets, followed by North America and Europe, according to the report.

Mergers and acquisitions between African countries quadrupled year-on-year to $13.5 billion as volume edged up three per cent year-on-year to 99 deals.

READ: Nairobi, Dar lead in region’s M&A deals

The bulk of domestic mergers and acquisitions took place in Nigeria and South Africa, with a combined value of $7.9 billion, or 59 per cent of total African domestic deal value.

South Africa continues to be an engine of growth for the continent, accounting for the largest share of mergers and acquisitions by volume and value.

According to the report, private equity activity remains a small part of Africa’s mergers and acquisitions story, but investor appetite for the continent’s assets is gradually increasing.