Mergers and acquisitions rose sharply in the first quarter of the year in East Africa compared with the same period a year ago, following increased deal making in the oil and gas sectors.

There were 12 M&A deals in all sectors with a total value of $3 billion completed or announced in the first quarter of 2012 – the highest during the first three months of any year – compared with six deals worth $17 million in the same period a year ago, according to Thomson One Banker, which provides access to financial data on public companies, as well as merger and acquisition information and market data.

Uganda and Tanzania, which have discovered commercially viable oil and gas deposits, had the most M&A activities and deals.

The acquisition of a 66 per cent interest in the exploration areas of Tullow Oil by a consortium of investors led by China National Offshore Oil Corporation (CNOOC) and Total SA for $2.9 billion was the largest deal closed in February.

Larger International firms have been keen on buying into smaller firms, in an attempt to add financial muscle to the exploration of oil and gas.

Uganda first struck oil in 2006 while Tanzania has started mining most of its natural resources mainly gas and gold though oil exploration is going on.

Tanzania has discovered over 7.5 trillion cubic feet of natural gas, with experts saying the discovery could rise to 60 million cubic feet in coming years as more exploration companies drill more wells.

Uganda’s oil discovery is placed at 1.1 billion barrels and with many prospects still to be drilled, Tullow Oil believes the basin has an additional 1.4 billion barrels of oil waiting to be discovered.

“The scale of mergers and acquisitions deals in oil and gas is (much) greater, due almost entirely to the landmark Tullow-CNOOC deal in Uganda.

The number has remained similar though. Note also that Cove itself is being bid for (this would be another big deal).

It is hard to tell if those doing the acquisitions are overpaying at this stage as no-one really knows the full extent of the assets.

The opinion among the gas people in Tanzania seems to be that they are not overpaying,” Burbidge Capital Ltd managing director Edward Burbidge said.

He added that overseas corporate acquirers are looking to gain exposure to the new markets and growth rates presented by the region and a number of businesses in the region that are looking to acquire across East Africa, primarily to serve their customers, who have operations across the region.

However, Mr Burbidge said that the M&A industry in East Africa is in its infancy.

“There is so much organic growth opportunity that companies do not necessarily need to acquire to achieve the double-, and sometimes even triple-digit growth that we are seeing here,” he said.

Another challenge for M&A transactions in the region is to achieve an acceptable valuation based on fair earnings, Mr Burbidge said.

“Decision makers can be slow and find it difficult to make a final decision to commit to the transaction,” he added.

Kenya, where Tullow Oil announced in late March it had discovered deposits of oil in Turkana, lagged behind the region in M&A deals because of a slow approval process.

The Competition Authority was set up in August last year but its board was only appointed at the end of February.

“They enacted a law without putting in a wide number of considerations and we went six months without approvals. It is a real concern,” said Paras Shah a partner at the Hamilton Harrison and Mathews law firm.

“We started getting our first approvals in March and they have been acting fairly swiftly.”

Players in the M&A sector also said that, in Kenya, there is no threshold on the deals to be approved by the Competition Authority.

Therefore, any merger and acquisition, however small, has to be approved by the agency.

“If one steals a pen from his neighbour and a complaint is not filed or the police are unaware of the theft does not mean that an offence has not been committed,” said Mahesh Acharya, a partner at Kaplan & Stratton Advocates, on M&A deals that require approval under the Competition Act not seeking approval from the Competition Authority at a time when there is no threshold.

Approval procedures

Uganda and Rwanda do not require deals to be approved by any authority while in Tanzania only deals with a value exceeding $800,000 require approval.

“We hope by May or June the regulations and thresholds will be in place in Kenya. Acquisitions in Uganda from a competition and monopolies perspective are fairly straightforward unless the government is part of the transaction, in which case specific approvals would be required or in certain sectors, which specifically regulate competition; such as telecommunications,” he said.

Kenya’s Competition Authority said it is looking into some of the concerns and effects but maintained the need for mergers and acquisitions to pass through it, however small, to be deemed legal.

“If I acquire another firm and the marriage goes sour, what happens and it goes to court? It will not have been deemed legal,” said Wang’ombe Kariuki acting director general at the Competition Authority of Kenya adding that they are consulting with players in the field to have the thresholds in place.

By Emmanuel Were and Peterson Thiong’o