Kenya leads EA in mergers and acquisitions of private companies

Saturday August 4 2012

Rising business confidence, consumer demand and improving economic conditions in the region have whetted business executives’ appetite for firms in the technology, mining and financial services sectors.

Rising business confidence, consumer demand and improving economic conditions in the region have whetted business executives’ appetite for firms in the technology, mining and financial services sectors. 

By MWAURA KIMANI and EMMANUEL WERE The EastAfrican

Craft Silicon, one of Kenya’s largest software firms, has bought back the 30 per cent stake held by Fanisi, the venture capital firm, in the latest mergers and acquisitions (M&A) deal in East Africa.

In the first seven months of 2012, the region recorded a sharp rise in the number of M&A deals compared with the same period last year, data compiled by The EastAfrican shows, reflecting a global trend.

But with the growth in the number and size of M&A deals in Kenya, Uganda, Tanzania and Rwanda, investors and entrepreneurs are increasingly experiencing difficulties settling the transactions as employee resistance and shareholders revolt land firms in expensive legal battles.

A case in point is the planned acquisition of listed oil marketer KenolKobil by Puma Energy, the Swiss trader, which is fighting a suit in the High Court after employees went to court to block the deal.

Over 20 publicly reported deals have been closed since January, mainly in Kenya, Uganda and Tanzania, with Kenya recording the highest number.

Rising business confidence, consumer demand and improving economic conditions in the region have whetted business executives’ appetite for firms in the technology, mining and financial services sectors.

“There is a lot of interest in the EAC region and especially Kenya. With the new oil finds, East Africa is where growth will happen in coming years,” said Wanjiku Mugane, managing director at Standard Chartered Securities.

“We are likely to see more foreign monies coming in, either in acquisitions or direct investments. All the region needs is to get its politics right,” she added.

A survey of global M&A deals in 2012 by Ernst & Young shows activity was up 10 per cent after plummeting to its lowest levels in two years in the first quarter of 2012, with Africa seeing a rise in deals.

The Democratic Republic of Congo and Sierra Leone were the most-targeted for copper and iron ore assets, despite the higher risks associated with these nations. This highlights the strategic importance of mineral supplies.

The KenolKobil deal will see the oil marketer delisting from the Nairobi Securities Exchange.

The Kenyan government has waded into the acquisitions debate, saying it was kept in the dark over the impending takeover of KenolKobil, putting at risk the interest of minority shareholders, workers and creditors.

Meanwhile, Emerging Capital Partners has bought a 90 per cent stake in Java, the Kenyan coffee house.

In the quarter to March 2012, there were 12 M&A deals in all sectors in the EAC, with a total value of $3 billion completed or announced in the first quarter, 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.

Fanisi had bought a 30 per cent stake in Craft Silicon for $2.5 million in November 2009.

But one and a half years down the line, both parties were not reading from the same script, leading to an agreement whereby the software company, which focuses on banking software, would buy back the shares held by the venture capital firm.

Ordinarily, Fanisi invests for three to five years in companies.

The sale deal was concluded on July 20, 2012.

Said Kamal Budhabhatti, the founder of Craft Silicon, “What we wanted was much more than just money.

If we needed money, we would have gone to a bank. What was the point when they were not adding value?” he posed, while maintaining the exit was amicable.

In Uganda, whereas there has been keen interest in the energy sector, especially oil, deals are emerging in other sectors too. At least five deals have been closed so far.

Ireland Blythe of Mauritius last month acquired 50 per cent shares in Fresh Cuts Ltd, a major distributor of fresh meat to local supermarkets.

Satnav East Africa Ltd, a navigation services provider, sold a 26 per cent stake to South Africa’s MAP IT for an undisclosed sum in April and Marsh Ltd, a US-based provider of insurance brokerage risk management services, acquired Alexander Forbes Insurance Brokerage Services’ operations in Uganda.

The China National Offshore Oil Corporation (CNOOC) farm down deal with Tullow Oil Plc for a one third interest in Tullow’s Exploration Areas for $1.467 billion closed in February.

In the pipeline, Actis, the British based private equity firm, plans to dispose of at least 30 per cent of its shares in Umeme Ltd to the public through an equity offer on the Uganda and Nairobi bourses before the end of year.

Rwanda is seeing its fair share of deals, especially in the banking sector, while in Tanzania, oil and gas as well as hospitality remain the key target sectors.

But even though foreign money is finding a home in companies in the region, it is not all smooth sailing.

Venture capital and private equity (PE) firms do not always share the same vision with entrepreneurs.

Some of the divorce proceedings are amicable while others never hit the headlines because of confidential agreements.

Analysts said only a sizeable number of deals are coming into the public limelight.

A recent survey by consulting firm Deloitte shows that the East African Community is this year expected to surpass the $200 million worth of investment recorded in the region in 2011 by private equity firms alone.

New East Africa-focused funds are targeting high-growth small and medium enterprises in consumer-driven sectors.

While investment sizes remain limited, several large deals have been closed so far, and investors expect deal size to creep up over time.

Large firms such as Helios have been reportedly looking for telecom towers providers while others are eying new opportunities in East Africa’s nascent oil and gas sector.

“Most investors are seeing their returns in the developed markets shrinking.

They are looking elsewhere,” said Patrick Obath, head of the Kenya Private Sector Alliance.

Some big private equity firms in the region have been raising cash from foreign firms to help them close deals.

For example, Pearl Capital Partners has already received commitments from foreign lenders for $25 million for its African Agricultural Capital Fund, set up to lend to and buy equity in small and mid-sized East African agribusinesses.

Across the region, financing is relatively expensive for potential buyers, with interest rates at historic highs, especially in Kenya and Uganda.

Additional reporting by Bernard Busuulwa