Deal Frenzy Heats Up in Africa As Middle Class Grows

To meet the demands of fast-growing markets like Kenya and Nigeria, deal-hungry executives are increasingly looking toward Africa, hoping to cash in on a rapidly expanding middle class.

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Mergers, acquisitions and other business transactions in the region are now growing at a faster pace than they were three years ago, and M&A experts at Ernst & Young predict the trend will continue as the broader deals market recovers.

"Africa is at the top of everybody’s mind," said Bryan Pearce, director of the Venture Capital Advisory Group at Ernst & Young. Kenya in particular, he says, is "growing very rapidly."

“African consumers want the same as consumers elsewhere – a mobile phone, a bank account, and the latest Beyonce CD."


Roughly 850 M&A deals were struck in Africa last year, an increase of 52% from the same period in 2009, while their total value climbed by 61% compared with three years earlier, according to data from Dealogic. Globally, deals volume was up just 16% during that same period.

Northern and Western Africa as well as Southeast Asia have been the biggest targets for M&A in emerging markets as of late, with the energy, commodity, financial as well as consumer and retail sectors leading the charge.

Consumption of goods and services has grown in Africa -- now comprising two-thirds of its GDP -- amid a rapidly expanding middle class, which has tripled over the last 30 years to 313 million in 2010. A reflection of higher wages and increased access to technology, the middle class is expected to grow to 1.1 billion by 2060, making it the world’s fastest growing, according to a recent report by Deloitte.

“African consumers want the same as consumers elsewhere – a mobile phone, a bank account, and the latest Beyonce CD bought in a store at a shopping mall,” Deloitte said.

Africa’s Deal Frenzy

Some of the continent’s biggest deals so far this year were in Egypt, Mozambique, South Africa, Zimbabwe, Morocco and Nigeria, including the $6.1 billion purchase of Egypt’s Orascom Telecom by Russia investment firm CTF Holdings and the $4.2 billion acquisition of oil and gas assets by China National Petroleum.

"We’re anticipating more cross-border activity, that’s where private equity is chasing deals," said Steve Krouskos, Ernst & Young’s global markets leader in its transaction advisory services group, adding that "more activity" is expected in emerging markets.

Mobile companies and financial services firms like electronic payment providers Visa (NYSE:V) and MasterCard (NYSE:MA) have in many ways led the charge on the consumer end to meet growing demand. Both have been heavy on the ground inking private and public partnerships with African governments as well as local nonprofits and merchants in an effort to meet a rising need for more advanced financial services.

The best way to accelerate investment in emerging markets is to work with local governments that have crucial sway in these markets while cultivating partnerships with third parties embedded in the region with established distribution routes and supply chains, according to M&A executives and emerging markets heads at both Visa and MasterCard.

Visa, for example, worked in tandem with local clients and sovereign parties like the Rwandan Ministry of Finance and Central Bank and even launched a financial literacy campaign to educate hundreds and thousands of locals. After striking a deal with the Rwandan government in 2011, Visa has now licensed every commercial bank in the country, infusing the nation’s largest banks with Visa-capable ATMs.

"If we hadn’t aligned our interest, or even formally combined [with the government], I don’t think we would have had nearly the same impact or certainly as quickly as we did,” said Gordon Cooper, head of emerging markets solutions at Visa. "We ended unexpectedly with a much larger opportunity at play."

MasterCard, meanwhile, scored a deal earlier this month with the Central Bank of Nigeria to roll out 13 million smart identity cards that have electronic payment capability, and both have also joined Citi (NYSE:C) on the Center for Financial Inclusion’s FI2020 initiative, an effort to drive greater access to financial services in emerging markets like Africa.

As the population in Africa becomes more affluent, there has also been an increase in family businesses and even mid-size African companies leading transactions. Rwanda’s major banks, for example, have secured deals with merchants in rural areas, enabling customers located out of cities to make transactions locally. Rwanda’s national airline, RwandAir, secured a deal with Visa and can now accept electronic payments on its website.

"You have to really, really get down and understand what people’s burning needs are" Cooper said. "If successful, we can export it to other emerging markets because we have similar dynamic in those countries."

Lessons Learned

Yet, investing in emerging markets carries significant challenges, especially for companies less familiar with the region’s cultural norms/clashes, systems and policies. As companies push into Africa, there are lessons to be learned and hurdles to clear.

“Companies have to recognize that there are going to be risks in a lot of these countries,” said Ed Brandt, managing director of MasterCard’s government services and solutions business. “It’s a longer term investment … it takes an entire ecosystem.”

Not having the right systems in place, for example, has ‘killed a lot of deals” in the past, added Herb Engert, Americas Leader of Strategic Growth Markets for Ernst & Young at a recent roundtable, as does not having the right leadership or being flexible enough to handle even the most unpredictable situations.

“There are always localization issues that are not obvious to people, certain complexities people always underestimate,” said Pete Pizzutillo, product manager of portfolio analysis solutions for CAST, a software analysis and measurement company.

During a merger or acquisition, for example, combing global IT systems like payroll has proven to be a major challenge even for the world’s largest and most advanced companies amid cultural and language barriers, Pizzutillo said. Companies also need to figure out how to fund the business abroad and understand the local tax structure, which vary pretty drastically in every region.

“There are many things that we take for granted in the U.S. in terms of logistics that can be much more difficult in emerging markets,” Pearce said.

If done right, though, it is a challenge worth taking.

Krouskos notes there is a “tremendous window of opportunity” in the M&A market over the next 6-12 months in both the U.S. and in rapidly growing emerging markets.

"Many of these emerging markets are growing much more rapidly than the U.S." Pearce said. "The good news is if you do it right, you can catch the tiger by the tail."

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