Lexology GTDT Market Intelligence provides a unique perspective on evolving legal and regulatory landscapes. This interview is taken from the M&A volume featuring discussion and analysis of legal developments, keynote deals as well as an insight into typical transactions within key jurisdictions worldwide.
1. What trends are you seeing in overall activity levels for mergers and acquisitions in your jurisdiction during the past year or so?
Gavin Davies and Rudolph du Plessis: The medium and long-term impact of covid-19, and the effect of lockdown restrictions, on the economies of countries in Africa will probably dominate any discussion about business and M&A activity on the continent for a while. The pandemic has caused a lot of uncertainty, not only about the consequences of the lockdown restrictions on the economy, but also the possibility of a second wave of infections and countries’ ability to cope with infections. At the time of writing, the data seems to suggest a slowdown of covid-19 cases in Africa, but uncertainty remains about the social and economic effects of the pandemic. The uncertainty has definitely had a short-term impact on M&A activity and many transactions were delayed, renegotiated or cancelled. We do, however, expect the crisis to operate as a catalyst for change and, as a result, there will be opportunities for those with capital to invest or a desire to expand. However, we think that M&A will be different. One immediate example of such change will be that the due diligence exercise will have to have an increased focus on certain key areas such as supply chain risk (including force majeure and the possibility of further waves of the pandemic). It will also be important to understand what steps the business has taken in response to the pandemic, (eg, payment of rent) and what activities the target may have undertaken (or carried out differently) during the covid-19 pandemic that could give rise to liability.
There is no doubt that covid-19 and the resultant lockdown restrictions have had a devastating impact on economies in Sub-Saharan Africa, especially on those economies that were struggling before the pandemic. For example, South Africa cut its 2020 growth forecast by half and the impact on unemployment has been severe – the figures from Statistics South Africa say there has been a 1 per cent increase in unemployment rates compared to the fourth quarter of 2019, currently sitting at 30.1 per cent. There is little doubt that continued global political and economic turmoil continues to have a negative effect on sentiment towards emerging markets. This, together with the impact of covid-19, will probably have a negative impact on M&A activity in the short term, but may bring some opportunity in the medium and long-term. We expect to see financial buyers (including private equity and sovereign wealth funds) leading the way as they are likely to be ready to move sooner than strategic buyers and many have plenty of dry powder. They may also be able to make an offer with less conditionality, as merger control and shareholder approval are less likely to be required on a bid by a financial buyer. Where the bidder is a corporate, we expect to see more all-share mergers in a desire to preserve cash and give target shareholders exposure to the business going forward to help address any perceived value gaps.
In Sub-Saharan Africa, the value of M&A transactions was down by more than 50 per cent for the first half of 2020, compared to the first half of 2019. East Africa has also seen lower transaction values in the first half of 2020. North Africa seems to be the one region on the continent that is seeing some M&A activity, with Egypt seeing a larger share of the Middle East North Africa M&A activity than before. In West Africa, Nigeria has also seen some positive M&A transaction flows.
2. Which sectors have been particularly active or stagnant? What are the underlying reasons for these activity levels? What size are typical transactions?
RDP: In keeping with previous trends, the first half of 2020 has again seen significant activity in the energy, and particularly renewable energy, and agricultural sectors. Continued policy uncertainty, especially in the mining industry, continues to impact negatively on M&A activity, but the sector has seen some recent activity, such as the acquisition by Harmony Gold of the remaining South African assets of AngloGoldAshanti. Under the deal, Harmony will pay AngloGold Ashanti US$200 million in cash as well as US$260 per ounce of underground gold production from the Mponeng, Savuka and TauTona mines for six years from 1 January 2021 – which AngloGold Ashanti values at around US$100 million based on its production forecast.
Boosted by the restrictions brought about by covid-19, the technology and telecommunication sectors, as well as the fintech sector, also continue to be very active, as companies continue to target the growing middle class and look to find novel ways to bring financial services to communities without access to traditional banks or to people affected by lockdown restrictions. Sectors such as consumer goods and healthcare have also seen some activity.
Aviation, hospitality, tourism and leisure accounted for 10 per cent of Africa’s greenfield foreign direct investment (FDI) in 2019 and manufacturing industries (which contributed 7 per cent) have been hit hard by the pandemic in the first months of 2020.
3. What were the recent keynote deals? What made them so significant?
RDP: One of the largest Sub-Saharan African deals of the first quarter of 2020 was MTN’s sale of its tower businesses in Uganda and Ghana to AT Sher Netherlands Cooperatief for US$523 million. Another keynote transaction was Africatel Holdings’ US$1.0 billion sale of PT Ventures to Angolan Sonangol in January 2020. Barloworld’s acquisition of Wagner Asia Equipment and a stake in SGMS LLC (3 billion rand) was also significant outbound M&A transaction.
4. In your experience, what consideration do shareholders in a target tend to prefer? Are mergers and acquisitions in your jurisdiction primarily cash or share transactions? Are shareholders generally willing to accept shares issued by a foreign acquirer?
GD, RDP, Hubert Segain and Richard Woods: Although it is difficult to generalise with a region of 54 jurisdictions, we have seen shareholders continue to prefer cash consideration, particularly in relatively stable overseas currencies such as the US dollar. As in all jurisdictions, shareholders accepting equity consideration will need to be diligent about the acquiring vehicle and investors will need to plan to take shareholders through legal structures that may be unfamiliar to them. Where the acquirer is itself a local entity, local counsel will need to advise on any formalities required for the issuance or transfer of the equity consideration.
In the most sectors and businesses affected by covid-19, where reaching a mutually acceptable price may even harder, we are seeing more parties explore earn-outs or deferred consideration as options to help bridge any value gap. We are also likely to see some less conventional solutions considered, such as ‘contingent value rights’ to provide additional contingent consideration in the event of a particular set of events occurring. That said, while we expect these alternative options to be considered, we do not expect to see them implemented often in practice due to the difficulties and lack of certainty they often entail.
In a number of African jurisdictions, exchange controls will apply to inbound and outbound currency flows, so it is important to check for any approval requirements at an early stage and plan for these as part of the deal timetable. Exchange controls may not be familiar to advisers with a focus on US and European M&A (where controls may not have applied for a generation), so this is an area for early attention.
In domestic South African public M&A transactions, share transactions are becoming relatively common.
5. How has the legal and regulatory landscape for mergers and acquisitions changed during the past few years in your jurisdiction?
GD, RDP, HS & RW: A particular area of focus is likely to be environment, social and governance (ESG) issues. Even prior to the pandemic, we were seeing increased scrutiny on ESG issues and this has only accelerated in recent months. In particular, a purchaser will likely be interested in employee issues, especially health and safety and compliance with employment law. Buyers should ensure that ESG issues are explored in detail, both in the context of the law as it currently stands but also in light of how law, regulation and expectations will likely evolve, at least over the short to medium-term, and any potential reputational risks.
The African Continental Free Trade Agreement (AfCFTA), which became operational in July 2019, will help to promote the free movement of goods and services across the continent and increase intra-Africa trade. The AfCFTA has been ratified by 30 African countries. This may facilitate further consolidation and restructuring of companies that will hopefully have a positive impact on M&A activity. Covid-19 also had an impact on these developments and a summit on the African Continental Free Trade Area that was scheduled to take place in South Africa earlier in 2020 was postponed to 5 December 2020. This summit is envisaged to finalise some of the outstanding issues relating to trading under the AfCFTA agreement, which seeks to create a single continental market for goods and services in Africa, and enable a freer movement of people around the continent.
There has been significant development in the context of local participation in companies operating in various African jurisdictions and these are important factors to take into account when doing M&A transactions in these countries.
An ongoing trend in the past few years has been the increasing harmonisation of commercial law across the region. The efforts of the Organisation for the Harmonisation of Business Law in Africa have been of key importance in driving this forward. Since its establishment, the organisation has taken important steps to attract investment by helping to standardise business laws and implementing institutions across the continent. Perhaps the most notable of these efforts have been the moves to establish market norms for local security issues, dispute resolution procedures and, most recently, the reliability and flexibility of structuring investments within the region.
Governments around the world have been tightening their controls over foreign investment in light of the pandemic. Amendments to the South African Competition Act (the Competition Act) have been enacted, which include an increased sensitivity towards foreign acquirers in South African mergers. The Competition Amendment Act establishes a framework within which a politically appointed committee (the Committee) may prohibit a proposed transaction that involves an acquisition by a foreign acquiring firm and relates to certain identified national security interests. A ‘double notification’ procedure is imposed where the transaction must first be filed with the Committee. Depending on the decision of the Committee, the competition authorities’ decision-making power may be excluded entirely or constrained.
The power to prohibit or impose conditions on a merger on the grounds of national security is novel in South Africa. While South Africa has been one of the leading jurisdictions in relation to the role of public interest factors in merger control, this assessment has, to date, been conducted by the competition authorities themselves as an integral part of their assessment of a merger (including orthodox competition factors). The Minister in the Presidency (the Minister) has power under the Competition Act to intervene in the merger control process – effectively as an interested third party – where this is warranted on public interest grounds.
In recent years, in high-profile transactions involving the acquisition of South African entities by large international corporations, a practice has developed of first approaching the Minister and entering into negotiations as to the type of commitments that might be appropriate to address the public interest grounds provided for in the Competition Act. This could lead to a negotiated agreement between the parties and the Minister that is incorporated into the ordinary merger approval process conducted by the competition authorities – the proposed amendments appear to be a codification of the practice, to an extent.
However, the Competition Amendment Act goes further, as it would grant a political body the power to prohibit a merger independently of the competition authorities and thereby prevent the ordinary merger control process from occurring at all. Alternatively, the Committee can constrain the discretion of the commission and the tribunal by permitting the merger to be notified, but ‘with conditions’.
Furthermore, the list of national security interests contemplated is extremely broad – the provisions go far beyond traditional public interest factors that have been the focus of legitimate ministerial intervention to date. In addition, it is not clear what would classify as sensitive technology, important goods or services, infrastructure essential to the economic well-being of citizens or a matter that could impact on the economic and social stability of South Africa generally.
The Committee is empowered to prohibit any merger that may have an adverse effect on an identified national security interest – there is no materiality threshold, nor is there any requirement that the adverse effect be likely. This broad discretion, together with the potentially far-reaching consequences of the Committee’s decisions, will create additional risk for foreign entities considering investment into South Africa.
Alongside the regional and national competition authorities, the central government may be another party taking a close interest in the deal, particularly where the state is involved as a commercial partner. And, even where the state is not directly a partner in the deal, governments will be focused on tax revenues available to the state, either as a result of the deal itself or from the target entity following the transaction. This should be considered at an early stage in the transaction.
Understanding the drivers for individual ministries or regulatory bodies and individuals within them will be all the more important in this context.
In assessing the legal and regulatory landscape, it is critically important to recognise that Africa is a continent that comprises 54 jurisdictions. Notwithstanding some regionalisation, integration or alignment between legal systems remains limited. Investors should assess the political, economic, legislative and security landscape for the relevant country before proceeding with a deal.
6. Describe recent developments in the commercial landscape. Are buyers from outside your jurisdiction common?
RDP: The covid-19 pandemic will likely negatively impact FDI flow into Africa, as will be the case for the rest of the world. The United Nations Conference on Trade and Development predicts that FDI flow into Africa will contract by 25 to 40 per cent in 2020. FDI into the continent was already in decline prior to the pandemic. Hopes are that the AfCFTA will have a positive impact on regional cooperation, but we will have to wait to see what impact covid-19 will have on sentiment. Trading under the AfCFTA had been earmarked to commence on 1 July 2020, but this been postponed due to covid-19. AfCFTA negotiations on rules of origin, tariff negotiations and schedule of services are still outstanding.
7. Are shareholder activists part of the corporate scene? How have they influenced M&A?
GD, RDP, HS & RW: Again, it is important not to generalise about Africa as a whole: the role of activists differs across its many jurisdictions.
Shareholder activism can only be prevalent in jurisdictions with meaningful numbers of listed companies and capital markets that are sufficiently well developed to allow activism to occur. As such, in those countries with the most developed and liquid capital markets (eg, South Africa, Kenya and Nigeria), activism is possible, albeit as a relatively new phenomenon compared to, for example, Western Europe or the United States. However, investors are familiar with the standards of governance and transparency that are required of firms listed on the world’s major exchanges and with the constant attempts to improve and refine these regimes.
Armed with this familiarity, there are signs of an increasing willingness to challenge boards and senior management in annual general meetings and in other public forums and to seek to hold to account governance and remuneration practices, as well as the performance of the company generally. In jurisdictions with only very small capital markets and very few listed companies, shareholder activism is not yet a meaningful feature of the M&A landscape.
There have been many examples of activists succeeding in changing the board of a target company. We expect investors to become increasingly assertive and important players in M&A transactions in the region. In South Africa, for example, there have been a number of interventions by shareholders that have resulted in changes to boards of listed companies. Shareholders are also increasingly challenging boards on remuneration, disclosure requirements and climate change.
8. Take us through the typical stages of a transaction in your jurisdiction.
GD, RDP, HS & RW: Along with the target revenues, management and potential for growth, one of the factors that is usually key to a client’s selection of a market and a sector is the target’s ability to demonstrate compliance with local laws and, potentially, preparedness for a ‘compliance uplift’ whereby overseas standards in relation to transparency and anti-corruption can be satisfied. This largely stems from reputational concerns and the desire to find a reliable local ‘partner’ with relevant expertise.
A common model for the provision of legal advice on an inbound deal into Africa, particularly on multi-jurisdictional deals, is for lead counsel to be based in the investor’s home jurisdiction, to assist with deal structuring, to project manage the process and to negotiate the acquisition documents under an internationally recognised legal framework (eg, English law or New York law). The lead counsel would then work closely with local counsel to complete due diligence, design a transaction structure that is appropriate under applicable local laws and identify any conditions that will need to be satisfied as a prerequisite to the deal (eg, merger control consents, foreign ownership approvals or exchange control consents).
In many African jurisdictions, there are sector-specific foreign ownership restrictions and we have seen this create obstacles during the deal structuring phase. In particular, restrictions can arise where clients are seeking to obtain a level of control over the target, not only for consolidation purposes, but also to ensure that it has the ability to lead the company in key decision-making. Requirements for this kind of regulatory approval can be difficult to identify and anticipate. In some jurisdictions, legislation is not available online and precedents for particular types of transactions may be limited. Once again, early engagement with experienced local lawyers and with government or regulators is key to identifying and addressing issues early in the process.
Formal or ‘soft’ local content requirements can give rise to similar questions. These take many forms across the continent, but typically require a minimum proportion of local staff to be employed by the target, along with staff training and welfare requirements.
All aspects of the deal process may, at some point, be impacted by practical considerations. A good example is document distribution. Lawyers will be familiar with uploading and managing large volumes of documents via online data rooms, but this will not always be possible in African transactions where documents may be held in paper form only. Indeed, we have seen creative uses of storage facilities like Dropbox being relied on in African transactions where a target’s existing technological capabilities may not be able to deliver what is usually expected.
9. Are there any legal or commercial changes anticipated in the near future that will materially affect practice or activity in your jurisdiction?
RDP: Changes to the natural resources regulatory environment in South Africa include the broad-based Black Economic Empowerment Charter for the South African Mining and Minerals Industry 2018, which significantly increases the requirements relating to the participation by black people in the ownership of mining companies as well as in relation to their procurement and employment policies. The proposed new Upstream Petroleum Resources Development Bill was published in December 2019. These changes are particularly significant when viewed in the context of similar movements across the continent to enhance protection afforded to local interests.
There will also be increased focus on ESG and corruption and money laundering measures across the continent.
10. What does the future hold? What activity levels do you expect for the next year? Which sectors will be the most active? Do you foresee any particular geopolitical or macroeconomic developments that will affect deal sizes and activity?
RDP: The future will largely be tied to the covid-19 pandemic and how it will play out in Africa over the latter part of 2020. Levels of M&A activity are increasing around the world, having dropped off significantly when the pandemic first hit. The big question is whether or not some of the optimism globally will bring a return of transactions to the continent.
While we are seeing some distressed M&A as activity picks up, the continued uncertainty around covid-19 and its trajectory mean that we have not seen the levels we might otherwise have anticipated. We are, however, seeing many ‘quasi-distressed’ deals, where companies need to dispose of assets to support their core business but are not on the verge of insolvency. We are also seeing ‘business as usual’ M&A activity and deals that were paused as the pandemic took hold being revived.
Logistical issues will continue to pose challenges in finalising M&A transactions quickly. Particular issues may arise around decision-making processes (such as board or shareholder meetings), getting documents witnessed or notarised, or ensuring filings are registered on a particular date. While we have seen many governments in the rest of the world introduce relaxations to regulations and requirements in light of the pandemic, many governments in Africa have been slower in facilitating continued commercial activity during lockdown restrictions.
The Inside Track What factors make mergers and acquisitions practice in your jurisdiction unique?
M&A transactions in Africa can involve a large number of stakeholders when compared to other regions, particularly in the extractive sectors and the other sectors of national interest. The concerns of these stakeholders may also need to be factored into the structure and execution strategy for a deal. This can be a challenging, although ultimately rewarding, balancing exercise. The involvement of governments and regulators all over the world has become much more important to consider early on in transactions and needs to be handled carefully.
What three things should a client consider when choosing counsel for a complex transaction in your jurisdiction?
- Consider the experience that local counsel has of advising on complex M&A transactions that may be an unusual feature of that M&A landscape. In less developed markets, this can be managed by appointing lead counsel with the experience to structure and manage the deal alongside local counsel.
- Managing and mitigating the legal and reputational risks associated with doing business in Africa. Doing business in Africa can involve practices that risk falling foul of anti-bribery and corruption legislation worldwide, so it is important to choose local counsel familiar with various regimes.
- Experience of navigating Africa’s increasingly complex merger control regimes, as domestic legislation is often layered over by supranational regimes.
What is the most interesting or unusual matter you have recently worked on, and why?
All the transactions we have worked on recently have been interesting and unusual because of the restrictions on travel and physical meetings. Parties to M&A transactions have had to adapt to these restrictions and find novel ways to do simple things like deliver a share certificate or update a securities register. The enduring legacy of the lockdown restrictions all over the world will probably be the realisation that transactions can be done without physical meetings. The other interesting aspect of doing transactions in the lockdown world is the interaction with regulators, all of which had to be done remotely or via communications platforms.
This interview was first published by Lexology GTDT Market Intelligence on 28 January 2021. You can view it here.
For more information, please contact Rudolph du Plessis, Hubert Segain, Gavin Davies or Richard Woods or your usual Herbert Smith Freehills: