HOW SELLERS CAN ENSURE THEIR ASSET OR BUSINESS IS LEFT IN GOOD HANDS

Higher commodity prices have historically led to a commensurate increase in merger and acquisition (M&A) activity within the natural resources sector. Extraordinary economic growth in China during the period 2002-2012 resulted in supply shortages, driving up global commodity prices. In its Global Mining Deals Outlook (2013), PwC reported that the aggregate value of global mining M&A increased five-fold during this illustrious decade.

Recent growth in emerging markets, and the demand for metals required in the race to net zero emissions, are once again driving up commodity prices. As we stand on the cusp of what could arguably be the beginning of the next commodity boom, companies and investors that have managed to weather the Covid-19 storm are gearing up for strategic acquisitions.

For every acquisition there is of course a disposal. Sellers have traditionally focused on a “clean” exit, in terms of which they seek to limit their obligations and liability after exiting the asset or business. However, achieving a squeaky clean exit, particularly within the natural resources sector, is somewhat of a myth for a number of reasons, including that purchasers will generally seek post-closing protections in the form of warranties, guarantees and indemnities. There are usually complex transitional mechanisms relating to permitting arrangements, ongoing statutory obligations imposed on sellers, as well as a continued association with the particular asset or business from a public or media perspective.

To complicate matters, risks associated with environmental, social and governance (ESG) issues are now front of mind (or should be) for both sellers and purchasers in any mining and metals transaction. There is good reason for this. In its ESG Sector Risk Atlas (2019), S&P Global identified the metals and mining sector as the sector most susceptible to ESG risks.

Though sellers will continue to focus on a clean exit, there has been a noticeable shift towards achieving a balance between a “clean” and a “responsible” exit. While at first the two concepts may appear contradictory, they are by no means mutually exclusive.

A responsible exit involves the sale of an asset or business to a purchaser that will continue to operate the asset or business in a responsible manner and in accordance with international best practice. There are various ways in which sellers could seek to achieve this outcome while creating value for their business or asset.

First, sellers should ensure their assets or businesses are being operated responsibly at the time of exit. A vendor due diligence is a helpful tool to identify existing issues and what actions need to be taken to rectify these issues, or what disclosures need to be made to mitigate liability. Though a vendor due diligence is certainly not a new concept, ESG considerations are beginning to play a far more prominent role in these investigations.

Second, sellers should conduct their own due diligence on the purchaser to satisfy themselves that the purchaser does not have a history of conducting operations in an irresponsible manner. While due diligences on purchasers have traditionally been carried out to assess the financial health and ultimate ownership of a purchaser, extending this investigation to the purchaser’s mission statements, ESG policies, memberships of voluntary organisations and initiatives that promote international best practice as well as any negative media coverage, will assist sellers in gaining a better understanding of the purchaser’s position on ESG issues.

Third, sellers could consider potential structures and contractual protections that enable a responsible exit. For example, sellers could put in place policies, committees or agreements focused on responsible operations before exiting that would continue post-exit. Additionally, sellers could impose post-exit obligations on the purchaser under the transaction documentation in relation to operating standards, stakeholder commitments and end-of-life rehabilitation actions. A failure by the purchaser to comply with these obligations could result in financial penalties or call (buyback) options.

Careful consideration would, however, need to be given in relation to contractual obligations that involve an ongoing relationship with the purchaser or the operations and how this may affect the risk vs reward profile of the seller.

Lastly, active and continued engagement with all relevant stakeholders throughout the sale process is an essential tool in achieving a responsible as much as a clean exit. Confidentiality undertakings should be carefully crafted to ensure that key stakeholders such as the regulators, local communities and labour are not excluded from or blindsided by any sale process.

This article was written by Patrick Leyden and was first published on Business Day’s website on 16 March 2021.


For more information, please contact Patrick Leyden and Bertrand Montembault or your usual Herbert Smith Freehills contact:

Patrick Leyden
Patrick Leyden
Director, Johannesburg
+27 10 500 2625
Bertrand Montembault
Bertrand Montembault
Partner, Paris
+33 1 53 57 74 19

 

AFRICA M&A OUTLOOK 2021

The following brief discussing our M&A predictions in Africa in 2021 accompanies our latest global M&A report, M&A in 2021, which you can download here.

Covid and its consequences  

It is still too early to know the full impact of COVID-19 given the heterogeneity of the continent, the uncertainty surrounding the evolution of the pandemic and the effectiveness of the global response to mitigate its impact on the world’s economy.

While the continent appears to have been relatively spared from a health perspective compared to Europe or America, on the economic front the pandemic has halted the African momentum of recent years. Growth projections have been revised downward and FDI flows are forecast to decrease by up to 40%, potentially reaching their lowest level since 2005 according to the UN Conference on Trade and Development (UNCTAD). Initial lockdown measures unleashed a wave of force majeure declarations and several ongoing projects have either been suspended or slowed down. Although we have not seen a massive exodus of investments, the COVID-19 crisis has led many investors to postpone new investments or search for safer havens.

A closer analysis reveals that the crisis has not affected all sectors equally. The travel and tourism industries have been hit particularly hard which could prompt restructuring operations, whereas several IT and communications companies have prospered, coupled with an emerging and renewed interest in gold mining projects.

Overall, despite an initial decline in the number of M&A transactions compared to last year, we are starting to see more M&A notably in Africa’s oil and gas industry, as cash-rich companies look to leverage opportunities, while other companies look to improve their balance sheets.

Climate change and energy transition

With the energy transition high on investors’ agenda worldwide, the shift away from fossil fuels in terms of investment priorities has been felt across the continent as well. Following the 2016 Paris Agreement, more and more countries have been submitting ambitious nationally determined contributions (NDCs), targeting less pollution and a cleaner environment over the next few decades. The most recent submission was made by Angola in November 2020, where it has pledged to reduce its greenhouse gas emissions by up to 35% unconditionally by 2030, no mean feat for a country whose largest export (by some way) is oil and gas. Nigeria, another oil and gas giant, has targeted 30GW of power generation by 2030, 30% of which is expected to come from renewables.

In response to the shift away from fossil fuels by these countries, international financial bodies (such as the World Bank, the EIB and the AfDB) have prioritised the financing of renewable projects, with some pledging to halt all investment in fossil fuels going forwards. This change in direction is beginning to be replicated by the key industry players, including traditional upstream oil and gas companies, some of whom have begun to redeploy capital into more sustainable projects primarily as a means of diversifying their portfolio, but also in response to the direction that the industry is heading.

Start-ups leading the charge

For many years Africa has been touted as the world’s growth market especially for smaller, start-up business that are able to nimbly plug a gap in the market in a much more efficient way than any local or governmental authority would be able to organise. This trend has only continued to increase, and its impact during the last 12 months has been even more important, as various countries across Africa have been impacted by COVID restrictions which have changed the way in which individuals and businesses are able to operate.

Important investments in different sectors have ranged from mobile payment solutions and digital banking (allowing consumers to transfer money without a need to physically interact), impact investing, and increasing electrification and access to energy in more rural areas of Africa. Some recent deal announcements from 2020 include:

  • Chipper Cash’s (mobile-based, P2P payment services app) $30million fundraising which included an investment from Jeff Bezos
  • Stripe’s (San Francisco company that offers online payment solutions for businesses) acquisition of Nigerian start-up Paystack for $200m+ (similar profile)
  • The EU’s investment and partnership (through its Emergency Trust Fund for Africa) with the impact investing group Investisseurs & Partenaires to launch “I&P Acceleration in Sahel”, a program aimed at supporting the growth and development of 300+ start-ups and small businesses in the Sahel and Lake Chad Basin
  • Greenlight Planet (Chicago-based company that offers solar home systems in Kenya, Tanzania, Uganda and Nigeria) securing a funding of $90 million from several financial institutions, including the Commonwealth Development Corporation, the Netherlands Development Finance Corporation, Norfund and ARCH Emerging Markets Partners

ESG and compliance focus

Scrutiny over energy projects in Africa has increased due to several high profile disasters and controversies in recent years. This situation is challenging in countries with poor regulation where companies arguably have an even greater responsibility to implement ESG standards in their supply chains. Indeed, media coverage relating to human rights and ESG controversies will often influence investment policy decisions. ESG factors are being used to scrutinise mining and oil & gas companies as global efforts to promote sustainability and the energy transition are rising. According to the rating agency Fitch, natural resources companies are more likely to have their credit rating affected by ESG issues. Likewise, there has been a strong trend in divestments of coal-based projects, often seen as the ‘dirtiest’ of investments, as demonstrated by investors recently withdrawing from the Thabametsi coal-based power plant project in Limpopo South Africa and the Lamu Coal Plant in Kenya.

For some commentators, social issues dominate ESG initiatives as opposed to a focus on the “E”, and more specifically on climate change in European finance. This appears to be in response to immediate social needs such as poverty that investors have to address in emerging markets. Although greenwashing is a risk for African markets, these markets also represent a great opportunity to develop green infrastructure that does not yet exist.

African countries and companies are amongst the fastest-growing in the world with a big infrastructure development potential but, for many international investors, Africa still poses a risk. Moreover, Africa has not yet reached its full potential regarding the adoption of widespread ESG criteria in all sectors, notably in respect of the development of voluntary or mandatory measures to incorporate ESG factors into its various national legislation. However the importance of ESG is growing as investors seek businesses with long-term sustainable strategies. In Africa, ESG data, which focuses on transparency in an environment with a high degree of uncertainty and sometimes controversy, creates clarity for both foreign and local investors. Focusing on sustainability and meeting the ESG expectations of investors, local communities and customers could play both as safeguards against environmental, human rights and governance risks but also as a business strategy which could increase market valuation and return on capital.

Africans investing in Africa

The diversity of African businesses can sometimes be overlooked, despite the fact that Africa is home to 400+ fast-growing companies with a revenue of $1 billion+ (according to McKinsey) covering not just the resources sector, but also financial services, food and agri-processing, manufacturing, telecommunications, and retail.

With the collapse of FDI, the confidence of local investors in their own countries’ ability to recover has been a major boon for African countries. This confidence is born from both an intimate knowledge of their respective country and from a form of patriotic optimism.

While economists are anticipating Africa’s first recession since last century, home-grown entrepreneurs’ investing activity despite the crisis contrasts with the caution of their international counterparts. Some governments have realised the potential they represent and are implementing policies to promote national, regional or even continental champions, such as Morocco and Nigeria. This ambition is also reflected in recent legislation on local content that tends to support local businesses. The need for increased manufacturing and processing activities in Africa, as well as the recent African Continental Free Trade Area may help to reinforce this trend.

Decrease in foreign aid 

As a result of COVID’s disastrous effects on the economies of many developed countries worldwide, some countries have announced that they will be slashing their foreign aid budgets for 2021, with some notable examples being the UK decreasing its budget by around £4bn (effectively lowering it from 0.7% to 0.5% of GDP) and the EU reducing its foreign aid budget to €70.8bn (down from the forward-looking target of €79.2bn in 2018).

This is slightly counterbalanced by the increased spending on overseas COVID-relief aid that has taken place this year, with the EU for example (through its Emergency Trust Fund for Africa) committing a package of €110m to aid North Africa with its COVID relief response. This aid has been replicated around the world by other intergovernmental organisations, such as the African Development Fund.

The news is not all doom and gloom however. With increasing confidence coming off the back of encouraging vaccine news and planned rollouts, the outlook for 2021 is looking rosier and will hopefully turn out to be truer than the predictions for 2020.


For further information please contact any of the lawyers below, or your usual Herbert Smith Freehills contact:

Rudolph du Plessis
Rudolph du Plessis
Partner, Johannesburg
+27 10 500 2623
Rebecca Major
Rebecca Major
Partner, Paris
+33 1 53 57 78 31
Ross Lomax
Ross Lomax
Partner, Johannesburg
+27 10 500 2685
Monde Coto
Monde Coto
Senior Associate, Johannesburg
+27 10 500 2622
Firas Albani
Firas Albani
Associate, Paris
+33 1 53 57 78 55
François Adao
François Adao
Avocat, Paris
+33 1 53 57 13 54

 

CATALYST // EXPLORING OPPORTUNITIES – M&A l BACK BUT DIFFERENT

Rarely have events accelerated so rapidly or so radically as they have in the course of the Covid-19 pandemic. We 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. In this briefing we look at how M&A has changed in light of the pandemic and some of the issues that those looking to undertake M&A in the coming months should consider.

In this briefing we look at:

  • current M&A activity levels;
  • what has changed on M&A transactions because of the pandemic;
  • considerations for public M&A transactions;
  • some of the particular features of a distressed M&A transaction; and
  • the potential impact of foreign direct investment controls and merger control on transactions.

For further information on how we expect the pandemic to operate as a catalyst for change, please see our Catalyst hub, and our Exploring opportunities: Investments and Acquisitions guide which looks at some of the structures and issues for those looking to explore opportunities emerging from the crisis.

Continue reading

RESPONSIBLE INVESTMENT BROCHURE

Authors: Nila Wilde, Martin Kavanagh, Rebecca Major and Joanne Elson

For Africa-focused developers and sponsors in the renewable energy market, ESG is likely in the forefront of your minds and it is important to show knowledge of what is expected in the responsible investing market in order to ensure swift project development and to enhance bankability. This handy guide profiles the key factors relating to ESG which may impact your business. We hope that this guide provides you with a better understanding of the ESG expectations in the responsible investment market. We are keen to speak with you about your approach to ESG and how we can help you achieve your strategic goals in the Africa renewable energy space.

You can download the English/French version of the brochure below.

ENGLISH VERSION

FRENCH VERSION


For more information, please contact any of the lawyers below or your usual Herbert Smith Freehills contact:

Stephane Brabant
Stephane Brabant
Partner, Paris
+33 1 53 57 78 32
Antony Crockett
Antony Crockett
Of Counsel, Hong Kong
+852 210 14111
Oliver Elgie
Oliver Elgie
Senior Associate, London
+44 20 7466 6446
Joanne Elson
Joanne Elson
Senior Associate, London
+44 20 7466 2802
Martin Kavanagh
Martin Kavanagh
Partner, London
+44 20 7466 2062
Rebecca Major
Rebecca Major
Partner, Paris
+33 1 53 57 78 31
Elsa Savourey
Elsa Savourey
Avocat, Paris
+33 1 53 57 76 79

Nila Wilde
Nila Wilde
Avocat, Paris
+33 1 53 57 65 50