A Perfect Storm: negotiating African M&A deals in these times of COVID-19, low oil and gas prices, currency fluctuations, increased nationalism and increased focus on ESG

Author: Rebecca Major

In spite of the current economic and sanitary climate, we are seeing, and expect to continue to see, M&A deals in Africa, including in particular:

• deals already agreed before COVID-19/the drop in oil and gas prices;
• sellers looking to sell to raise money; and
• buyers with cash/available credit lines looking to leverage opportunities.

1. Investment Appetite
   Many management teams just don’t have the bandwidth at the moment to consider M&A deals. They are so busy managing day to day personnel, operational and funding issues. And they are concerned about what the future holds. They are not having business dinners, and are maybe not talking about future growth strategies  and investments in the way they would have been doing a few months ago. The climate is therefore not so ripe for M&A deals. However some have already committed to doing deals, some are looking to raise cash by selling assets and others are seeing this period as a time for opportunities.

2. Price
   There are considerable uncertainties at the moment around both valuation and funding. We think it is likely that we will see parties being more creative with pricing mechanisms in future deals, with both parties looking to mitigate their risks by using deferred consideration and earn out mechanisms.

3. Due diligence
   Some of the issues that are front of mind at the moment (in addition to the key problem of actually valuing an asset) include:

• Financial and business resilience: ability to weather the storm
• Identity and financial stability of key partners: joint venture partners, key contractors and subcontractors, lenders, governments; and
• Flexibility under underlying contracts and ability of either party to renegotiate or terminate or suspend certain contracts: financing arrangements, host government contracts, sale and purchase arrangements, supply arrangements, construction contracts, employment contracts;

Most buyers are keen to visit target companies before they buy. Whilst they can interview management teams from a distance, they want to get a full understanding of the business by visiting the offices, checking the books and seeing the relevant sites. This is particularly so in Africa. It is also hard for advisers (financial, technical, environmental, compliance) to produce comprehensive due diligence reports without doing the customary site visits. Without being able to fly to the relevant country, buyers are not ready to commit. We are seeing buyers doing preliminary due diligence but not prepared to move to the next stage until they can get their feet on the ground. Buyers are also keen to see the impact of COVID and the economic upheavals on the business of the target. Last year’s account may not be enough.

4. Other practical issues
   In the past couple of months we have come across a number of practical issues preventing us from closing deals in Africa, or making it more difficult.
   Registries are closed. A lot of registries are still maintained in physical format in Africa. It is therefore difficult in a number of countries to obtain a company search, or register a sale.
   Whilst most competition authorities, tax authorities, notaries and regulators in Africa have continued to work, the fact that many people are working from home or working reduced hours has slowed down the ability to get competition, tax or other regulatory approval for a sale. A number of African government authorities have shown considerable flexibility in the circumstances. However, this is not universally the case.
   It has become very difficult to get original documents and registers from one place to another given the lack of flights (and therefore couriers) and strict lock down in certain cities.

5. Foreign currency
   Some countries have found themselves short of foreign currency, particularly those countries that are dependent on exports of goods (for example Ethiopia) or oil and gas revenues (for example Nigeria and Angola). This means that African buyers have struggled to be able to obtain the foreign currency necessary to do deals. It has also meant that foreign investors are concerned about their investments becoming cash trapped in country. These issues have arisen on top of the already existing issues around the tightening of regulations in certain regions (for example the CEMAC region) in relation to the ability to maintain offshore bank accounts.

6. Partner risk
   Many foreign investments in Africa are through joint ventures with local partners and/or with other international investors either for legal reasons or for business reasons, or a combination of both. Many foreign companies are also dependent on local contractors and suppliers.COVID combined with the oil and gas crisis has not only made target companies and projects more fragile but has also made certain investors and contractors, particularly smaller investors and contractors, more fragile. In a company or project where the financial stability of each of the stakeholders is important (for example an entity requiring shareholder funding or dependent on shareholder services) this can be a real issue. Foreign investors are therefore being increasingly diligent both in relation to new investments and in relation to existing investments.

   These circumstances may provide opportunities for larger investors to acquire bigger stakes in companies and projects. However, it may also require them to acquire additional stakes to protect their investments from the financial difficulties of their partners rather than because they wanted a larger stake. Where local partners or contractors have financial difficulties, international investors may prefer to support them financially rather than buy them out, because it makes legal or business sense to do so.

7. More national sentimentAs African countries are feeling economically more fragile, some will become more protectionist in terms of foreign investments (increasing tax rates etc). However, this is not universally the case and a number of countries have realised that they need the support of others either regionally or internationally. We have seen some African countries introducing measures to make the position of foreign investors easier (for example the oil sector in Equatorial Guinea).

8. Employee issuesIn countries where there is no government support for “furloughed” employees, closing businesses can be an extremely sensitive issue. Even if foreign investors look after their employees, the knock on effects on a community (sub-contractors and other service providers) can be enormous. This is the case for example with some African mines that have been put on care and maintenance. Such issues may make governments very open to solutions, or conversely very hostile to the relevant international investors (or perhaps a combination of these). Potential buyers and sellers need to be aware of these issues with governments, employees and communities and consider the allocation of risks in this respect.

9. ESG (Environmental, Social and Governance) issues: prior to COVID-19, this was one of the key point in the minds of many companies and should not be forgotten. It is still there and even more important. Sellers looking for a clean exit, or buyers looking to avoid having to take on past issues, should negotiate pre and post-closing indemnities carefully on this basis.