While the same old story of political volatility continues to pervade in Africa, a bullish M&A market and renewed optimism driven by a pan-Africa trade agreement makes the continent hard to ignore for law firms.
For Herbert Smith Freehills (HSF), an ongoing commitment to Africa has played an important role in galvanising its place among global firms. London and Paris offices have targeted the continent for decades, while the launch of a Johannesburg office in 2015 took its ambitions a step further. Nina Bowyer, the Paris-based co-head of HSF’s Africa group is very much alive to the challenges: ‘Obviously, Covid has crippled a number of economies across the world and Africa is no exception. Finding the necessary resources to tackle some of the challenges will continue to be difficult.
‘We have seen a disturbing number of coups and attempted coups across Africa, so when international investors are weighing up where to invest, concerns regarding political instability can play out in certain jurisdictions,’ asserts Bowyer.
Chris Taylor, Addleshaw Goddard’s London-based head of UK M&A and Africa, notes the opportunities and pitfalls of the Ethiopia market. ‘The government in Ethiopia has been pursuing a program of privatization of state-owned assets, which in and of itself has driven a lot of corporate activity. Big Blue-Chip companies from Europe and the United States are looking at getting a foothold in that territory. The reasons for this are obvious to a certain extent: a huge population, a real drive for middle class trappings of wealth, and those sorts of indicative behaviour in those countries. ‘But of course, Ethiopia unfortunately, recently has had some civil unrest which has slowed down investments in that particular territory.’
Joana Andrade Correia, partner and co-head of Raposo Bernardo’s corporate and M&A department, notes: ‘The most important challenge is always the economic challenge. At the beginning and at the end it will always be about economy.’
M&A opportunities
Whatever the clear misgivings of lawyers specialising in Africa, there are pockets of opportunity across the region that are hard to ignore, and firms like HSF have been reaping benefits too, particularly in an uptick in M&A activity.
Says Bowyer: ‘Last year we advised on 990 matters across Africa, and that’s a Covid year, so that gives you an idea of the scale of the practice. And corporate over the last year accounted for about 40% of that revenue.’
Indeed, HSF is not alone as an international firm seeing potential reward in the region. Hogan Lovells hired M&A partner Chris Green in Johannesburg from Pinsent Masons in November 2021, while other international practices continue to focus on incoming investment from afar. Says Addleshaws’ Taylor: ‘We are really committed to the region, whilst we don’t actually have any offices in Africa, that’s a purposeful decision because what we want to do is to assist and work with the very best local firms.’
Despite being particularly severely hit by the effects of the coronavirus pandemic, healthy levels of M&A activity in South Africa are a reason to be cheerful. As HSF’s Johannesburg-based corporate partner Huneiza Goolam is upbeat: ‘South Africa had a booming M&A year last year, we had about 430 M&A transactions that took place. I think that the companies here are quite undervalued, so they are very attractive for foreign buyers. Of those 430 about 70 of those deals were in fact by foreign buyers.’
But now for a reality check: this is not a sweeping trend. As Bowyer notes: ‘Although we are having a bumper year in our practice, it is very much tailored around specific sectors, where people see potential.’
‘Covid has crippled a number of economies across the world and Africa is no exception. Finding the necessary resources to tackle some of the challenges will continue to be difficult.’ Nina Bowyer, Herbert Smith Freehills
Meanwhile, Taylor has seen a resurgence in popularity of an old favourite. ‘For a long time, oil and gas was very much king, and interestingly, that has come back a little bit because a sudden ramp-up of energy prices has made those sorts of investments incredibly attractive.’
Indeed, one of the factors attributed to a retrenchment of the ‘Africa rising’ narrative is the volatility of commodity prices and their inseparability from certain jurisdictions’ economic success. ‘Nigeria’s economy is so tied to its extractive industries that as soon as the price of crude fell, you almost saw overnight the impact that had on the economy, its corporate activity particularly,’ says Taylor.
Not only are oil prices rising, but there is growing demand for commodities driven – somewhat counterintuitively – by investors’ desire for cleaner energy assets. Africa is no exception to this market trend as climate change and awareness around social responsibility bring to the fore environmental social and governance (ESG) imperatives.
Bowyer explains: ‘We have seen a marked uptick in interest and competitive tension for certain key minerals to which Africa is home. Effectively to fuel this energy transition, we need certain types of minerals to support the new technologies such as cobalt, lithium and copper. So we see, as part of this global energy transition, this scramble for the future minerals that are needed to support that sector and that is creating a very buoyant environment which we suspect will continue to provide further M&A opportunities this year and in years to come.’
Meanwhile Taylor notes that the realities of doing business in Africa have caused investors to change tack. ‘A few years ago, large US private equity houses created huge Africa focused funds. Substantial amounts of money were put aside to make investments in Africa and the problem they ran into was, whereas in the rest of the world they can deploy hundreds of millions of dollars on a single investment, it’s much harder in Africa because the businesses aren’t at the same scale. What we have then seen is that the profile of private equity investments in Africa has changed from those mega funds into smaller and more nimble mid-market funds,’ says Taylor.
A different kind of energy
It is fair to say that the energy transition is driving transactions in its own right. ‘A number of clients, oil and gas companies, are looking at their portfolios and looking at how they can reduce their footprint. So, there are a number of divestments occurring across the continent. We have seen some large transactions in Nigeria, but we are seeing transactions spread across Africa, Sub-Saharan Africa and North Africa. Africa has amongst the lowest electrification rates in the world, so there is this very keen drive to solve both energy access and creating cleaner energy,’ says Bowyer.
And with both fossil fuel and renewable markets proving a draw to investors, there is a potential playoff between the critical and immediate need for power and infrastructure across the region and the push for clean energy. But Raposo Bernardo’s Andrade Correia insists the interests are compatible: ‘The truth is that these goals can be achieved simultaneously. We saw that happening and were strongly and positively impressed by it,’ she says.
Morais Leitão managing partner, Tiago Arouca Mendes, says: ‘Mozambique already has one of the largest renewable energy generation projects in Africa (Cahora Bassa Hydro Power), and in recent years we have seen the development of multiple photovoltaic plants such as Metoro, Mocuba and Cuamba, which are under construction. There are many other projects already announced in the pipeline, such as the construction of the Mphanda Nkuwa dam. Other projects will follow.’
Addleshaws’ Taylor echoes this sentiment: ‘It will be fascinating to see how the deployment of money works as you’ve got attractive returns from oil and gas and renewables coming to the fore again, but my suspicion is that the journey towards a much, much more carbon neutral, carbon zero environment is going to be inevitable, so I just think we’re going to see more and more of that.’
TMT has also endured as a destination for investors, in line with inevitable global demand, with telecoms a source of prominent deals in the region. Says Goolam: ‘I worked on the IHS transaction where they bought towers by way of an auction process from MTN, a large telecoms operator here. The transaction value was about ZAR6.4bn. It was hotly contested as there were about 22 bidders that showed interest. TMT remains an active sector in South Africa, and on the rest of the continent as well. A number of the other mobile network operators are gearing themselves up for further activity, with Vodacom, for example, in the process of splitting their towers into a separate vehicle.
‘It will be fascinating to see how the deployment of money works as you’ve got attractive returns from oil and gas and renewables coming to the fore again.’
Chris Taylor, Addleshaw Goddard
‘Telecoms is such a dynamic sector whether it is relating to towers or fibre. For example, Vodacom has made a big investment in CIVH (Community Investment Ventures Holdings), which is very heavy into fibre as well,’ adds Goolam.
Andrade Correia notes: ‘I foresee a whole lot of opportunities in another level of development – the massive digitalization and development of technologies. At this level many efforts have been made, but there is still a long road ahead. I believe this will be the source of many legal work opportunities.’
The fintech sector has also continued to develop apace, according to many market commentators, with a host of investment opportunities in start-ups and joint ventures to play for.
Says Taylor: ‘Africa is to a certain extent much further developed in terms of its mobile wallet capabilities. There was a product called M-Pesa, which was the mobile wallet in Kenya and has been replicated across a whole host of jurisdictions. Micro finance lending, so very small elements of borrowings for businesses and individuals, is an increasing focus.’
Despite the inevitable economic and supply chain-driven delays and suspensions of development projects wrought by Covid, firms remain undeterred from this focus. ‘There is still a lot to accomplish regarding infrastructures, public facilities, such as roads, bridges, airports, railways, dams, renewable energy facilities, hospitals, universities and an immense array of public infrastructures that shall contribute to the development and wellbeing of the people. All these projects generate major mandates of legal work particularly in sectors such as transportation, infrastructure, health and energy,’ insists Andrade Correia.
Indeed, firms continue to tool up, with Pinsent Masons earlier this year hiring partner Edward James from South Africa-headquartered ENSafrica to its corporate crime and investigations bench to work predominantly in global energy and infrastructure sectors. Also in January, Bowmans hired Allen Leuta as a project finance partner from the International Finance Corporation, the multinational that promotes investment into developing regions.
Taylor asserts: ‘We continue to be incredibly active this year and for us it will be a record year for work in Africa, by some distance as well. Not all of that is just a reflection of the strength of the continent – it’s as much about investments that we’ve made in our teams – so that’s no surprise that turnover has shot up. We have brought in a number of partners (particularly in the oil, gas and energy sectors) who will focus the majority of their time on Africa. Over the last year we have assisted clients with investments across numerous African countries. We have seen increasing investments back into Nigeria and have also handled investments into Angola, Egypt, Mozambique and Kenya, and have seen a lot of work related to Uganda.’
While many commentators speak in earnest on the ever-popular subject of ESG, the extent to which these concerns genuinely feature on the Africa agenda should probably be viewed with healthy scepticism. Nevertheless, it is a consideration cited by every partner interviewed for this piece.
‘ESG is definitely a big trend. If it has not already, it will be driving transactions in the future, not only just from a risk perspective but also in terms of value creation,’ says Safiyya Patel, transactional partner at Webber Wentzel in Johannesburg.
‘ESG is definitely a big trend. If it has not already, it will be driving transactions in the future, not only just from a risk perspective but also in terms of value creation.’ Safiyya Patel, Webber Wentzel
Andrade Correia agrees: ‘Companies have become even more aware that environment, social and governance subject matters are essential for their development and for the success of their operations. Therefore, despite the difficulties created by Covid, they have launched intense compliance programmes and have implemented good practices regarding ESG requirements and criteria. ESG requirements will have a strong penetration in the African countries with higher sustainability indexes, being already a strong concern of many companies operating in those markets. This past year this has been one of the main growth vectors of legal work.’
Arouca Mendes observes: ‘ESG policies are increasingly present in the daily life of Mozambican law firms and are becoming a priority in their management, as well as in the services provided to the client. However, the tendency has been to work the three areas separately and not structured as the acronym indicates. But this does not represent an absence of ESG policies, because they exist and are very well implemented, for example, in the mining and oil and gas energy transition, net zero emissions, recycled water, distribution of rights, child labour and slave work. Clearly, the area that needs the most development is the social area, and that is a priority to us.’
To trade or not to trade?
While efforts to create free trade regions have notoriously proved largely unsuccessful, the African Continental Free Trade Area (AfCFTA) came into force on 1 January 2021 and is touted as having huge potential for Africa’s place in global trade.
There is certainly a sense of renewed optimism. Bowyer comments: ‘There is a long-recognised anomaly that is the lack of intra-African trade, when you compare it, for example, to how much trade there is within the EU. Although a lot of the regulations still need to be implemented, the aim is to remove barriers to cross border trade across Africa such as tariffs and customs.
‘It’s not just about having the right regulations in place to support pan-African trade, it is also about addressing some of the practical issues on the ground. There is a huge infrastructure gap which will need to be addressed if we are really going to be able to achieve pan-Africa trade, which is really on the critical agenda,’ Bowyer adds.
Meanwhile Taylor is alive to the benefits and downsides. ‘Without addressing exchange control restrictions you’re only dealing with one side of the coin. I can understand for some of these more junior economies in Africa, the need to stabilize their economies by using some form of exchange control, so that, for example, dollars don’t flood into the market. But at the same time, I can’t help but feel that actually the strictures of some of these exchange control rules are really quite damaging for business.’
Bowyer concludes on a more bullish note: ‘There is a hope that it will help drive further interest from international investors into Africa because they can look further down the path at a more pan-African play.’ LB