‘There is no African law firm that does infrastructure the way we do; it’s front and centre of our strategy. There is a real gap in the market for a sector-based law firm.’
This bold statement comes from Richard Laudy, head of infrastructure at the latest foreign entrant into the increasingly popular South African market, Pinsent Masons. The national UK firm announced in July that it would be opening formally in Johannesburg in early 2017 with an office staffed by 20 lawyers and seven partners, including two partners taken from local heavyweight, Bowman Gilfillan, including head of construction Rob Morson and disputes partner Shane Voigt.
‘The challenge for law firms is: how do you lawyer the continent?’ asks Laudy. ‘The way to do it is through hubs. We will be leading with our infrastructure offering, but we also see great potential in our energy and technology sectors. The demand for power in the region, especially in South Africa, is absolutely colossal and technology increasingly works hand in glove with infrastructure and energy.’
But while the strategic horizon across Africa may look tempting, these are not markets for short-term gain. In many African countries, economic stagnation has taken hold. According to the World Bank’s latest report, the continent achieved aggregate annual GDP growth of 5.4% between 2000 and 2010, equivalent to $78bn a year. However, that slowed to 3.3% a year between 2010 and 2015, while sub-Saharan Africa will decelerate to just 1.4% this year, the slowest for two decades, according to the International Monetary Fund (IMF).
This slowdown reflects the tough economic conditions that prevail in the largest economies and commodity exporters – Angola, Nigeria, and South Africa – as they recalibrate in the wake of lower energy and commodity prices and tighter financing conditions. Angola and Nigeria, in particular, have had painful renegotiation of their debts with China.
‘As a whole, Africa is a critical medium-to-long-term play for global businesses and for law firms. But if you’re not there now showing commitment, you will struggle when things really take off,’ claims Andrew Skipper, head of Hogan Lovells’ Africa practice.
But Africa is much more than just a continent. It comprises 54 different jurisdictions, each with its own dynamics. Although South Africa and Angola have not grown at all in 2016 and Nigeria is in recession, non-resource dependent countries (such as Kenya, Uganda and Tanzania) – aided by falling oil prices and cheaper imports – will grow at 5.6%, suggests the IMF. A clear dividing line therefore exists between two types of jurisdiction: resource and non-resource dependent.
The long haul
Making a success of an Africa practice requires long-term commitment, local understanding and a developed expertise. ‘Over the years, we have worked in every one of the jurisdictions, 54 – or 55 if you count South Sudan – both on contentious work and on the finance and corporate side,’ says Craig Tevendale, head of international arbitration at Herbert Smith Freehills (HSF) in London. ‘Many projects have been mothballed; some have stalled at the financing stage, others have hit the buffers during the early stages. That has a chilling effect on further positive investment, because the case becomes rather more difficult to sell.’
‘Clients said: “We just want the work done. It doesn’t matter if you do it out of Johannesburg, London or Lagos.”’
Christo Els, Webber Wentzel
Despite these challenges, Tevendale points to a 30% year-on-year increase in the firm’s Africa revenues. This may be largely due to HSF opening a Johannesburg office in 2015 with 22 lawyers, becoming one of the most recent in a cluster of international firms that have taken a similar approach: plant the flag in South Africa as a regional hub to benefit from long-term sub-Saharan growth.
In 2011, Norton Rose Fulbright (NRF) merged with South African firm Deneys Reitz, while Hogan Lovells used a similar tactic in 2014 to combine with Routledge Modise. Allen & Overy (A&O) opened in Johannesburg initially by taking a six-lawyer team from Bowmans; Dentons opened in Cape Town in 2014 by joining with local energy firm KapdiTwala, and opened in Johannesburg in 2015; while DLA Piper terminated its alliance with indigenous firm Cliffe Dekker Hofmeyr to establish its own Johannesburg presence in 2015.
To supplement their regional offering HSF, Hogan Lovells and DLA have all recently hired prominent partners from leading South African firm Webber Wentzel (which has been in alliance with Linklaters since 2013): energy specialist Brigette Baillie and mining expert Peter Leon joined HSF; competition partners Nkonzo Hlatshwayo and Lesley Morphet joined Hogan Lovells; while heavyweight corporate partner Johannes Gouws was appointed DLA’s South African managing partner, arriving at the same time as fellow corporate partner Peter Bradshaw.
Christo Els, senior partner of Webber Wentzel, says: ‘We test our strategy against the those of some of our South African competitors who have opted for opening local offices in a number of African countries, as well as the international firms that have opened up in Johannesburg. It is not always clear to me whether all of these local offices make sense, and you wonder how sustainable some of them are in the long term. It will be interesting to see in three years’ time who is still there and what they are doing.’
In addition to its Linklaters tie-up, Webber Wentzel has an independent network of African firms, with 12 members across sub-Saharan Africa. According to Els: ‘Before we did it, we asked clients: “Do you want us to have an office there?” Across the board, they said: “We just want the work done efficiently. In the end, it doesn’t matter to us if you do it out of Johannesburg, London or Lagos.”‘
A transactional lull: commodities dip equals a muted African M&A market
Africa’s resource-led downturn has left the M&A market subdued. IPOs are also thin on the ground – although Freshfields Bruckhaus Deringer advised the Cleopatra Hospital Company (Egypt’s largest private hospital group) on its Egyptian Exchange IPO for an initial market cap of $162m. Slaughter and May was also active in healthcare, advising Johannesburg Stock Exchange-listed Mediclinic International on its combination with Al Noor Hospitals Group. This created an international private healthcare group operating in the United Arab Emirates, southern Africa and Switzerland.
Despite the slowdown, there has been continued project-led activity, not least in power and energy. In Egypt, White & Case advised Tahrir Petrochemical on the development and financing of a $5bn petrochemical complex, including proposed financing from US Export-Import Bank, the Export–Import Bank of Korea, the Korea Trade Insurance Corporation and the Italian export credit agency, SACE. In Uganda, Allen & Overy (A&O) advised SN Power, the Norwegian hydropower company, which acquired a stake in the Bujagali 250MW hydropower project from SG Bujagali Holdings, a Mauritian subsidiary of Blackstone, which was advised by Kirkland & Ellis. Meanwhile Clifford Chance (CC) advised 15 lenders on financing Nigeria’s first fully privately financed independent power plant, which will come on-stream in 2017: the first phase of what will become a 1,500MW power plant.
Meanwhile, alliance partners Linklaters and Webber Wentzel advised the sponsors on the Horn of Africa pipeline project – an offshore mooring facility in Djibouti, together with a 550km refined product pipeline from the port in Djibouti across the border into Ethiopia. Again in east Africa, CC advised CDC Group, the UK’s development finance institution, on a primary equity subscription of $140m in ARM Cement in what was the largest announced equity investment transaction in the region this year.
Despite precipitous price drops, oil and especially gas projects are still attracting strategic investment. White & Case represented the lenders on the proposed multibillion-dollar project financing for the development of a LNG facility in Mozambique, one of two major LNG projects under development in the country in what will be the first of its kind on Africa’s east coast. Dentons is advising the Mozambique government in the negotiation and development of the onshore LNG project, scheduled to come on-stream in 2018.
DLA Piper has been particularly active in energy matters and advised Oando, Nigeria’s largest local energy group and dual-listed on the Nigerian and Johannesburg stock exchanges, on a $210m recapitalisation and partial divestment of its downstream operations. DLA also advised HSBC France and Standard Chartered (as lenders) on their $500m letter of credit to Ghana’s state oil company, Ghana National Petroleum Corporation (GNPC). This will support GNPC’s role in the development of Ghana’s Sankofa Gas Project.
A&O advised APM Terminals on a 30-year concession (worth €758m) for a container terminal within the Tangier Med 2 port complex. Also in Morocco, Baker & McKenzie advised SNI as joint venture partner on the $4bn merger of Lafarge Ciments and Holcim Maroc. This created LafargeHolcim Maroc, which has the largest market capitalisation of any local industrial company.
Elsewhere, Herbert Smith Freehills (HSF) has advised on a broad range of deals: CFAO on its agreement with French investment company Wendel, advised by CC, and private equity investors to develop an investment in SGI Africa, a pan-African property company to build and lease retail shopping centres; IHS Holding on its acquisition of Helios Towers Nigeria (more than 1,200 telecoms tower sites) from HTN Towers – claimed to be the first mobile infrastructure consolidation in Africa; and Brazilian energy company Vitol on the financing of its $7bn oil and gas project in Ghana with Eni supplying gas for power generation – the largest single foreign direct investment project since Ghana’s independence.
Alongside Canadian firm Osler, Hoskin & Harcourt as lead adviser, HSF, together with King & Wood Mallesons and Covington & Burling, also advised China Molybdenum on the acquisition of Freeport’s indirect 56% interest in the Tenke Fungurume copper-cobalt mine in the Democratic Republic of the Congo for $2.65bn – one of the year’s largest mining deals.
As one of the largest long-term players in the region, White & Case has run a Johannesburg office since 1995 and in June opened in Cairo through an association with new Egyptian law firm MHR & Partners. The most recent LLP accounts for Europe, Middle East and Africa show that the firm’s Johannesburg office income was £4.2m in 2015, up from £1.9m in 2014: a year-on-year increase of 121%.
Mukund Dhar, a local energy and infrastructure partner at White & Case, says: ‘The most obvious impact [of falling energy prices] has been a slowdown in upstream activity and in the launch of significant new projects. There is certainly pain for many participants.’ However, he adds: ‘We should draw a distinction between the energy or natural resource-dependent economies, where there is much turmoil, and non-resource dependent countries like Kenya, to an extent Tanzania, and some francophone jurisdictions like Senegal, where a lot of other business is happening and significant growth is expected.’
White & Case is representing the Brazilian mining company, Vale, on the development and financing of the Nacala corridor rail and port project in Mozambique and Malawi. Andrew Jones, head of the Africa group at Linklaters, has been advising the African Development Bank, the International Finance Corporation and a syndicate of export credit agencies on the $5bn financing for this project, the biggest infrastructure deal on the continent. ‘It works because coal is a dollarised commodity, so the whole thing is a dollarised infrastructure project,’ says Jones. ‘But overall, there’s an acute shortage of dollars in many African countries – a real structural constraint on infrastructure development. Perhaps the biggest challenge to African development is the currency issue.’
Els adds: ‘There’s a reason the returns you can get in Africa are higher than elsewhere: corporates that are willing to go in for the high returns know these challenges exist, they try and structure around them.’
Meanwhile Christophe von Krause, a Paris-based partner in White & Case’s international arbitration group, identifies a significant increase in disputes work: ‘Arbitration is a common feature to francophone, anglophone and lusophone Africa, so it has impacted every region.’ In representing foreign investors and state entities, he identifies the fall in commodity prices, together with a shortage of US dollars, as catalysts for disputes in oil-and-gas-dependent economies. ‘Infrastructure and oil and gas or construction projects are often financed by the state and their budget is dependent on their oil and gas production. So if there is a fall in prices, it affects their ability to carry on.’
With the development of African courts and arbitral institutions, disputes work has developed to become a cornerstone of many global firms’ Africa practices. ‘The volume of arbitration is increasing dramatically,’ says Robert Gaitskell QC of Keating Chambers, who has been involved in African arbitrations for nearly 30 years. In addition to White & Case, which he sees ‘absolutely everywhere’, he identifies Freshfields Bruckhaus Deringer, Shearman & Sterling, Clifford Chance (CC) and Latham & Watkins as being particularly active.
‘Pressures on traditional sources of finance are opening up opportunities for alternative lenders. We are seeing increasing activity in this space in Africa from debt funds.’
Kem Ihenacho, Latham & Watkins
‘Because China has stopped buying huge volumes of minerals as it did previously, that has had a dramatic effect on commodity prices, which feeds into disputes. Premature termination is a factor: projects that were previously viable suddenly became unviable and got cancelled. Others didn’t get cancelled, but the parties were making considerably less profit or there were delays, so they look for people to blame.’ This, he adds, includes infrastructure and power projects.
Dr Livingstone, I presume?
Johannesburg has not been the only African centre attracting international attention of late. Morocco has seen several firms entering the market with the role of regional hub for north Africa centred on Casablanca. Both A&O, which hired a team from Gide Loyrette Nouel, and NRF opened there in 2011, as did CC in 2012. In 2015, these firms were joined by DLA. All have deployed strong project finance teams as a launch pad into North Africa.
‘The point of entry to the continent used to be just South Africa,’ says Mehdi Bennani, founder of local firm Bennani & Associés. ‘This approach has changed. North Africa is an alternative.’ He points to the Emirates Telecoms (Etisalat) acquisition of Vivendi’s stake in Maroc Telecom in 2014 for €4.5bn. Freshfields advised Etisalat alongside Bennani. ‘This demonstrated Morocco being used as a bridge to Africa. Ventures start out in Morocco and the goal is to reach out to several other countries in Africa.’
But Charles Morrison, trade and project finance partner at DLA, is cautious about overplaying his firm’s recent ventures into Africa, even though DLA’s Africa group already has 15 local member firms: ‘Our Casablanca office has a strong connection to Paris, which helps to oversee its development; in Johannesburg, we are building a good team. We have our first partners in the finance and project group who are already active working for banks and doing deals. But it’s early days and I wouldn’t want to paint it any other way.’
Morrison confirms that some large upstream disposals are still going on – particularly in Mozambique, Tanzania, Ghana and Angola – and he is enthusiastic about gas projects: ‘Whether it is east, west, south or north, there is gas everywhere and there are lawyers involved in developing those gas resources.’
In the east, Kenya has emerged as an attractive destination for international firms, particularly with the 2013 launch and subsequent development of the Nairobi Centre for International Arbitration, potentially making Kenya a credible forum for the settlement of disputes in the region. In July, NRF announced an alliance with nine-partner Kenyan law firm Walker Kontos.
Meanwhile in the west, Nigeria remains the key focus for many firms – even those without an on-the-ground presence in Africa – its 190 million people make up 18% of the continent’s total. At Winston & Strawn, London partner Zoë Ashcroft says: ‘We work on transactions across sub-Saharan Africa, but our concentration is on Nigeria, in large part because it is such an important economy within the continent.’
She highlights Seplat Petroleum’s IPO and dual listing on both the London Stock Exchange (LSE) and the Nigerian Stock Exchange (NSE) in 2014 – the first of its kind – on which she advised. There are now nine Nigerian companies quoted on the LSE: six oil and gas explorers and three Nigerian banks. However, it is notable that there have been no listings on the LSE this year, nor have there been any IPOs on the NSE (see box, ‘A transactional lull’, above).
‘The international banks have been more cautious in closing transactions. They’re still doing them, but it can take a little bit longer,’ she says. The gap created by an absence of conventional financing creates opportunities for alternative sources of funding, most especially private equity. Most active among the PE houses in Nigeria are Helios, Kohlberg Kravis Roberts & Co (KKR), Carlyle, and TPG Capital.
Kem Ihenacho, co-head of Latham’s Africa practice, says that PE work has been extremely busy: ‘Despite the obvious challenges with the economy, there is still significant interest in Nigeria from investors. We have signed a number of Nigerian deals this year across various sectors and remain very active on live transactions in that market in particular, as well as in the other large African economies.’
‘There’s an acute shortage of dollars in many African countries. The biggest challenge to African development is currency.’
Andrew Jones, Linklaters
He continues: ‘As we have seen in other markets, short and long-term pressures on traditional sources of finance are opening up opportunities for alternative lenders. We are seeing increasing activity in this space in Africa from debt funds and the like.’
Caribbean-based Harneys handles an increasing share of Africa-related work with an offshore component, with partner Greg Boyd advising development finance institutions. He says: ‘In Nigeria, because of the oil price drop, in debt finance the ability to service foreign currency debt is extremely difficult. A lot of their infrastructure projects are now being done through equity finance.’
Harneys head of Africa Patrick Colegrave adds: ‘Equity funds are currently having a tough time, partly because of liquidity issues and a cyclical downturn, whereas commodity trade finance funds are doing okay because they plug a financing gap left by the banks. So we have seen some fund formation and investor flows coming into that space.’
Elsewhere in lusophone Africa – Angola, Mozambique, Guinea-Bissau, Equatorial Guinea, Cape Verde, and São Tomé and Príncipe – Portuguese firms continue to be prominent alongside large international players. ‘Africa is the reason this firm exists,’ says Diogo Xavier da Cunha, chair of Miranda & Associados, which is set to announce a new addition to the firm’s alliance, in the Ivory Coast, adding to its spread of west African jurisdictions. ‘2016 saw disinvestment in Africa by several international companies, mainly oil and gas related, especially service providers,’ he says. ‘Mining has also suffered in Mozambique and Angola. The upshot, he adds, has been a big pressure on fees: ‘Oil industry clients have requested rate reductions. Recently, that has stabilised, but we very much regard this as being the new normal.’
Rui Amendoeira, partner at Portuguese rival Vieira de Almeida, adds: ‘For us, the most important jurisdiction by far is Angola. Some of the work has just disappeared – fewer transactions, fewer companies buying assets, fewer farm-ins or farm-outs, virtually no tenders for new licences. That work is significantly reduced or gone completely. But while you lose certain types of work, you gain other types that are needed exactly because the oil price is low. We’ve also seen a significant increase in litigation against the government – tax litigation mostly – because the government is increasing its efforts to collect taxes from corporates.’
At Raposo Bernardo, which operates in Angola, Cape Verde, Mozambique, Guinea-Bissau and São Tomé, managing partner Nelson Raposo Bernardo says: ‘It has been a very active year for the renegotiation of debts, not only in Angola but also in Mozambique. With delays in project payments, both governments are allowing the renegotiation of large contracts. Deadlines have typically been extended by between two to five years, which in some ways means that governments understand that these difficulties are transient.’
Risk and reward
Commodity prices may fluctuate, but three perennial challenges for law firms remain in much of Africa, the three Cs: currency, corruption and certainty. ‘The oil price crash has made it difficult to obtain dollars in key markets like Nigeria and Angola, so doing international business without an international currency remains a short-term challenge in such markets,’ says Skipper. ‘Corruption is difficult to deal with, it remains a persistent challenge in many countries and global business and companies need to be very careful and ensure thorough due diligence is performed when investing on the continent.
‘Consistency and certainty – whether you call it the rule of law, reliability of approach, or simply knowing how much you are going to be fined if you get something wrong, or if the government is going to pull out of contracts – all these things still make it quite difficult to do business with certainty how ruling authorities will react in regulatory and relationship terms, and acts to affect confidence in long-term investment.’
Jones adds: ‘Our job is to structure deals in a way that addresses and mitigates the three Cs, and to help clients mitigate country risk in terms of having the right sorts of funding arrangements and political risk mitigation structures.’
But in a continent with many opportunities for high potential returns, perhaps the biggest risk facing law firms building a practice in Africa is not being there at all. LB