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Posted on Thursday, 11 October 2012 16:11

How corporates benefit from Africa's new business deals

There are greater opportunies for Africa to help finance the growth of international firms/Photo©AKINTUNDE AKINLEYE/REUTERSWhen African telecom companies started to emerge in the late 1990s, many scoffed. How could it be, went the general chatter, that Africans have money to spend on telecoms? Several multi-millionaires later, after the historic sale of Mo Ibrahim's Celtel for $3.4bn and the rise of South African giant MTN, investors piled in.

 

The last 24 months have seen an escalation of the talking-up of Africa from investment banks, such as JP Morgan and Renaissance capital, and global consultancies like Pricewaterhouse-Coopers and Ernst & Young. But currently, opportunities in Africa far outstrip the players.

"There is a relatively low level of competition in Africa, both as an investor and [as] a company" says Simon Harford, co-head of Africa at Actis, a private equity firm that has invested $1.5bn on the continent.

The investment equation is changing quickly. Thirty years ago, there were 100 million people in African cities, of whom only 30 million were earning more than $7 a day. "So it was a non-market," says Luc Rigouzzo, president of Amethis Finance. "We're shifting from that to a continent which in 20 years is going to be two billion people, with at least 1.2 billion of them in the cities. And of these 1.2 billion, 300 million will be capable of buying something, earning over $20 per day, which is more or less a $2trn market per year."

The MTNs, Glos, Safaricoms and other African telecom companies that now bestride the continent benefited from a lack of competition. Can African manufacturing, retail, agribusiness and other companies develop before the competition from abroad arrives to snap up this $2trn-per-year market?

If this is to happen, African banks will have to be at the forefront of helping firms upgrade and expand their operations. Governments would also need to push for a new partnership between banks and industry, a new deal for Africa's development.

Our exclusive ranking of Africa's top 200 banks, compiled in conjunction with sister publication Jeune Afrique, shows a picture of growth becalmed by the global downturn finally catching up with Africa in 2011 and the slide of African currencies against the dollar. South African banks in particular have been hard hit, while still making up just under half of the continent's assets. But the figures also show a fast-emerging pool of capital in Africa.

MISSED OPPORTUNITIES

Certainly, as Rigouzzo explains, banks in the United States and Europe are not yet seeing the opportunities: "Let's say you are a serious banker at a Western bank, and I am proposing a loan in Madagascar. Because you are a very serious banker, you look at the tables and your committee will tell you that you have a perspective of 70% of non-performing loans and final losses of 60%. So you should lend to me with a spread that allows you to cover over eight years the 60% of final losses. Where this number comes from, nobody knows! And no one can afford those interest rates."

In Europe, we consider leverage to be a serious illness, we consider private equity to be something detrimental to the wellbeing of society

For all the opprobrium heaped on bankers in the West, African banks are crying out for some of their tools. "In Europe, we consider leverage to be a serious illness, we consider private equity to be something detrimental to the wellbeing of society," says Lionel Zinsou, CEO of PAI Partners. Apart from the South African banks, few African financial institutions can use financial leverage on an acquisition and so have to use equity finance. "So we are exactly in the reverse situation, where in Africa we see that underdevelopment of the financial industry is a constraint for the life, succession planning, development and so on, of a mid-sized company," explains Zinsou.

The same might be said for the lack of secondary market for trading housing finance securities in Ghana. The collapse of Fannie Mae may have stopped debate on securitisation in Africa, but there is an argument that a well-regulated Fannie Mae-style housing finance institution could greatly deepen home ownership in Africa. The lack of access to long-term finance remains a challenge. Though Nigerian legislators created a legal framework to encourage local banks into the energy sector, many simply cannot provide the same rates on longer tenors offered by their international peers.

Rilwan Belo-Osagie, chief executive officer of Nigeria's First Securities Discount House, adds: "There is a lack of bankable projects in Nigeria. But there are also problems with the enforcement of contracts – where you have to go to court to liquidate a facility or an asset. Take mortgages – if I have to sell your house because you have skipped mortgage payments, it is so easy for the borrower to go to court and get an injunction. That case will be in court for three to four years. Why would I lend to homeowners again?"

OVERCOMING CONSTRAINTS

He also points to high interest rates, encouraging lending for trade finance rather than investment in capital stock. Most African finance ministers would recognise these constraints too, even if there has been a great deal of work done to master macroeconomic issues over the past decade.

While many African banks lack the tools they need, African companies suffer from a similar list of obstacles. But, in a sign of improvement, they are no longer the first to be accused of strangling African corporate growth. The continent's infrastructure needs are slowly being addressed but still add crippling costs to manufacturing. For Jeff Tall, a vice-president for strategy and development at cement company Lafarge, "If you ask private companies, they will say there are bottlenecks – but it's changed. It's no longer finance. It's not corruption. It's power."

NEXT PHASE

Financing electricity generation is the challenge of the next phase of African development, already embraced by institutions such as the African Development Bank, which in 2011 invested $645m in energy projects. A lack of standardised 'cookie-cutter' contracts for power station construction is one problem. "It's hard to quantify, but it seems to take on average seven years to develop a power project. It doesn't take that long elsewhere. We shouldn't have to reinvent the wheel every time we approach a new deal," says Andrew Alli, CEO of the Africa Finance Corporation. Best practice is on its way. Distribution company Kenya Power has a standard contract format that it uses, and there is a standard government support letter to provide comfort to investors.

There are still other strengths that could be tapped. Liquidity levels are high across many markets. Pension funds in Nigeria control around $14bn that has yet to be properly invested towards national development. Governments typically keep reserves abroad in dollar denominated triple-A investments but could repatriate a portion to lend for infrastructure projects.

We shouldn't have to reinvent the wheel every time we approach a new deal

As Africa's economy changes towards a stronger industrial base – assuming China continues its path up the value chain and out of low-end manufacturing – new financing opportunities are opening up. Our yearly ranking of the continent's top 500 companies – next available in February 2013 – tracks corporate takeoff in Africa. In the financial year ending 2010, the total turnover of Africa's top 500 companies was $690bn – 18% higher than in 2009 and 75% higher than five years ago.

Investors both international and domestic are assiduously targeting these companies. Some of this interest is coming from traditional Western companies, but also now from emerging-market countries. Where China and to an extent Brazil are more resource and infrastructure-focused, Indian companies are now very interested in Africa. "We have seen the private sector appetite from India for private sector companies in Africa growing extremely fast over the last three or four years. We sit in both markets and a lot of them are actually talking to us about piecing together their merger and acquisition jigsaws," says Actis's Harford.

CORPORATE STRENGTH

This turnaround in African corporate strength is something international companies are starting to rue. For Tall, of Lafarge: "All of our new competitors including Dangote and people in East Africa used to be transporters and distributors for Lafarge. And a lot of very intelligent people said 'Oh, but these people, they are traders. They will never go into manufacturing. They like to turn around their money very quickly. That's how they were brought up, so don't worry.' And then all of a sudden they started building these massive plants and they bring two hundred people from India to run it and they're doing a very good job."

And beyond the emerging African corporate giants, there are greater opportunities to finance international partners too. Olam, a Singapore-based commodity trader moving upstream into plantations, took out a $228m syndicated loan in July with Ecobank Capital, the lead arranger alongside Afreximbank and BGFIBank Gabon.

Much of the attention is now focused on consumers. "One of the first stereotypes that we need to kill in Africa is there is no such thing as one African consumer," says Joëlle de Montgolfier, senior director of consumer products, retail and luxury practice for the Europe, Middle East and Africa region for management consultancy Bain & Company. "But in terms of an emerging middle class, the universally agreed divide is above $5,000 [in] disposable income a year."

Banks like Attijariwafa Bank in Morocco have been quick to lend to companies exposed to this growth in consumer spending, with the telecom firms first in line. The sharper financial institutions are starting to boost advisory services subsidiaries to guide clients into Africa, an otherwise unfamiliar market for many international companies. They will need to hurry.

"There are already 70% of the largest global consumer products companies that have set foot in Africa one way or another," says de Montgolfier. "Unilever, just in Africa, is generating $4.3bn in sales, which is basically more than the global revenues of a company like Bacardi."

African internal markets are getting stronger, creating more opportunities for banks to make their mark. For Rigouzzo, this gets around much of the problem of transport costs traditionally hindering companies. "In the good old days, you were doing oil, power and rice to export. Now you can do, for the first time, oil, power and rice, and your main market is Africa," Rigouzzo says.

But for all the optimism, it will be a long time before growth bites into the mass of poverty. Jean-Michel Severino, managing director of I&P Management and former head of the aid agency Agence Française de Développement, has launched a fund to invest in small and medium companies (SMEs), which he believes is the only way to speed up the trickle down of Africa's prosperity: "The SMEs are major redistributors of wealth within the economy, and they are one of the roots of the middle class."

But a problem is that they are vulnerable. "They lack access to finance, the legal environment is tougher, they are more vulnerable to bribery and corruption than others because they are just more fragile, and financially and technically they lack capacity," says Severino.

ROLE OF THE SME

Severino believes one of the largest challenges faced by the continent is the political strain caused by massive demographic growth and the rural-urban shift of population. He argues that SMEs are key to creating the jobs that can temper these societal strains, but banks are traditionally shy of lending to the sector. Some banks are trying to embrace the problem, such as South Africa's Standard Bank's SME QuickLoan, which aims to provide up to $30,000 for small and medium companies, to be repaid in 12 months. Egypt's Banque du Caire is also establishing itself as a microfinance and SME specialist.

Ultimately, once that middle class is established, bolstered by jobs in small companies, its members will be the ones transforming Africa, the ones demanding a new deal. Says Lafarge's Tall: "They expect and demand kind of the same standards as they see on satellite TV and the internet. These expectations are going to push the leadership of these countries to really perform better than the previous leadership did. There is definitely going to be more accountability over the next 10 years" ●

 This article was first published in the September, 2012 Finance edition of The Africa Report, on sale at newsstands, via our print subscription or our digital edition.



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