NewsWest AfricaPrivate equity: A Nigerian mattress company feels the bounce

Wed,22Nov2017

Posted on Thursday, 01 October 2015 11:11

Private equity: A Nigerian mattress company feels the bounce

Photos© DDB LagosPhotos© DDB LagosThe succession of deals for Nigeria's Mouka mattress company is a sign of bounce in the private equity market that helps family-run companies profit from growing consumer spending trends

As a result of his unsuccessful 2008 presidential run, US businessman Mitt Romney inadvertently highlighted the plight of American mattress company Sealy.

Its unhappy fate – loaded up with debt and 'flipped' by a succession of private-equity companies including Romney's Bain Capital – seemed to cement the reputation of an industry seen as keener on extracting value than building it.

So, when private equity company Actis announced on 7 July that it had sold on its majority stake in Nigerian mattress company Mouka to private equity firm Abraaj for an undisclosed sum, you could be forgiven for wondering whether history was repeating itself.

But, while suspicions about private equity funds may remain in the US, in Africa the sector is in a different phase – taking companies from their early stages and gearing them up with modern management techniques.

Hasib Moukarim, a company director and member of the family that founded the Mouka mattress business in 1972, agrees.

He argues that private equity can help to preserve family-owned businesses. "That step taken by us proved to be successful for both parties, Actis and the family, as the turnover and profitability more than doubled in five to six years," he says.

Cutting away the fat

John Opubor, director of the Actis office in Lagos, explains: "They were a classic Nigerian company. They had grown to a good size but wanted to institutionalise. That's why they wanted us in."

Actis started with industrial processes, trying to bring down manufacturing costs.

Electricity was one focus, and the procurement of raw materials was another.

Bringing in industrialists who know the sector, Actis "focused a lot of attention on trying to make the process more efficient," recalls Opubor.

To consolidate Mouka's national footprint, it invested in operations in the northern city of Kaduna and in Benin City, about 240km east of Lagos.

Next, came the hard work on the marketing and sales side. Mouka was already a solid brand in Nigeria, one of two nationally known mattress makers along with competitor Vitafoam.

Distribution is a key to success in consumer businesses, and this is tough in Nigeria and more widely in Africa.

"The reality is, even though there are large urban centres in Nigeria there is still a very large population of people who live outside of those urban areas," says Opubor.

Reaching those populations required investment in sales teams, recruitment of new distributors and more extensive advertising.

Jacob Kholi of Abraaj, the company that bought a controlling stake in Mouka in July, explains: "Actis had to institutionalise the company, introduce governance best practices. And they have succeeded."

Kholi argues that with the increasing amount of investment going into African businesses, there will be an increase in these secondary transactions, as with Mouka.

"You have funds that are doing very good business in this sector that have come to the end of their holding period and have to move on. Not for any other reason but just because most private equity [funds] are closed funds and they have a holding period," he explains.

The flip side, says Opubor, "is what does that mean for valuations when you have so much capital coming into the market? You have larger guys with large funds coming in [and] needing to put money to work in what is still a relatively small pool of assets."

New homes need beds

Nonetheless, Opubor says there are benefits for both parties in secondary transactions. The due diligence and corporate governance work, such as the adoption of modern accounting practices, has been done. "So you know you are buying a clean asset", he says, while the seller can get a good price.

Meanwhile, because it is a growth market, there is still plenty of value to be created.

Mouka's Moukarim agrees, saying: "Now, with Abraaj taking over from Actis and new managers and ideas com- ing in, we expect higher growth and revenues."

Kholi says that Nigeria's demographics are in the company's favour and the consumer boom is still in its
infancy.

This is especially true when it comes to housing, where demand far outstrips supply: the Centre for
Affordable Housing Finance in Africa estimates there is a deficit of 16m housing units in the country.

"Once you have a house, you have to furnish the home!" Kholi points out.

Abraaj's purchase of Turkish mattress maker BRN Sleep Products in February may also come in handy.

Kholi insists the Mouka deal has to stand on its own merits, but Abraaj is also looking to apply lessons learned from the Turkish manufacturer.

"If there are opportunities for these two companies to collaborate, we would certainly bring that to the table," he adds.

Beyond that, the plan is to look at what different products can be introduced using the current distribution platform, as well as working on new emerging distribution channels. Mouka also wants to boost its sales to other West African countries.

And when the time comes for Abraaj to exit, one option is an initial public offering through the Nigerian Stock Exchange.

alt

Kholi points to recent financial reforms, seen in many countries as well as Nigeria, which have allowed pension administrators to start looking at alternative investment vehicles.

These do not generally include private equity, which remains too risky for pension funds.

But these local pools of capital are looking at listed companies on the local exchange, which helps bring liquidity into the market.

Another option is the growth in South African companies that, with their domestic market saturating, are looking for new entry points into the rest of Africa.

"We in Abraaj have had some success in selling our businesses to companies coming out of South Africa," says Kholi.

"SABMiller for example – we sold them a bottled water manufacturer that had become regional." Abraaj also sold a biscuit maker to South African food conglomerate Tiger Brands.

Abraaj's investment in Mouka will likely not be as long as eight years, the time it took Actis to exit.

"The vintage year of the investment was right before the downturn," recalls Opubor, "and following that, in 2009, was the Nigerian banking crisis."

In addition, a greenfield investment tends to take more time than subsequent ones.

In the meantime, Actis is still looking for investments that straddle the consumer and manufacturing sectors in Nigeria like Mouka does.

"But it's difficult to find a business of scale, and we are looking to put $50m at the minimum to work in a transaction,"Opubor says.



Nicholas Norbrook

Nicholas Norbrook

Nicholas Norbrook is Managing Editor of The Africa Report, helping to set up the magazine in 2005. He has been a producer for Radio France International, and has lived and worked in West Africa. In 2011 he won the Diageo Business Reporting award for Journalist of the Year.

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