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My piece from February’s Business Diary Botswana:
At the peak of the credit bubble, observers noted that a “swell of private equity buyers, solid corporate profits, the availability of cheap debt and robust liquidity” all underpinned a $4.5 trillion global boom in M&A, an industry in which both volume and value are historically positively correlated with GDP. Yet the steadfast nature of that relationship may be in doubt–at least in terms of South Africa’s deal flow industry–if current projections prove accurate. While the continent’s largest economy took a harder than expected hit during the global recession, due primarily to an unexpectedly pronounced plunge in manufacturing, as well as in the world’s demand for raw materials, prognostications for 2010 are generally positive. Putting aside the IMF’s World Economic Outlook, released in October, which foresees fairly tepid growth of 1.7%, myriad analysts are quite bullish on the economy, drawing upon a host of indicators to support their optimism. For example, Nicky Weimar, Senior Economist at Nedbank, highlights the buoyancy of the very same manufacturing and mining sectors which caused the country’s hasty downfall; after being pummeled at the end of 2008 and into the first half of 2009, the two showed marked improvement in the third quarter of 2009, though admittedly on the back of the ever-increasing BRIC (namely Chinese) appetite for commodity-based exports. Other signs of comfort, she notes, include increased car sales figures (on a month-to-month basis) and improving trade activity and business confidence levels, including a two-point uptick in Decemeber’s Merchantec CEO Monfidence Index, a forward-looking survey of 100 executives measuring both current and expected conditions over the next six months. The boldest projections come from Old Mutual Investment Group, a Southern Africa-based asset manager, who in mid-January predicted 3.7% expansion in 2010 following the summer’s World Cup, and 4% growth in 2011 against the backdrop of an inflation rate hovering somewhere “around the upper end” of the Reserve Bank’s 3-6% CPI target range. “The combination of a recovery in consumer demand, ongoing robust public sector spending, an end to the cycle of destocking, moderate export gains and the World Cup Soccer, could combine to generate a surprisingly robust acceleration in growth during the middle quarters of 2010. We could even see another interest rate cut from the Reserve Bank adding to the positive conditions, should inflation surprise on the downside and the rand remain strong,” opined Rian le Roux, its chief economist.
Amidst such hope, however, is the stark reality of a continualy declining M&A market, which saw a 61% decrease by value in deals from the year before, and which Mergermarket, an industry intelligence service, expects to further languish in 2010 due largely to “increasing unemployment figures [that] have taken a substantial number of paying customers out of the economy, affecting sectors such as retail and manufacturing.” In particular, the group noted, telecoms may have to “rethink growth strategies in the year ahead in light of the failed attempt to merger MTN and Bharti as well as pressure to lower tariffs due to government intervention and increased competition.” That said, other industries may outperform despite a falling and corrective, pre-World Cup market that even most market bulls accept as a likely requisite for accelerated growth in latter quarters. For instance, Standard Bank Group Ltd. and FirstRand Ltd., the country’s largest lenders and with Chinese ties, announced mid-month that they had registered an interest with Nigeria’s central bank (CBN) to investigate the possibility of acquiring distressed domestic lenders, something industry consolidation-seeking Nigerian authorities would readily embrace having decided last October to limit domestic banks’ market share to 20% and to prevent the country’s biggest lenders from acquiring stakes in the ten institutions that failed an August audit in which regulators determined that certain institutions had built up bad loans that left them too weakly capitalized to sustain their operations. Financial M&A in Nigeria “makes sense,” London-based Silk Invest’s Baldwin Berges wrote to investors in January, given that “there are more than 150 million consumers in Nigeria (and 3-4 million new ones are born every year), and [that] most of these people [will] need to access the financial services industry for the first time. A genuine growth market that can [thus] be entered at a handsome discount. This could well signal the beginning of the next major chapter in the development of Nigerian banking, a more joyful one for a change.” Yet pricing such deals could be tricky. “There is a fine balancing act taking place, however, as local banks assess these opportunities carefully so as not to get burnt by any risky assets they may acquire,” Mergermarket said. To that extent, “there may be concern over the quality of the assets at distressed banks,” Henré Herselman, a derivatives trader at Johannesburg-based BoE Stockbrokers, told Vanguard, a Nigerian daily newspaper. The upside of such a deal, however, will likely be too good to pass up. From Standard Bank’s standpoint, an acquisition would at worst bolser its current presence in the country, while best case add market share and scale in its operations. For FirstRand, entrance would mean the newfound birth of a Nigerian division (i.e., a “greenfields” approach) that would include both commercial and retail units, in a relatively mature environment that Sizwe Nxasana, its CEO and the first-ever black South African CEO of one of the country’s five largest banks, reiterated to CNBC Africa would already “suit mobile money transfers, investment-banking products and debt and equity capital markets products.” Kokkie Kooyman, head of Sanlam Investment Management Global, offered a more sobering take on Nxasana’s vision. In the firm’s “rush to expand into Africa,” FirstRand “might make bad acquisitions. This then means they would have to put in lots of money in an effort to fix the acquired entity,” Kooyman said. “It is going to be very tough for FirstRand. Another problem would be establishing accounts and control functions in those countries. This means they would have to send talent out there, which will not be good for the company’s operations here at home.” Nxasana, however, likely feels emboldened from the July partnership agreement he signed with China Construction Bank in order to help both companies win investment, corporate and project finance deals across Africa.
Yet while analysts, fund managers and investors alike ultimately anticipate a relatively imminent flurry of action in Nigeria’s financial sector–events that, per the Financial Times, some observers think “will reshape not only the Nigerian banking system, but possibly the pan-African financial services landscape”–the exact timing and true breadth of such dealmaking is up in the air. Last November, for example, the FT wrote that in naming Deutsche Bank as the leading adviser to “oversee the stability of the Nigerian financial sector,” the CBN was essentially signing off on the expected sale of at least nine Nigerian banks, and that “a number of UK, South African, domestic and Asian banks [had already] emerg[ed] as interested buyers.” Moreover, South African ones, in light of their hitherto presence regionally and in conjunction with their generally strong balance sheets and ability to raise funds to finance large acquisitions, were assumed to have the upper hand in prospective talks. That said, the pie at hand is finite, and the spoils aren’t exactly equitable in nature. Speaking to Bloomberg last month, John Storey, an analyst at Bank of America-Merrill Lynch, labeled Guaranty Bank as “the best-in-class bank within Nigeria that provides exposure to upside surprises to the oil and macro-economic story,” while concluding that “Zenith, United Bank for Africa, Guaranty and FirstBank,” the four largest banks market capitalization, were the most attractive targets. But bank executives would be wise to be choosy, especially amongst those not considered best in class, no matter the apparent discount. As history has shown in at least one industry, namely the telecom market, Nigerian-based dealmaking can be fraught with perils. For every MTN, there seems to be a Vodacom. Caveat emptor.