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FEATURED ARTICLESISSUE 30 | JUNE 6, 2013Recurring Issues In African M & Aby Nick Aziz and Tara Walsh,McDermott Will & EmeryEconomic growth in sub-Saharan Africa continuesat a pace that is impressive in comparison with globalaverages. While the more mature markets in theUnited States and Europe continue to struggle withthe consequences of the financial crisis of 2008, theoutlook for business in Africa is very different.Some of the outstanding performers – Angola, Nigeriaand Chad – owe their progress to oil, but whathas helped fuel sustained growth across this regionis the effect of a marked transition away from subsistencefarming to employment in the wider commercialsector. Analysis from the McKinsey GlobalInstitute suggests that just 32 per cent of Africa'sGDP growth from 2000 through 2008 was generatedfrom natural resources and related governmentspending. The remainder came from the wholesaleand retail, transportation, telecommunications andmanufacturing sectors. This highlights a fundamentaldemographic change that is characterized by Africa'sincreasing urbanization and its rising consumerledmiddle class, leading to new potential investmentopportunities in the region in food production, fastmoving consumer goods, financial services/consumerfinance, manufacturing and technology.Background TrendsMerger & acquisition activity in the region rangesfrom auction sales of long-held family businessesthat are now run by professional managers becausethe younger generation is either too disparateto present a manageable shareholder base orsimply not interested in carrying on the business,to auction sales of African subsidiaries of familyownedinternational groups where the Africancomponents are now valued at higher multiplesthan the group as a whole. Exits also are beingprecipitated by the comparatively prohibitivecost of local bank finance in Africa, which is forcingbusiness owners to sell or to seek alternativesources of finance such as from strategic foreignequity investors.First time international investors are most likely tomake strategic alliances with local, well-establishedgroups, for example Danone SA's USD686 million(or 37.8 per cent) stake in the Moroccan dairybusiness, Centrale Laitiere. Other investors aremaking strategic acquisitions as part of a "buy andbuild" strategy to embed themselves into the regionwithin a sector. Examples include Singapore-basedOlam International's acquisitions of Crown FlourMills, OK Foods and Ranona, which together benefitfrom integrated scale and synergies.50
Recurring IssuesRestructuring of the Target BusinessTarget businesses, particularly the ones establishedover generations, are rarely single purpose vehiclesand can include a wide range of unrelated and undocumentedactivities and trading relationshipsboth within the group and with counterparties.As a condition to closing, the target group shouldbe required to undergo a restructuring to formalizethird-party trading relationships, formalize ordischarge related-party agreements and intra-groupdebt, discharge local debt (as the buyer will oftenwant to refinance using international bank debtwithout prior security granted to local banks), divestnon-core assets and put any arrangement withany member of the selling shareholder group thatis to remain in place post-closing on fully documented,arm's length terms. More often than not,the pre-sale restructuring is as complex as the transactionitself, but if carried out effectively, it canreduce significantly the transaction risk associatedwith the acquisition.Selling ShareholdersCompanies in Africa very often include minorityshareholders unrelated to the controlling familygroup. These should be bought out by the principalcontrolling shareholder prior to sale at a fairand transparent price on arm's length terms, oreffectively bound into the sale process. Ideally,a buyer should seek a cohesive seller group withaligned interests as a counterparty to the purchaseagreement.Sale StructuresSellers often create an offshore holding companystructure pre-sale. It is essential to ensure the structuredoes not infringe local laws that restrict foreignownership (normally restricted to minerals, defence,media and the banking industries) or foreigninvestment controls, for example, requiring centralbank approval. This applies to both share ownershipand shareholder debt.RestrictionsLocal exchange controls and other regulations maylimit the ability of the buyer to repatriate profits orotherwise leverage the investment. A buyer shouldtherefore seek advice as to its intended method ofrevenue repatriation before acquisition. Some jurisdictionsalso require technology, licensing androyalty remittance arrangements to be approved bylocal regulatory authorities, and impose financialand practical constraints on inbound investors toensure local technology is not exploited to the detrimentof the local economy.Management and EmployeesMost jurisdictions impose quotas on expatriate employeesand many require social infrastructure as acondition of investment, in addition to national insuranceand social fund contributions.Effective Due Diligence and DisclosureThis area is critical. Even though buyers typicallyencounter undocumented business arrangements,significantly lower standards of corporate governanceand vague and inaccurate data disclosure51
Page 1 and 2: GLOBAL TAX WEEKLYa closer lookISSUE
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Page 85 and 86: THE CYPRUS BAIL-OUT ANDFOREIGN CLIE
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