COVID-19: AFRICAN M&A TRENDS DURING THE PANDEMIC

Monday, August 24, 2020
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Having delivered an unprecedented systemic shock to economies across the world, the COVID-19 pandemic has precipitated sharp drops in M&A deal value and volume in Africa.  However, there are already indicators of increasing M&A interest, which is likely to accelerate.

We engaged with some of our M&A experts on the ground in Ethiopia, Kenya, Malawi, Mauritius, South Africa, Tanzania, Uganda and Zambia to get a sense of the state of M&A on the continent and identified seven trends (available here).

Some highlights:

  • Quality assets in post-lockdown liquidity crunch: In the early days of lockdown, M&A activity mostly focused on saving or exiting existing deals, and several potential transactions were pulled or put on hold. This phase is now mostly complete, although some transactions remain in dispute for reasons relating to force majeure or material adverse change impacts. For the rest, the focus has turned to rebuilding.
  • Sources of FDI: FDI into Africa had increased in 2018 and 2019, but COVID-19 has altered the picture. The UN Conference on Trade and Development estimates that the pandemic will negatively impact FDI into Africa, with contractions of between 25% and 40% based on GDP projections and other investment factors. We have noticed that as countries emerge from lockdown their levels of activity increase proportionally as they make attempts to kick-start their economies.
  • COVID-19-influenced industries: COVID-19 has brought certain industries into sharper focus, either because they came to a virtual standstill early in the pandemic, or because demand for their products and services has surged.
  • Industry consolidation, coordination and reorganisation: The crisis occasioned by the pandemic has caused companies to re-consider their immediate ecosystems and value chains in order to try and address inefficiencies in the systems. We have seen an increase in industry organisation and association, aided in part by relaxations in competition rules relating to peer collaboration (although these relaxations are mostly limited to initiatives aimed at fighting the pandemic).
  • ESG, sustainability and impact: The pandemic has brought issues of social responsibility into sharper focus, with the world experiencing first-hand the consequences of not paying attention to broader societal issues including health, climate change and poverty alleviation. As the pandemic subsides, we can expect a greater focus on ‘governance activism’, and a growing recognition of the importance of monitoring the impact of corporate activity.
  • Local policies and politics, public interest and foreign investment reviews: Prior to the pandemic, cross-border investment had been shrinking or stagnating relative to world GDP amid rising nationalism and trade protectionism, as well as a tendency towards more interventionist approaches. This has had a chilling effect on M&A.  The impact of upcoming elections in various important African jurisdictions will also need to be monitored.
  • Intra-African trade: Given the many border closures, and the deferral of the 1 July 2020 implementation date to at least 2021, the pandemic may have put a spoke in the African Continental Free Trade Area (AfCFTA) agreement wheel. The result is an increased focus on domestic rather than international trade and the potential for a reorganisation of value chains along regional lines. 

While some trends are apparent, there is a multitude of factors that influence levels of deal activity across important African economic destinations. Certain countries, such as South Africa and Kenya, are economic centres in their own right, but still also remain important hubs for broader regional and continental expansion.

Other countries are attracting interest by virtue of their relatively ‘free economies’, examples here being Mauritius and Rwanda, which are the only two African countries featured in the top 50 of the World Bank’s Doing Business 2020 list. Other jurisdictions may be more tricky to access, but hold sufficient promise of growth to catch the attention of investors.

There is still some distance to travel on the road to recovery from the pandemic, but we have seen developments that are cause for optimism. Those countries that actively prepare for renewed interest are likely to benefit the most.