African sun shines on M&A

Ben Johnson, MD at Mergermarket and Dealreporter

African sun shines on M&An contrast to the rest of the world’s sluggish progress, African economies stand out for their high rates of growth and the effusive confidence they inspire.

Mergers and acquisitions (M&A) activity in the global mining sector saw a decline in deal volume of more than 30% and value volumes of more than 70% during the first half of 2013, but some improvement during the second half, with Africa expected to attract loads of activity during 2014.

The cause of the global drop in M&A activity has been attributed by some analysts to major companies who drive M&A activity having made some poor decisions and costly acquisitions in previous years. Another cause given is the extended cyclical bear market which has pushed the majors, in terms of acquisitions, to the sidelines, and seen the emergence of so-called mid-tier type companies that have taken over the M&A charge by generating healthy cash flow and earnings and having the working capital to do so.

Putting it in another perspective, the management of Mergermarket, a global US-based leader in M&A intelligence analysis, believes the focus by majors “has certainly rather been on portfolio optimisation and divesting non-core assets, rather than acquisitions, in 2013”.

Leadership put some questions to Ben Johnson, MD at Mergermarket and Dealreporter, as well as Julie-Anna Needham, industrial and mining correspondent at Dealreporter, and their considered opinion was put somewhat differently: “Big write-downs and CEO changes have ushered in a new era of caution and cost cutting. This is set to continue as the likes of BHP Billiton, Rio Tinto and Anglo American put projects on hold and look to make further divestments where possible.

Whilst mid-tier miners are expected to be those driving deal activity, many will tread carefully, wary of making the same mistakes as their larger peers.

Major shareholders, most notably Blackrock, have been urging miners to focus on improving shareholder value and paying dividends instead, so that there is limited investor support for significant M&A.

“For those mid-tier players with cash on their balance sheets who are prepared to make acquisitions, there will be plenty of options available. Junior exploration and development companies are struggling for cash as many of the traditional options for project financing dry up.

“Whilst London’s equity capital market saw plenty of IPO (initial purchasing offer) activity in late 2013, it remains largely closed to junior miners as investors continue to shun the sector,” was their response.

They confirmed that whilst the global downturn had limited global deal activity, mining was more cyclical than most sectors. “It is largely reliant on Chinese growth, which slowed during 2013, leading to caution among most miners and putting M&A a long way down the agenda.

“Gold mining M&A in 2014 is seen by sector players to be driven by cash-strapped and beleaguered juniors seeking financing and larger players needing to replace reserves at a relatively low cost,” they said in a December report .

2013 report

Their comments follow on the latest Mergermarket report for the whole of 2013, which reveals that the energy, mining and utility (EMU) sector of the M&A global market accounted for US$ 426.7 billion or 19.3% of the total global merger and acquisition value of US$ 2,216.3 billion, or a decline of 26.5% from 2012 (US$ 580.7 billion).

The report indicates that the sector was overshadowed by TMT activity in 2013,which put an end to the three-year consecutive increase. It was the lowest proportion in five years where in 2008 the sector registered US$ 414.8 billion-worth of deals that accounted for a 17.2% share of global M&A. In fact, 2013 was the first time in three years to see the proportion drop below a quarter of global M&A.

Taken together, energy (US$ 331.7 billion) and mining (US$ 52.7 billion) transaction values dropped by 23.8% and 54.8% respectively compared to 2012 when energy was valued at US$ 435.4 billion and mining was valued at US$ 116.8 billion). Utilities (US$ 42.2 billion) saw an increase of 48.1% over 2012 (US$ 28.5 billion) by value.

The largest EMU transaction of the year was Russian Grids’ US$ 14.4 billion bid for Federal Grid Company of Unified Energy System in April; followed by US-based Spectra Energy Partner’s US$ 12.3 billion acquisition of Spectra Energy Corp’s US transmission, storage and liquids assets in August.

Looking regionally the Mergermarket report says mining activity in the Americas remained stable at US$ 12.3 billion compared to US$12.8 billion in 2012.

However, the Asia-Pacific region (excluding Japan) saw a high amount of activity in its energy sector during 2013 with deals valued at US$ 72.3 billion increasing 62.1% over 2012 (US$ 44.6 billion). Indian and Chinese oil and gas (O&G) majors were expected to continue on their growth strategy in the sector with confidence.

In contrast, Europe’s energy and mining sectors dropped by 45.2% and 70.5%, respectively, but this was impacted by the Glencore Xstrata merger, which completed in 2013 but was part of 2012 figures.

The report valued Europe’s utility sector at US$ 20.9 Indian and Chinese O&G majors, up 43.4% from 2012 (US$ 14.6 billion).

It also expected the deregulation of the Russian power industry to open up new M&A opportunities in one of the most capital intensive sectors of the economy.

“Globally, mining majors are expected to rationalize portfolios and pare down expenses wherever possible. 2014 could see further deals for Asia as the Australian government plans to encourage the development of a streamlined environmental approval process to fast-track mining projects.”

Asked whether the decline in global M&A was coming to an end with market sentiment improving, Johnson and Needham reacted with quite a bit of enthusiasm.

“After a lacklustre 2013, sentiment in 2014 is already looking up with a flurry of announcements of major deals across a range of sectors, involving names such as Google, Jim Beam maker Beam Inc, mining group Goldcop and engineering services group AMEC,” Mergermarket experts says.

TMT was the strongest sector for deal activity in Q1-3 in 2013 in part due to the huge Verizon/Vodafone deal valued at USD 124.1bn, according to Mergermaket data. Mining was likely to “continue to be muted due to a continued focus on project development rather than growth through major acquisitions”

African economies

Looking specifically at Africa, Mergermarket recently presented the second edition of Deal Drivers Africa, a comprehensive review of African M&A, based on interviews with 100 M&A practitioners operating in Africa. Published in collaboration with ENSafrica, Nedbank Capital and Ecobank, this report provides invaluable insight into the African M&A market “from those who know it best”, it says. It notes that in contrast to the rest of the world’s sluggish growth and uncertainty in the wake of recent economic turbulence, African economies stand out “for their high rates of growth and the effusive confidence they inspire”.

“M&A activity on the continent has remained resilient and this looks likely to continue: over 80% of respondents in our survey expect an increase in M&A activity over the next 12 months. Those surveyed see energy, mining and utilities as the most active area for M&A deals, followed by the consumer sector and technology, media and telecommunications.”

It said that underlying this dynamism, respondents had consistently pointed to three factors with, firstly, much of the growth coming from acquisitions by Chinese companies, mostly in energy, mining and utilities sector as China sought to secure raw materials to satisfy the huge demands of its own industries.

Secondly, there had been a notable change in M&A activity in the rise in importance of the consumer sector as firms – from both outside and within the region – sought to capitalise on Africa’s “burgeoning middle class”.

Thirdly, a key feature of the region’s M&A landscape was the prominence of African firms themselves with cross-border acquisitions by African firms consistently accounting for the largest share of M&A deal volumes.

“There has been a marked rise in the value of deals originating from the Asia-Pacific region, increasing from a 13% share in deal value in 2006 to reach 56% by 2013.

“The outlook for African M&A activity among survey respondents is positive, with 96% anticipating that M&A activity will either increase or stay the same.” Looking at the EMU sector of the continent in particular, it refers to the region’s huge wealth of still relatively untapped natural resources which has “long made energy, mining and utilities a standout sector for M&A activity – and to the continent’s good fortune its natural wealth has recently been well-completed by external developments”.

“Most strikingly, booming commodity prices and the spectacular rise of the economies of Asia, in particular China and India, have resulted in massive demand for Africa’s raw materials.”

It also points out that African companies themselves were increasingly becoming a feature in the continent’s M&A deal-making.

“Cash-rich and growing in confidence and expertise, the region’s corporates are key players in African M&A.”

Since 2006, US$276 billion worth of M&A transactions had taken place in Africa, over a total of 1 647 deals. Following a peak in 2007, M&A activity had remained relatively steady, with 188 deals taking place in 2012 at a combined value of US$33 billion, slightly up on the total value for 2011.

The 36-page report said that in the first three quarters of 2013 activity had remained strong, with 115 deals with a total value of US$26.6 billion. In terms of sector, EMU deals accounted for the largest share in terms of both volume of deals and value.

Between 2006 and 2011, this sector accounted for 284 deals (21% of the total) with a combined value of US$60 billion (27% of the total value of all M&A).

Between 2012 and 2013, the number of deals in energy, mining and utilities had stayed at the same percentage of the total (21%), but deal values had shot up to US$32 billion, over half of the total value of all M&A since the beginning of 2012.

On a geographical basis and when measured by deal volume, the majority of M&A activity was driven by African acquirers, with Western Europe accounting for the second largest share of M&A in volume.

A noticeable trend since 2006 had been the marked rise in the value of deals originating from the Asia-Pacific region from 13% in 2006 to reach 56% by 2013, reflecting the surge in Chinese and, to a slightly lesser extent, Indian investments in Africa’s capital-intensive energy, mining and utilities sector.

The report notes that seven out of the top 10 deals of 2013 were in the energy, mining and utilities sector and in three of these deals the acquirer was Chinese.

The biggest of all these transactions, with a total value of US$4.2 billion was China National Petroleum Corporation’s (CNP) recent acquisition of a 28.57% stake in Eni East Africa Spa from Eni Spa.

This was followed, in value terms, by Sinopec International Petroleum Exploration and Production Corporation’s US$3.1 billion acquisition of a 33% stake in the Egypt-based oil and gas business of Apache Corporation.

The third Chinese deal was China Petroleum Corporation’s (Sinopec Group) US$1.5 billion acquisition of a 10% stake in Marathon Oil Corporation’s Angolan offshore oil and gas field block 31.

Elsewhere, the report notes, India’s ONGC Videsh Limited was involved in two separate deals (worth US$5.1 billion between them) for a total of a 20% stake in the Rovuma Offshore Area 1 Block in Mozambique.

Overall, the largest deal of 2013 was Emirate Telecommunications’ acquisition of a 53% stake in Maroc Telecom of Morocco, with a deal value of US$6 billion.

Politics in motion

Commenting on the importance of the political stability in M&A proceedings and an apparent uptick instability in West, Central East Africa, including Mozambique, Benson and Needham agreed that political stability was a big issue for those thinking about acquisitions.

“Alongside the quality of a company’s assets, the political risk of the jurisdiction where they operate is a key factor in the decision making process.

“Miners need operating and environmental permits, approval for infrastructure, so the stability of the country’s regulatory framework and working relationships with regional and national governments are important.

“Tax and royalties are also issues, as demonstrated by concerns about Mozambique’s capital gains tax, following extensive M&A in the oil and gas sector. Some countries have state-owned mining companies that take stakes in projects being sold, such as Namibia’s Epangelo which took a 10% holding in the Husab uranium project after it was bought by Chinese group CGNPC.“

As far as West Africa was concerned, they said the region was seen as one of the “hardest places” to operate, with Guinea proving to be particularly problematic.

“Even in South Africa, a country with comparative political stability, proposed changes to mining legislation coupled with labour unrest have had a negative impact on miners that operate in the country.

But despite the challenges, many mining groups are used to operating in risky jurisdictions, such as Democratic Republic of Congo.”

Udo Rypstra

Julie-Anna Needham2.jpg
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