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The rising wave of Mergers & Acquisitions

April 11, 2018
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This year, the ongoing recapitalization of Ghana’s banking industry is expected to generate several mergers and acquisitions. But while the banking industry is the focus of public attention in this regard, M&As are on the increase across several other sectors as well, propelled by the liberalization of Ghana’s economy, its growing status as a direct investment destination and intensifying market competition. TOMA IMIRHE traces how this activity has grown in recent years and examines the potentials into the future.

Over the past six months, ever since the Bank of Ghana, BoG, announced a 233% increase in the minimum capital requirement for Ghana’s universal banks in mid September, from GHc120 million currently to GHc400 million effective from the end of 2018, the spectre of consolidation in the country’s banking industry has become an impending concrete reality. This reality has indeed already arrived – the sharp increase in banks’ minimum capital was preceded by a Purchase and Assumption agreement which has seen GCB Bank take over the liabilities and some of the assets of two now defunct banks – UT Bank and Capital Bank – which had had their operating licenses revoked by the central bank  because of their irredeemable insolvency.

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All this is coming hard on the heels of three major acquisitions in the banking industry, over the past half a decade which made headlines nationwide. First was the acquisition, in 2012, of the erstwhile The Trust Bank, by Ecobank Transnational Incorporated, the Lome, Togo headquartered pan African bank, which subsequently merged it with Ecobank Ghana, its local subsidiary, to create the biggest universal bank in the country. This was followed, over the subsequent years by the long drawn out, and ultimately acrimonious acquisition of HFC Bank by Republic Bank of Trinidad and Tobago in a takeover, executed on the Ghana Stock Exchange that started out friendly but ended as a hostile takeover.

Around the same time, a private equity fund, Fortiz Fund, established by local investors as a special purpose vehicle acquired a controlling equity stake in the then troubled Merchant Bank, which at the time was a state controlled bank through the majority shareholding of the state run national pensions trust SSNIT, which is also the largest institutional investor in Ghana.  During this same period, First Bank of Nigeria quietly acquired International Commercial Bank, Ghana as part of a wider deal in which it acquired all the West African subsidiaries of that bank’s erstwhile Malaysian parent bank. However this deal went under the Ghanaian public’s radar.

With the expectations of several mergers and acquisitions among Ghana’s banks dominating discourse in the financial media currently, Ghanaians can be forgiven for thinking that M&As are activities peculiar to the country’s financial services industry.

However this is far from the truth.  Over the one and a half decades, M&As have reshaped the respective structures of the ICT, oil and gas, mining, agriculture and pharmaceuticals industries, as well as the financial services industry itself, inclusive of both the insurance and the non-bank financial intermediation segments too. Goodman AMC estimates that between 2004 and 2016, M&A activity in Ghana was worth some US$15 billion. This global research firm reckons that this is expected to double to over US$32 billion over the period 2017 to 2030.

M&As are increasingly being seen as strategic instruments favouring the expansion of enterprises’ product portfolios, penetration of new markets and in the purchase of new technologies.

To be sure though, Ghana still lags far behind the biggest African countries with regards to the number and value of M&A transactions being executed. About half of such activity in sub Saharan Africa takes place in South Africa. However Ghana’s M&A activity is rising faster than in many, if not most, other economies on the continent.

This was not always the situation though. M&As are a relatively recent phenomenon in Ghana, unleashed by the liberalization of the economy from the mid 1980s.

“M&A activity will be largely driven by the need by companies to accelerate earnings since most companies in Ghana are now focusing on growth” says Managing Ghana, a business management research organization. “M&A activities have occurred, and will continue to do so in a host of key sectors of Ghana’s economy from the pharmaceuticals and telecoms sectors to oil and gas, manufacturing, financial services and mining.”

Managing Ghana computes that the mining sector has accounted for the most M&A activity since 2004, while the telecom sector has overtaken the financial sector as the one with the highest grossing inbound value.

But the ongoing recapitalization of the financial services sector makes it the prime candidate for increased M&A activity over the coming months. Already HFC Bank has revealed that it is in talks with two other banks to merge although rumours, late last year, of an impending acquisition of National Investment Bank, NIB, by GCB Bank have been denied by both parties. Other rumours claim that the two smallest Nigerian-owned banks in Ghana are willing to be acquired. Several Ghanaian subsidiaries of major international banks are said to be armed with veritable cash war chests to snap up smaller banks that are having difficulties meeting the new GHc400 million minimum capital requirement, and which offer strategic benefits.

M&As in Ghana’s financial services industry have generally yielded positive results for the parties involved. Societe Generale’s acquisition of the erstwhile Social Security Bank in 2004, when it bought a 52.24% controlling equity stake not only gave the French global banking group a strong foothold in Ghana, but has resulted in improved shareholder value.

The acquisition of the erstwhile TTB by Ecobank not only made it Ghana’s biggest bank but also increased returns on equity from 37% in 2011, the year before the acquisition, to 61% in 2013, the year after the M&A.

Financial services industry acquisitions have not been restricted to those between banks themselves. For instance Fidelity Bank recently acquired Pro Credit Savings and Loans, one of the leaders in its genre, which significantly expanded the bank’s portfolio of small and medium sized enterprise customers, and its branch network.

Indeed, the banks now see both savings and loans companies and microfinance institutions (MFIs) as potential targets for acquisitions, in their bid to expand down market and acquire the peculiar skills to deal with micro and small enterprises at the same time.

The insurance industry has also been brought into the sphere of M&A activity too, with the historic merger of the erstwhile Regency Alliance Insurance and NEM Insurance to create Regency NEM Insurance in 2016. This merger, the first (and as yet still the only) merger between insurance firms in Ghana was designed to enable the two firms meet the new minimum capital requirement for general (non-life) insurers of GHc15 million set by the National Insurance Commission.

Between 2004 and 2016 the aggregate cash value of M&As in Ghana’s financial services sector was some US$215 million. Expect this to rise dramatically over the coming months as consolidation arising from the need to meet new capitalization requirements propels M&As not just in the banking industry but in other genres as well and indeed between various genres as some financial institutions use it as a means to diversify.

But Ghana’s telecom sector is generating  public interest in M&A activity as well, with the merger of the Tigo and the Airtel networks, which has created the second largest network in Ghana, and one big enough to challenge the dominance enjoyed by MTN Ghana to date.

To be sure, Ghana’s telecom industry has been the busiest with regards to M&A activity over the past two decades.  Government sold a 70% controlling equity stake in Ghana Telecom to Vodafone, the British global mobile telecom industry leader for US$900 million in 2OO8, thus creating Vodafone Ghana which is currently the third largest mobile telecom network and the largest fixed line network.

MTN itself entered the Ghanaian market through its acquisition of Investcom which in turn owned Scancom, the owner of the Areeba network in Ghana. This US$5.5 billion acquisition, consummated in 2005, involving a payment through a combination of cash and shares, gave MTN Investcom more customers spread across the Middle East, Europe and Africa, inclusive of Ghana itself.

Meanwhile, a controlling 75% equity stake in Western Telecommunications Systems, a subsidiary of the Ghana National Petroleum Corporation was acquired by Celltel International, a subsidiary of the Kuwait based Zain Telecom for US$120 million in 2007, thus creating the Zain network in Ghana. In 2010, the Indian Bharti Airtel acquired Zain’s African operations for US$10.7 billion, thus creating Airtel Ghana which recently merged with Tigo.

This merger has changed the structure of the telecom industry and is likely to trigger further M&A activity in response. “The sheer scale of this transaction is bound to trigger more deals in the sector in 2018 and beyond” predicts Managing Ghana. “It is likely to pave the way for more future mergers of not just mobile service providers but also smaller technology companies who will begin to realize that joining forces makes sense at a time when everyone in the industry faces highly capital intensive demands for investment in technology and building networks.”

Indeed over the past five years, several relatively small Ghanaian owned ICT software applications firms have been bought by big foreign companies operating in that field whose strategy is to grow inorganically by identifying and then acquiring such small firms with strong growth potentials in emerging market economies.

Ghana’s oil and gas sector is another which will expectedly experience an uptick in M&A activity over the coming years, in line with global trends. Indeed Oxford Economics expects that in 2018, the value of emerging markets oil and gas related M&A transactions will be about 50% higher than in 2015.

Already, in Ghana, major M&As have occurred in the downstream industry segment involving Bulk Oil Distribution Companies (BDCs) and Oil Marketing Companies (OMCs). The biggest so far has been the acquisition of the erstwhile Mobil Oil Ghana by Total Ghana to create Total Petroleum Ghana, which has generated faster growth in the resultant company’s turnover and assets as well as increased earnings and dividends per share for shareholders on the Ghana Stock Exchange.

BDCs and OMCs provide the best M&A opportunities because they can boost distribution and supply chain capacities, especially to the land-locked countries to Ghana’s north which rely heavily on transit trade in petroleum products through Ghana.

The upstream industry however is a different kettle of fish despite the huge opportunities on paper in the areas of both exploration and production. Mergers and acquisitions tend to be affected by political factors because of the state’s heavy involvement in the sector for strategic reasons. Thus while the acquisition of E.O by Tullow Oil went through despite lots of political wrangling and commentary, Exxon Mobil’s attempted acquisition of Kosmos Energy’s operations in Ghana was blocked by Ghana’s government, illustrating the complexities involved in M&A activities in the sector. Exxon Mobil however recently entered the Ghanaian industry through a somewhat controversial agreement with the government.

Ghana’s mining industry is yet another area where M&A activity is expected to increase over the coming years. Instructively, total M&A deals in Ghana’s solid minerals mining industry between 2004 and 2016 amounted to about US$12 billion, the highest amount by any sector of the Ghanaian economy. It has also been the leading source of Foreign Direct Investment, this amounting to about US$10 billion between 2000 – 2015.

This included the merger between AngloGold of South Africa and Ghana’s Ashanti Goldfields in 2004, a transaction which increased the market capitalization of the GSE by US$7.8 billion, or 433%, and attracted capital investment of US$303 million within the four years following the merger. Now however, the company needs yet another merger to get the new investment and technology required for it to exploit the underground gold resources left at its Obuasi mine.

“Larger mining operations need to leverage their new positions by acquiring distressed mining assets in Ghana that will compliment their portfolios ahead of any eventual recovery of global market gold prices” advises Managing Ghana.

Add to all these opportunities in agro-processing and pharmaceuticals in particular. With regards to agro-processing, the most notable M&A transactions have involved Benso Oil Palm Plantation, where a 58.5% controlling stake was acquired by Unilever in 2003 for US$11.7 million before Wilmer International secured a 77.97% stake in the company in 2012 . Another major acquisition was the 1997 deal in which SABMiller acquired a controlling stake in Accra Brewery, even as around the same time, Guinness Ghana Breweries, the larger of the two breweries in the country was being created out of a merger between the erstwhile Ghana Breweries and Kumasi Brewery.

With Ghana’s huge agro-processing potentials and the implementation of the current government’s one district one factory and one district one exportable product initiatives there are plenty of opportunities for companies and investment funds to acquire existing enterprises and make them bigger in order to exploit the emergent business opportunities on offer from both programmes.

To be sure, great expectations of growth have not always been fulfilled through M&As, usually because of the incompatibility of organizational cultures and lack of sufficient internal communication which sometimes leaves staff on different pages and sometimes results in outright factionalism and hostility.

However, properly planned and executed, M&As are a great way to accelerate corporate growth, penetrate new markets, diversify product and service portfolios, increase financial muscle and acquire new skills and technologies. In Ghana, where financing costs are still inordinately high, M&As are a good way to finance growth too.

“With many economic sectors experiencing modest growth, purchasing a healthy company in Ghana – even if consequently having to pay premium value for the firm – is an attractive option for business executives with corporate cash piles” asserts Managing Ghana. “Companies publicly listed in the US, Europe and Asia have benefitted from sharp increases in share prices which have added to their capacities to raise monies for acquisitions.”

Besides private equity fund managers such as Carlyle, Abraaj, Blackstone and Kingdom Holdings, with billions of dollars raised over the years are now all willing to do deals in Ghana. One prime recent example of this is the acquisition of Movenpick Hotel in Accra, in late 2O16, by Mauritius -based Global Africa Investments Management, from Kingdom Holdings for a total enterprise value of US$100 million. This was the largest open market transaction in sub Saharan Africa’s hotel sector to date. However it was not the first major hotel industry M&A in Ghana. Over a decade ago, the ownership of La Palm Royal Beach Hotel, one of the biggest and plushest in Accra, was merged with that of Elmina Beach Hotel in the Central Region and Busua Beach Hotel in the Western Region to create Golden Beach Hotels Limited, as the owner of all three facilities.

Transactions such as these are likely to ensure that M&A activity will continue to increase in Ghana over the coming years and not just in the banking sector where ongoing recapitalization is attracting most of the public’s attention.

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