Nigeria: Claiming the African M&A crown
Nigeria is home to the world’s seventh-largest population (with 173 million inhabitants), which is expected to surpass Brazil’s by 2030. And with increasing disposable incomes and a GDP growth rate around the 6% mark for the last 10 years, it isn’t hard to understand why Jim O’Neill, former Chairman of Goldman Sachs Asset Management International, included Nigeria as one of the new wave of emerging economies, alongside Mexico, Indonesia and Turkey — the MINTs — that have massive growth potential and offer attractive international investment opportunities.
What are the five key boom drivers for Nigeria?
- Between 2008 and 2014, 105 M&A deals were completed in Nigeria. With more than two-thirds (70) of these deals completed between 2011 and 2014, the market is gaining momentum. Some of this growth is due to more domestic activity, but a large proportion is accounted for by international buyers and investors. A recent example is in November 2014, the Carlyle Group paid US$157m for a stake in Lagos-based Diamond Bank. Nigeria has seen compound growth of the value of foreign direct investment projects of nearly 20% since 2007, according to EY’s recent Focus on Nigeria report.
- Statistically, energy, mining and utilities (EMU) has been Nigeria’s most important investment area. In 2013 alone, there were six EMU deals valued at almost US$1.5b. In 2014, volume halved while value doubled, as the total of three EMU deals were valued at US$2.5b. This makes it the highest sector by both value and volume according to Mergermarket data. Deals in 2014 included Singaporean Temasek Holdings’ acquisition of Seven Energy for US$150m in April. This deal activity follows the liberalization of the power market in 2013, which acted as a tool for driving Nigeria’s growth. In a market that produces less grid electricity than the Republic of Ireland, and where — according to consulting group Adam Smith International — 50% of the population receives no electricity at all, the country’s lack of power infrastructure has hampered economic advancement. Adam Smith International estimates that US$70b of investment is needed to bring electricity supply to the same levels as Brazil and South Africa, leading to a sector ripe for further corporate finance activity.
Yet, while the energy sector offers investment potential, the development of a reliable power network is opening opportunities in other sectors. “The privatization of the power market and the establishment of new distribution companies create a lot of opportunity in Nigeria for investors,” says Michael Chu’di Ejekam, Real Estate Director at the Lagos office of private equity firm Actis. “If power becomes less of a risk for developers, for example, Nigerian growth could reach up into double digits.”
- Underpinning opportunities in Nigeria is the population’s growing affluence. In EY’s 2013 Africa Attractiveness Survey, Nigeria’s population was given lower-middle income status. While oil and gas FDI projects account for the largest share of FDI capital (52%), according to the EY Focus on Nigeria report, a breakdown by number of projects suggests a greater diversity by sector. Technology, media and telecommunications (TMT) accounts for 24%, retail and consumer products for 21% and business services 8%. MTN, the pan-African mobile telecoms operator, illustrates the growth in consumer spending on TMT. It recently announced a near 10% increase in subscribers to 207.8 million, with Nigeria registering a 20% increase in numbers.
“Nigeria reflects the trend seen in many other African countries — an economic diversification and steady emergence of consumer spending power,” says Michael Lalor, Head of EY’s Africa Business Center. “We have already seen a surge of investment into service sectors such as telecoms, financial services and consumer products. As African economies continue to grow and develop, we also anticipate growth in private investment into infrastructure —particularly power and logistics — and manufacturing, with the automotive sector, for example, having already experienced strong growth over the past five years.”
- “The large population with increasing disposable income means that two sectors in particular will shine,” says Azevedo. “Fast-moving consumer goods, where we are now seeing a lot of investment by large companies, and M&A as they acquire local operators; and financial services, as people increasingly seek financial inclusion.”
Real estate is another sector to benefit. “Back in the 1990s, the middle class was severely reduced, but now it is surging back,” says Chu’di Ejekam. “In 2000, just 34% of households had discretionary income. In 2020, this is forecast to be more than 50%, demonstrating a fundamental shift. These households are now able to spend on retail and housing.” More than 25 new shopping malls opened across Nigeria in the last four years, with up to a further 60 in either planning or construction phase.
- A large number of expatriate Nigerians are now returning home (there are an estimated 15 million people in the Nigerian diaspora), boosting local talent. One of the areas attracting returnees is oil and gas. Reforms to the industry stipulate that international oil companies (IOCs) must work with local companies, sparking fast growth of home-grown oil companies. Many of the IOCs are selling assets. For example, Shell’s Nigerian subsidiary disposed of its 30% interest in Oil Mining Lease 24 to Nigerian company Newcross Exploration and Production. These companies need capital to expand and are tapping international capital markets as a result. Nigerian oil group Seplat, for example, raised US$500m in a London-Lagos IPO in April 2014, which valued the company at US$1.9b. Its listing success is something of a trailblazer for indigenous oil companies looking to consolidate the market.
Not all boom: the challenges of business in Nigeria
Despite the market’s promise, Nigeria is not an easy country to target. Lack of infrastructure can hamper companies’ growth prospects, and instability in the northeastern region deters some investors.
In addition, corruption is still a major issue in Nigeria. The country was ranked 144th out of 177 in the Transparency International Corruption Index, with 44% of respondents admitting to paying a bribe in Nigeria. Investors and corporates need to take caution and understand the risks of operating in a country that is still in the nascent stages of economic development.
The country is also exposed to oil price fluctuations — as oil accounts for 70% of Nigeria’s export revenue and 35% of its GDP, according to OPEC. However, as the country’s economy diversifies, exposure will reduce. “We are already seeing the growth of other businesses, such as agribusiness, services and light industry,” says Azevedo. “The development of these sectors means the government will have to ensure the country has basic infrastructure for growth.”