Jennifer Mbaluto is a Partner at Clifford Chance LLP and co-heads the firm’s East Africa practice. In a wide-ranging interview, Jennifer discusses M&A opportunities, the role of private equity and IPO activity in the TMT space in Africa.
Mbaluto will chair the 'What is driving the next wave of transactions in Africa?' panel and the ‘How are opportunities and investments developing across TMT?’ break out at TMT Finance Africa 2019 on November 28.
TMT Finance: Where are the most exciting TMT investment opportunities in Africa?
Jennifer Mbaluto: There are a lot of synergies between the TMT sector and the African mass market, therefore we are finding huge growth where the two converge. As with all other hot sectors, we are seeing most TMT investment opportunities in the major economic hubs of the different regions in Africa (that is, South Africa, Nigeria, Kenya, Morocco and Egypt).
But what is interesting is that we are also seeing quite a lot of TMT investment activity in countries other than those considered to be the main regional hubs. If you look at East Africa, for example, Ethiopia is a really exciting market at the moment due to the steps being taken under Prime Minister Abiy Ahmed to liberalise various sectors of the economy, including the telecom sector. Despite being a small country, Rwanda is very exciting especially when it comes to technology, with recently announced initiatives including Kigali Innovation City, a multi-purpose knowledge and innovation hub and the Rwanda Innovation Fund, a government-backed VC fund targeting the tech sector in Africa.
In West Africa, there has been some M&A activity in Ghana especially in the tower space. In Southern Africa we have recently seen activity in Botswana and Zimbabwe. For example, in 2018 Clifford Chance advised UK development finance institution CDC Group plc on its equity investment into Liquid Telecom. CDC saw the opportunity to invest in Liquid, which like a number of other African telcos at the time, was mulling a potential listing. Liquid was an ideal target for CDC because it is a fast-growing business with an ambitious plan to roll out fibre network to underserved markets in Africa from Cape to Cairo.
TMT: What are the regulatory challenges that investors come across in the M&A context?
Jennifer Mbaluto: In the TMT sector, I would put the challenges into two main categories: regulatory overlap and local ownership requirements.
Regulatory overlap is mainly encountered in merger control, where you have regional bodies such as the Common Market for Eastern and Southern Africa (COMESA) which has its own competition laws and regulator but, at the same time, the member states also have their own local competition laws and regulators. This leads to some overlaps as some countries accept COMESA’s oversight and therefore will not require a local merger filing, while in other countries a local filing must be made even where a COMESA filing is required. We also see regulatory overlaps in telecoms M&A between the issues that the telco regulator is looking at in approving a transaction and those that the merger control regulator is looking at in approving the same transaction, often with little or no co-ordination between them.
The second challenge is around local ownership requirements, which are still a feature in the African telecoms industry, particularly in East and Southern Africa. For example in Kenya and Tanzania companies holding certain types of communication licences must reserve a certain percentage of their shares to local citizens. Additionally, Tanzania has a listing requirement that has been very difficult to achieve for the telcos. This does not seem like a trend that is going away soon because Uganda is said to be planning on implementing similar laws in the short term.
In order to address these challenges, it is important at a very early stage to undertake a thorough jurisdiction-specific regulatory survey in order to fully understand where the challenges are and factor those into your deal. Where you are looking at a cross-border transaction that involves multiple countries, this means reviewing the position both at a country and regional level. It is equally important to understand the wider political context, as this may present practical challenges even where the law may be straightforward.
A common mistake we see cross border M&A practitioners sometimes making is assuming that Africa is one country or that there is a harmonised regulatory regime. So you might find that a transaction which has been signed off by regulators in one country encounters regulatory bottlenecks in another country that were not anticipated at the time the transaction was signed. This could have serious ramifications on the transaction.
TMT: What are some of the key trends that you’ve noticed in the African market?
Jennifer Mbaluto: While we are still seeing some consolidation of telcos, and I think that this will continue, the bigger and more exciting trend that we are seeing with telcos is revenue diversification. This realignment is not only driving M&A in terms of investments into tech, but it is also driving other types of transactions such as joint ventures and collaborations.
One of the key areas that telcos in Africa are diversifying into is financial services. A key example is Safaricom in Kenya, which has long had a successful mobile payment service, but is constantly diversifying to include new fintech products such as the recently launched Fuliza, a mobile microlending platform rolled out in partnership with two different banks and which saw nearly USD 800 million borrowed within six months of operation. Another example is the partnership between Bharti Airtel with Mastercard and Ecobank in West Africa. Besides telco operators entering the fintech space, we are also seeing these firms entering the media space in areas such as VOD and streaming services.
Another interesting trend that we are seeing in the Telecoms space is sector liberalisation, which is opening up or expanding investment opportunities in certain markets. Zambia and Angola have recently offered additional mobile licences. Ethiopia, which I have mentioned is such a large market in East Africa with c. 100m people, is opening up sectors, including the telecom sector, that were previously not available to foreign investors. It has been interesting to see the range of investors that are looking into this "new" market. We are not only seeing telcos, but we are seeing financial investors exploring opportunities to invest in the country’s telco space.
This trend of diverse investors entering the telco space feeds into a wider context because it is also demonstrative of another trend that we are seeing which is the growth in digital infrastructure across the continent. There is a significant demographic change and an increase in population in the continent. This has led to the rise of consumers of content over the internet. There is therefore an increased demand for data which is in turn driving demand for faster and better connectivity, resulting in increased demand for digital infrastructure. This is all music to an investors' ears and we are seeing a lot of interest from financial investors and infrastructure funds that are looking for investment opportunities in digital infrastructure. We are also seeing the large tech companies – such as Amazon, Google, and Oracle – also investing in digital infrastructure assets in the continent, particularly in data centres and cloud.
TMT: So, we’re also seeing several Africa-focused companies driving IPO activity in EMEA over the last few years, can we expect this trend to continue?
Jennifer Mbaluto: Helios Towers and Airtel Africa achieved listing on the London Stock Exchange this year. Other players, particularly the TowerCos have in the past been said to be considering a listing so it will be interesting to see which of them decide to do it next year.
I think a lot of it will be determined by macro factors such as Brexit and the global geopolitical environment, which is causing a lot of uncertainty within the capital markets in Europe. Additionally, you’ve got to consider other in-country factors such as election cycles. Whilst it is unclear whether we’ll see the IPO trend continue, I think there are certainly some good companies out there that in the right market conditions would be suitable for listing.
TMT: How would you assess private equity investment in Africa over the last few years?
Jennifer Mbaluto: The private equity space in Africa has had its ups and downs in period since the boom in 2013 fuelled by the "Africa rising" story, where we saw unprecedent levels of fundraising and transactional activity on the continent. This was followed by the commodity crash and resulting slump in major African currencies in 2016, which significantly slowed down private equity investment, with some investors withdrawing from the market altogether.
As the market continues to recover and stabilise, what we are now seeing is the emergence of a category of sophisticated investors (a majority of which are African investors) who understand this market well, have teams on the ground, know how to navigate the M&A landscape, and are there for the long haul. These investors are actively pursuing opportunities in the consumer facing sectors and the infrastructure that supports those sectors, because, ultimately, the African growth story is all about the consumer.
Each year my firm is involved in over 100 M&A transactions in Africa, and a significant portion of these is in consumer facing sectors. The TMT sector falls very neatly into this investment sweet spot. In addition to significant investments in digital infrastructure (such as the CDC investment into Liquid) we have also seen large cheques written for tech companies, such as Cellulant. We expect this trend to continue.
TMT: What are you most looking forward to at the TMT Finance Africa 2019 event?
Jennifer Mbaluto: I am hoping to hear some discussion about 5G. I attend a number of conferences in Europe and 5G discussions are the trend. It would be interesting to hear where 5G features in Africa's agenda. I read that MTN has announced a partnership with Huawei to launch 5G trials in South Africa as part of the road map to roll out the technology across Africa and the Middle East.
I am also looking forward to the M&A panel discussions and I am particularly interested in hearing what the financial investors have to say in relation to investment opportunities in Africa. So the sessions around sources of investment for TMT will be key for me.
Finally, I am looking forward to catching up with industry players from Africa.
Read the full list of speakers or contact enquiries@tmtfinance.com for speaker and sponsor opportunities.
