The bulk of the money entering Africa, until recently, was through aid programmes. Now companies from across the globe want to tap the continent's rich resources and untapped consumer potential. The gross domestic product per household across Africa has more than doubled in the last 15 years. Ernst and Young's Adrian Macartney, leader of transactions advisory services (Africa), spoke to Divya Guha of Mint about the shift in perception.
Why is Africa an exciting place for Indian businesses to look for acquisition targets? Are Indian multinational companies factoring Africa into their long-term growth strategies?
Africa is on the agenda of many countries, not just India. The continent is approaching one billion people in population, it has a growing middle class, growing level of wealth, greater disposable income, a growing number of cities approaching a million people.
The downside is that the geographic mass, the sheer spread of people, is far greater than in India. This will be a challenge.
What are the success rates of businesses in Africa?
It would be premature to comment at this time. However, it would be worthwhile to observe the performance of investors such as Bharti, Godrej and Essar.
What's the downside?
No different from any other — lack of ability to penetrate the market and scale up, and operating in a market that (at the moment) is too small.
What is the main reason for the rise of interest in Africa as a growth hot spot?
Africa is rich in minerals, yet has traditionally under-invested in infrastructure. Combining this with the factors mentioned earlier, Africa offers an opportunity for sustained growth over coming years compared to stagnant markets in Europe and North America. Like many developing markets, projected growth in GDP is significantly higher than mature markets.
How many of these businesses are looking at acquisitions as a means to strategic growth versus survival? How does this compare with deals to Africa from other markets (say Europe or the US)?
Most businesses are looking for growth, not necessarily survival. Africa offers the opportunity for long-term growth. Europe and the US are not growing, so in order to deliver growth to shareholders, it is important to look for growth elsewhere. International clients, whom I have worked with, whether already having a presence in Africa or entering the market for the first time, see Africa as offering growth opportunities.
In terms of comparing it to other markets, they are not very different. Africa has become a more competitive playground, capital is available and, of course, Indian companies will have to compete with them. This includes China, which competes extensively in the infrastructure and natural resources space. Opportunities abound, but competition will rise as it becomes more focused.
What challenges does Africa face in attracting business? And what might India offer the region?
One of the things Africa needs is the ability to manage a low-cost environment. Indian companies have experience of this. Africa competes with many other emerging markets for foreign direct investment. The largest challenge is a lack of knowledge of the realities of business on the continent. Indians coming in and providing a low-cost, high-quality product will capture market share. But consumers are sophisticated in today's market and will quickly see through poor quality.
Culturally, Indian companies might be a little closer to Africa. In terms of their shared colonial histories, Indian companies will have a unique cultural understanding of the market as well; they will understand the need to work with communities, perhaps better than some competitors.
To what extent are they looking at acquiring established African brands?
In the consumer products sector, local brands are particularly important as they allow a new player an entry to the market. This can then be used to leverage other products into the market. This is not quite the same for other sectors where it is possible to introduce brands directly.
To what extent is lowering costs their main motivation? Which sectors are most motivated by this?
This applies differently in different sectors. Many companies requiring resources are seeking to secure off-take agreements (an agreement between a producer and a buyer to buy or sell portions of the producer's future production) and manage their long-term business through integrating the value chain. Other companies are seeking to secure ranks to market (significant market share) for their products. These companies are seeking growth. However, the ability to cut costs is what makes Indian companies attractive to the African market.
What proportion of Indian companies do you think are just testing the waters as opposed to being serious contenders?
There are many serious contenders—some slower, some faster. Each company needs to make the assessment around whether or not Africa is the best use of their capital. Indian companies are competitive and they are seeking to secure their long-term growth. Many have the skills and abilities to go offshore and where they don't, there are sufficient skills in the market to assist them.
How will the deals be financed—retained earnings, private equity, public listings, debt or accruals?
If we look at the years 2005-08, there were many debt-financed deals. Then (after) the economic crisis, liquidity dried up, capital was scarce and the money that was available, debt, was more expensive. Now people will see more equity-financed deals. A number of funds in Africa are starting to see that they have some capital available to start investing. They will have to see exits to see more capital. South Africa is seeing a number of companies raising equity. Certainly, our expectation is that the resources sector is looking attractive for initial public offers.
I think there is probably a move towards looking for the right opportunity and finding the right structure for that, a joint venture maybe, rather than take the risk alone. There is a fair amount of debt in India, but there are many Indian companies that have a significant amount of cash and find no problem in raising finance. There's a trend towards more sharing and partnering rather than 100% ownership.
Which are the relatively more mature countries in Africa? Do they get their fair share of attention from investors?
People know a fair bit about South Africa and Nigeria, but then it tails off. People use broad brushstrokes to paint Africa. They are worried about political risks and these issues are based on a lack of understanding and are often out of date. Go out and find out the latest details rather than base your views on reports from two years ago. Your experience in Egypt will be completely different from Tanzania. Rwanda is a country that has completely transformed itself in a very short space of time.
Current, up-to-date and reliable information is what is required. This is best summed up by the chief executive of a large listed company who insisted on taking his entire executive team on a walk through the city streets of a target to taste, smell, see and hear the sounds of consumers in that city. That seemed a sensible approach to me.