Landmark merger and acquisition transactions that occurred across the Nigerian banking industry in 2006 will go down in history as some of the board room events that have most helped to stimulate Nigeria’s economy following the deepening of financial services industry as a result of these transactions.
United Bank of Africa for example had its total asset grow from ₦884.1 million in September 2006 to ₦1.7 billion in 2008 (~90% growth) after the merger between United Bank for Africa, Standard Trust bank and continental trust bank. Similarly, Stanbic Bank Nigeria Limited’s acquisition of Chartered Bank & IBTC resulted in the emergence of a new entity, Stanbic IBTC bank, that has gone on to create a strong reputation in banking, asset management and pension fund management (where it holds ~37% of Nigeria’s total pension assets).
The words “merger” and “acquisition” are commonly used interchangeably although there is a slight difference in their meaning. A merger may be defined as the consolidation of two or more companies into one larger company for economic or strategic reasons. Typically, the businesses and management of both companies are fused together as one.
An acquisition occurs when one company (the “acquirer”) takes over another company (the “target”) by purchasing a controlling interest in the target. In many cases, the acquired company ceases to exist and its stock (in the case of listed companies) ceases to trade while the acquirer absorbs the business and consolidates it under its management. However, in other instances, an acquisition may only result in the target’s business being under the indirect ownership or control of the acquirer’s shareholders and management.
Mergers and acquisitions play an important role in the world of finance. Typically, mergers and acquisitions are processes that help companies combine assets and know-how based on the economic principle that assets used in combination are more valuable than the sum of those assets individually.
Reasons for Mergers
There are various reasons why companies merge or seek to acquire or be acquired by others. Some of the reasons include: eliminating or weakening competitive forces, improving quality of earnings, seeking rapid inorganic or organic growth, creating liquidity and the ability to raise new financing via the acquisition of a more financially stable target. Other more strategy-related reasons may include situations where a company looking to enter into a new market but lacks experience and expertise acquires a small company/start-up with strong local understanding and track record of success in the target market.
Mergers and acquisitions also occur for speculative reasons. Here, the acquirer, usually a large financial institution, views the target as an asset to be bought, developed and sold at a premium. A good example of this is when a private equity fund acquires an established company in a potentially profitable market position with growth opportunities, implements a value creation plan to help the target move closer to full potential and then sells it at a higher price to make profit. Although the pay-offs could be very high, as in the case of early investors in the telecommunications giant, MTN, this approach is clearly high risk, even if the targets are analysed and selected very carefully.
A major risk, particularly in the case of small and highly specialised targets, is that a significant proportion of the highly skilled people who work for the target may leave either before, during or immediately after the merger or acquisition. Other risk factors such as abrupt changes in regulations, as was the case with motorcycle hailing companies in Nigeria and the introduction of new players who may disrupt the industry landscape – think the impact of AirBnB on the traditional hospitality industry. When these happen, the actual (rather than apparent) value of the target could diminish significantly within a very short time, leading to significant investor losses.
Other Common Transaction Types
Some other common business transaction types include:
- Tender offer
- Leveraged buyout
- Management buy-out (MBO)
A tender offer is an open invitation by a prospective acquirer to all shareholders of a publicly listed company to tender their stock for sale at a price during a specified time. The acquirer offer price is usually higher than the market price of the shares. An example is the tender offer by Lafarge Africa Plc to the shareholders of Ashaka Cement Plc in 2016. Securities and Exchange Commission’s (SEC) law require any corporation or individual acquiring up to 5 percent of a company to disclose information to the SEC, the target company and the exchange.
A Leveraged buyout is the acquisition of a company using a large amount of debt borrowed money (debt). The asset of the company being acquired is usually used as the collateral for the loan. Typically, a leveraged buyout usually consists of 90% debt and 10% equity.
A Management buy-out is where the management of a company carry-out the acquisition by means of debt. The management team then uses the assets of the company as collateral for the loan. Management buyouts involve investors, financial sponsors or private equity firms making large acquisitions without committing all the capital required for the acquisition.
Documentation of Merger & Acquisition transactions
The documentation of a Merger and Acquisition (M&A) transaction usually starts with the acquirer filling a letter of intent which usually binds the parties to confidentiality and exclusivity while the transaction goes through due diligence. After due diligence has been completed, the acquirer and target draw up a “Merger Agreement” or Share Purchase Agreement, depending on the transaction type, with the help of legal advisors.
In Nigeria, the Securities and Exchange commission (SEC) regulates mergers and acquisitions. Section 428 of the SEC Rules provides a list of documents that must be available for a scheme of merger and acquisition to take place. Some of which are:
Merger stage – Documents required
- reasons for the merger
- letters addressing the shareholders of the merging companies from their chairman/director
- plan for employees
- general information on the merging companies
- information of the merged (enlarged company) and its profit forecast etc.
Acquisition stage – Documents required
- Two draft copies of information memorandum
- Copies of letters appointing financial advisors(s)
- Summary of the claims and litigation of the company to be acquired
- Annual reports and accounts of both companies involved in the transaction for the last five years
Valuation and Financing in Mergers and Acquisitions
Valuation of an M&A transaction is the analytical process of determining the current value of the company to be acquired or the value of the combined entity in a merger. The company is usually benchmarked against others within its industry using its enterprise value.
The Enterprise value (EV) is the total value of a company as it accrues to shareholders and debt holders. The most common methods used in finding the enterprise value of a company are the Income approach (such as discounted cash flow), Market approach and Asset approach.
Investment analysts who value businesses typically use more than one method to estimate the value of the company. A business valuation done with more than one method makes the analysis more accurate.
The eventual transaction purchase consideration is usually agreed after the acquirer has carried out a detailed due diligence exercise. The acquirer can then finance the M&A transaction through cash, debt, or a combination of financial instruments. The best financing option depends on the condition of the two parties’ asset value, debt obligations and perception on the risks and benefits of the transaction.
M&A Transaction Process
The sale or acquisition of a company is usually an intense time-consuming process spanning several months. Consequently, both sides usually hire a team of well-trained advisors versed in sell-side and buy-side advisory to support each party in achieving their transaction objectives.
The key processes include organization and preparation, first round, second round, negotiation and closing. The organization and preparation stage is where the sellers determine an appropriate sale process, perform due diligence and preliminary valuation analysis, select buyer universe, and prepare marketing and confidentiality agreements.
The first-round stage
The first-round stage is when the sellers contact prospective buyers, negotiate and execute confidential agreement with interested parties, distribute confidential information memorandum and initial bid procedure letter, prepare management presentation, set-up data room, get non-binding offers and shortlist interested parties.
The second-round stage
The second-round stage is when the sellers conduct management presentation, facilitate site visit, provide data room access, and receive final bids.
The negotiation stage
The negotiation stage is where the sellers evaluate final bids, negotiate with preferred buyer(s) and receive board approval and executive definitive agreement. The stages listed above is the ideal, however, some stages mentioned might not applicable in some M&A deals.
Notable Merger & Acquisition Deals in Nigeria
One of the biggest M&A transactions in Nigeria is the Merger between Access Bank and Diamond Bank. The deal was strategic as it consolidated Access bank’s position as a tier one bank with a strong capital base. The merger has contributed to a healthy competition between the new entity and other existing banks, and helped strengthen the Nigeria Banking system.
Another which occurred in 2012 was the acquisition of Conoco Phillips by Oando Plc through its subsidiary Oando Energy Resources in a transaction worth over $1.5 billion. Skye bank Plc also acquired Mainstreet Bank limited from the Asset Management Corporation of Nigeria (AMCON) for N120 Billion.
In the ICT sector, MTN Nigeria Limited acquired VGC Communications Limited in 2008 to form a new entity MTN Nigeria Limited. In 2011, Visafone also acquired 100 % shares (₦2.7 billion) in Cellcom Communications Limited.
In the oil production sector, notable mergers that have happened in Nigeria include; the merger between Niger Delta Exploration & Production Plc and Niger Delta Petroleum Resources to form a new entity called Niger Delta Exploration & Production Plc, and the acquisition of Elf Nigeria Limited by Total Nigeria in 2001. The shareholders of Elf Nigeria Limited surrendered their shares for an appropriate number in Total Nigeria Plc. One other very notable acquisition transaction was Prudent Energy and Services Limited’s acquisition of 75% majority stake of Forte Oil Plc in 2019.
In the manufacturing sector, two notable mergers that have happened in Nigeria include; The merger between Tower Aluminium (Nigeria) Plc & Cook N Lite (Nigeria) Plc to form the new entity Tower Aluminium Nigeria Plc, the acquisition of 50% equity holdings in Nigeria Eagle Flour mills Limited by Flour Mills of Nigeria Plc in 2010, and GlaxoSmithKline’s (GSK) $2.1 billion sale of its nutritional drink brands Lucozade and Ribena to Suntory Beverage & Food Limited in 2013.
Other popular merger and acquisition transactions include Coca-Cola’s acquisition of Chi limited. Coca Cola’s reason for acquiring was because they were very optimistic about Africa’s consumer opportunity. Mansard Insurance Plc also acquired 60 percent equity stake of Penman Pension Limited in 2015.
Whilst growth might be achieved organically, M&A’s presents a quick way to grow inorganically and achieve organisational objectives. With huge risks around the realisation of perceived synergies, overpaying for targets or getting the short end of a deal for a multitude of other reasons make it important that transaction parties secure the services of experienced transaction advisers to improve their chances at realising the highest possible value post-transaction.
Our transaction advisers at Leonine continue to support our clients on their path to growth with bespoke outcome-driven advisory services across the deal cycle. If you’re seeking out investors or Targets for growth, I have one advice for you – Click here.