At the midway point of 2023, Zimbabwe’s Competition and Tariffs Commission (CTC) announced that mergers and acquisitions (M&As) were up by 50% compared to 2022s half-year mark. As is usually the case we were curious to see what was driving this activity and what was pushing the commission which tends to be on the quieter side to make noise about this development.
What activity occurred?
Whilst the CTC is yet to report on which particular transactions went over the line during this period, we know that 12 transactions were approved with manufacturing highlighted as the dominant sector for M&A activity in the first half of the year. This is in keeping with the trends, as M&As in the manufacturing industry have been more common deal types since 2020.
This trend is unlikely to slow down given that of the 10 merger applications received in the first-half of 2023, 5 of them were in the manufacturing sector.
There are a few hypotheses put forward for the activity in the manufacturing sector and fragmentation is one of them. Zimbabwe’s manufacturing sector is characterized by numerous small and medium-sized enterprises (SMEs). This fragmentation limits individual players’ access to resources, economies of scale, and market share. M&A deals offer a way to consolidate the market, creating larger entities with greater reach and efficiency.
Increased competition from regional and international players also puts pressure on Zimbabwean manufacturers. M&As can help companies combine resources, optimize production processes, and reduce costs, making them more competitive.
Another motivator is that bigger manufacturing companies tend to have readily identifiable and valuable assets like factories, equipment, and land, making them attractive targets for M&As. These assets can be readily valued and integrated into the acquiring company’s operations – making them more attractive as M&A targets. Combining manufacturing capacities, distribution networks, and expertise across different companies can create significant synergies, leading to increased efficiency and profitability.
Activity in Agriculture, Forestry and Fishing was also pointed out as note-worthy which is interesting given that that sector has been trending upward for the past few years. In 2020 the sector only made up 5% of M&A deal distribution, which grew to 11%, then 15% in 2021 and 2022 respectively.
When it comes to the motivating factors that is encouraging near-unprecedent M&A activity, the CTC cited that companies were responding to “the Second Republic’s pro-business policies”. Whilst this could sound like lip-service there does appear to be truth in this.
When the government proposed parastatal reforms in 2018, 7 public offices were recommended for merger with significant players such as the Postal and Telecommunication Regulatory Authority of Zimbabwe (POTRAZ) and Broadcasting Authority of Zimbabwe (BAZ) earmarked for mergers. This strategy is still in practice today with energy players Petrotrade and Genesis Energy, one such example of the government being involved in M&A activity. In Q1 of 2023, the government-owned Sovereign Wealth Fund was involved in the merger cases received by the CTC. There seems to be a bit of conflict of interest there but it still illustrates how the government is also actively involved in some of the M&A activity.
Outside of “pro-business policies” and government involvement, there are broadly cited reasons that we know to be motivators for mergers and acquisitions. Buyers tend to be looking to:
- acquire existing networks;
- gain immediate access to established channels;
- overcome entry barriers to new markets;
- gain control over strategic points in the value chain;
- secure exclusive partnerships;
- enhance their bargaining power with suppliers and retailers
Economic recovery after the COVID-19 pandemic is another reason cited by KPMG researchers for increase in deals within the Sub-Saharan Africa (SSA) region as a whole and it checks out that this could be one the motivators for activity in Zimbabwe as well, with Zimbabwe’s CTC previously linking economic stability to deal activity.
This year we expect more mergers as the economy has not really changed from last year and companies are trying to strengthen their balance sheet from foreign competition.
– CTC executive Benjamin Chinhengo (in 2015)
What else is being said about M&As in Zimbabwe and the region?
It appears that the trends within Zimbabwe are lining up similarly with activity in the Sub-Saharan Africa region as a whole.
In the Doing Deals in Sub-Saharan Africa report published by KPMG, surveys were conducted which included 150 C-suite executives with current or past involvement in M&A deals in SSA. 68% of the surveyed executives indicated that they expect deal activity to increase in the region over the next two years. As part of that research, Zimbabwe ranked 10th among SSA countries among which surveyed investors were signalling interest in completing deals.
A key driver of M&A interest in SSA is that the region is an attractive market to investors, primarily due to the region’s abundant natural resources. According to the United Nations, Africa is estimated to hold around 30%, 12% and 8% of the world’s mineral reserves, oil and natural gas reserves, respectively. These commodities make Africa attractive for strategic investors. 20% of survey respondents in the KPMG report noted that physical assets/ natural resources were the single most important driver of their most recent deal in the region.
Another key driver of investment within the region has been compelling valuations. Over half of the respondents said that attractive valuation along with value realisation were among the biggest motivating factors behind their most recent investment decision withing the region. These lower ticket prices compared to M&As in other regions are informed by several variables.
Limited trading volumes and liquidity result in lower asset prices in capital markets is one such factor. Additionally, the region is perceived to have higher political, economic, and operational risks, driving investors to demand a risk premium. Information asymmetry is another factor, with less accessible and unstandardised information affecting asset valuations in the region. Exchange rate volatility (something we are familiar with in Zimbabwe) must also be factored into deals making the region attractive hunting ground for those with appetite for risk.
