IMF/World Bank 2007: Growth potential
The search for new markets is constant for investors seeking out ever greater potential returns. The established markets of Russia and Eastern Europe are not providing the opportunities experienced equity investors are seeking, but early indications from Nigeria and Kenya suggest sub-Saharan Africa could offer the desired risk/reward balance, writes Owen Wild.
The entry of independent Russian bank Renaissance Capital into sub-Saharan Africa this year alerted many to a region that had not always been considered worthwhile for equity investment.
Most bankers maintained that the emerging market focus in EMEA would remain Russia and the new markets to appear would be other members of the Commonwealth of Independent States, such as Ukraine and Georgia. Yet the move by Renaissance has coincided with a trickle of deals that has found strong appetite from international accounts and shown investor appetite for more.
Experienced hands are looking for the early stage opportunities they saw in Russia during 2004–2005, and recent deals suggest they see this in sub-Saharan Africa.
"There is an investor search for the next opportunity," said a head of emerging market ECM at one US bank. "Sub-Saharan Africa has growth potential but there are only a few markets, so while it is an opportunity I doubt whether there can be a flood of issues."
Yet there has already been a clutch of deals, dominated by the banking sector, and those closer to the market suggest the growth could be more rapid than some expect.
"The market has changed dramatically since last year," said Yvonne Ike, JPMorgan's senior country officer for West Africa. "Just 12 months ago the international equity deal was almost non-existent. This year, JPMorgan has so far completed three equity transactions, adding that to the other deals which have been completed and Nigerian issuers have so far raised in excess of US$3bn and there are more deals on the way."
JPMorgan began the flow of Nigerian deals with the IPO of Dangote Sugar Refinery on the Nigerian Stock Exchange in January 2007. The stock was all placed locally, but the placing size of US$450m suggested deals were now sufficiently sizable to open the market to international investors.
Dangote was followed up by the capital increase by United Bank of Africa in April in the first significant test of international interest. JPMorgan and Renaissance Capital found demand was stronger than some had expected with the result that they increased the international offer from US$200m to US$300m. Total demand in the book for the unlisted GDRs was US$600m.
Nigerian banks are growing quickly in line with the growth in the economy that their loans are supporting. Regulators are also gradually increasing the regulatory demands on banks and their capital adequacy leading to the need to raise equity. Following on from UBA has been Access Bank, which raised US$300m from its offer of unlisted GDRs in July through JPMorgan and Renaissance and a US$750m GDR offer from Guaranty Trust Bank, also in July. GTBank was a more developed company and listed its GDRs on the LSE in a deal led by JPMorgan and Morgan Stanley. Notably GTBank was the first African bank to list in London, including South Africa. Yet there are prospects outside of the banking sector with a cement company expected to come to market by the end of the year.
The success of this initial flow of deals led to a hotly contested process for the award of the IPO mandate for Kenyan mobile operator Safaricom. Many international banks yet to establish a presence in Nigeria or Kenya were well represented among the syndicates responding to the RFP issued in July.
Citi, Credit Suisse, Goldman Sachs, Morgan Stanley and Renaissance Capital all teamed up with local brokers and were successful in making it through the first round of assessment by the government. Several other international banks responded to the RFP but did not make it through the first stage.
Banks were attracted to the deal for several reasons. The first was the comparative ease of getting the deal done as Vodafone has been a strategic investor since 2000 and therefore accounting and corporate governance was already good. Also the deal is expected to total US$500m so would immediately give lead banks a high profile in the region.
The level of competition was underlined by rumoured bids on fees as low as zero and 50 cents. Morgan Stanley and Dyer & Blair, which has led two previous Kenyan privatisations, were the winning bidders and are now preparing to complete the IPO by year-end.