M&A opportunities: a focus on Nigeria and Malaysia
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Market attractiveness for M&A opportunities: a focus on Nigeria and Malaysia
It goes without saying that elections matter when investors are looking at the attractiveness of M&A opportunities. Pending elections can freeze a market like no other political event. Conversely, elections can trigger speculative investment, driving investors with a low aversion to risk to get first-mover advantage under a new government. Here, we look at the potential impact of elections in countries that have been investment favourites in recent years.
In Malaysia and Nigeria electoral politics will continue to impose significant change on the course of public policy, stakeholder shake-ups and the flow of foreign investment. In the case of Malaysia we are now surveying the fallout from arguably the most pivotal election in the country’s history. For Nigeria, potential drama awaits. For both, it is a time of difficult decisions for foreign investors.
Nigeria – a growth market for investment?
Nigeria is Africa’s biggest economy and most populous nation, and remains an appealing long-term prospect as a growth market. Given its highly complex political, ethnic and institutional make-up, it’s not unusual for policymaking and deal flow to slow ahead of big elections. As Nigeria gears up for its 2019 general election cycle, the country’s two major political parties, the ruling All Progressives Congress (APC) and the opposition People’s Democratic Party (PDP), will hold their conventions to select their presidential tickets in the summer of 2018. Thereafter, federal and state-level government activity is likely to almost exclusively turn towards campaigning and fundraising. Although President Muhammadu Buhari of the APC is facing increased criticism from voters for a perceived failure to tackle the economy and security, he remains likely to be re-elected.
Former vice president Atiku Abubakar is the frontrunner to represent the PDP in the February 2019 presidential election. Abubakar is a reform-minded businessman and would seek to modernise economic management. Buhari is under pressure to deliver on economic promises from his campaign in 2015. If re-elected, his administration would seek to reverse the regulatory uncertainty that discouraged inward investment in 2016 and 2017.
There’s uncertainly around the election, but the number of inbound M&A deals in Nigeria is set to increase in 2018 (17) and 2019 (20) compared with 2017 (11). In 2018, the federal government is expected to spend a record NGN 8.6 trillion (USD 24bn), with capital spending accounting for nearly 30% of the state’s budget. Most of this spending will be directed towards infrastructure development through public-private partnerships (PPPs). Road, transport and utility projects are therefore likely to present increasing opportunities for international investors.
But it is Nigeria’s oil and gas sector that is most likely to witness a rise in M&A activity in the coming year. Greater regulatory stability with the passage of the Petroleum Industry Governance Bill (PIGB) in 2018, increased international oil prices, and a more favourable economic and business environment through the Economic Recovery and Growth Plan (ERGP) are expected to boost M&A activity in this sector this year. International oil companies will continue their gradual divestment of assets, oil blocks and marginal fields that remain dormant. This will attract local and international investors looking to attract capital to optimise them.
Malaysia – will shock election result leave investors blindsided?
If elections in Nigeria regularly present questions for investors, in Malaysia polls have traditionally barely registered with the foreign investment community for the simple reason that every election since independence in 1957 has been won by the same party – until now. On 9 May, voters put an end to the Barisan Nasional (BN)’s 60-year rule, and elected an upstart collection of ethnic Chinese, conservative Malay and urban progressive parties united under the Pakatan Harapan (Alliance of Hope) coalition. The alliance is led by 92-year-old Mahathir Mohamad, who served as prime minister from 1981 to 2003 in the very BN government he has just unseated.
Revenge has been swift. Outgoing prime minister Najib Razak is banned from foreign travel pending investigation into allegations of large-scale corruption in the management of the country’s 1MDB sovereign wealth fund. And that might just be the beginning. This could be followed by both a broader shake-out of BN appointees in the bureaucracy and wider investigations into other claims of abuse of power. Not least among these are allegations of massive kickbacks on a French submarine deal.
For foreign investors these scandals have been an unpleasant backdrop to a country that has become a byword for pro-investment regulation, fiscal stability and sound macroeconomic policy making. Perhaps the exact opposite of the rough and tumble of politics in Nigeria. Najib was on track to keep the fiscal deficit under the government’s target of 55% of GDP, helped in large part by the introduction of a 6% GST widely applauded by economists and the business community – but hated by the public. And whereas Nigeria investors have priced in a lot of the risks inherent in the country’s election cycles, Malaysia investors have been blindsided by the shock election result. Concerns now focus around the new government’s immediate decision to ditch the GST, which will not be mitigated by rising oil prices (GST constituted more than 17% of the tax take).
Concerns around big deals are perhaps even greater. Mahathir on the stump promised to not only scrutinise the probity of all recent deals done by Najib, but also railed against foreign Chinese involvement in big infrastructure projects and the sweetheart deals they were getting as part of Najib’s desire to receive project financing on a “no questions asked” basis. Even companies peripherally involved in these deals – and certainly not just Chinese ones – are getting worried that a renegotiation (at best), cancellation, or even an investigation could be on the cards.
Pre-investment due diligence
With electoral politics bringing rolling uncertainty in Nigeria, and sudden and profound shock in Malaysia, foreign investors in both markets are advised to:
- Monitor key political, regulatory or security developments, which highlight recent and upcoming events, identify trends, and draw out specific implications for transactions.
- Forecast political trajectories using most likely, credible alternative and outlier scenarios in order to anticipate changes to relevant legislation and policy. Changes in government stakeholders could also impact policy and levels of government support for specific transactions or projects.
- Consider an up-to-date and detailed stakeholder map to understand the institutions and individuals with the power to make and influence decisions at a government, ministerial and local level. Having mapped their interlocutors, dealmakers entering new markets benefit from identifying the key players around a sector, assessing their connections and influence within it, and illustrating their individual dispositions towards transactions.
And last, but definitely not least, make sure your house is in order. As we are seeing in Malaysia – and could see next year in Nigeria – political change can be a time of reckoning among rivals. If you are doing business with the losers, their ministries, their government-linked businesses, or even their families, make sure – or review if you are not sure – that you’ve done it with the upmost probity.