Mastering Modern M&A: The Power of Due Diligence and Innovative Deal Structures in Africa

Lydia Shadrach-Razzino - Baker McKenzie | 2024/2025 Africa M&A Outlook

By ansaradaMon Jul 29 2024

Lydia Shadrach-Razzino from Baker McKenzie emphasizes the importance of comprehensive due diligence to secure warranty and indemnity insurance. This not only protects buyers and sellers but also ensures a robust transaction process. Ensuring access to quality information, positioning the business correctly, and managing the sensitivity of information are pivotal aspects of modern due diligence ortance of comprehensive due diligence to secure warranties and indemnities insurance. This not only protects buyers and sellers but also ensures a robust transaction process. Ensuring access to quality information, positioning the business correctly, and managing the sensitivity of information are pivotal aspects of modern due diligence.


To start, can you tell us a bit about your career in M&A?
My career has been exciting and challenging, especially being a woman in this industry. But it’s a challenge I’ve embraced, and I absolutely love what I do. It’s an incredible time to be a South African and to live through the changes we’re witnessing.

M&A activity in Africa experienced a sharp decline last year. Given the current economic environment, what are your expectations for when the cost of capital might come down and provide
a boost for deal-making activity?

2023 was one of the quieter years, especially coming off the back of the busy 2021 and 2022. While we hoped for an immediate turnaround at the start of 2024, the tide is turning, albeit slowly. There’s a lot of work happening in the background, especially in sectors like digital infrastructure, telecoms, and Consumer Goods &Retail. We’re starting to see the fruits of that labour, and I’m optimistic about the next six months.
Although a couple of those deals have already been announced and signed in the first half of this year, including the telecoms and digital infrastructure deals that we’ve seen, one being Telkom’s disposal of its Tower portfolio, Swiftnet. And the other was Actis’s disposal of Octotel.

That’s encouraging. What about private equity (PE) activity? How do you see it evolving throughout this year?
We’re seeing more activity in the mid- market space, with potential for a couple of large-cap deals. There’s quite a bit of dry powder, and funds need to exit assets, bringing disposals to market quickly. There’s certainly more activity than we’ve seen over the last two years. And dare I say, we might have one or two large cap deals that we haven’t been fortunate enough to see over the last couple of years.

How would you characterize valuation gaps between buyers and sellers currently?
Valuation gaps are narrowing. Coming off the back of the last year where sellers and buyers were miles apart. They are still starting off miles apart, but finding each other through the deal-making process and through the negotiation.
Also there are more creative structures are coming to the fore. Typically, we used to use either the locked box mechanism or completion accounts mechanism to get to a final price but more often we are seeing a hybrid of the two mechanisms.
And in order to take risk out of the process, more than 90% of our deals, especially in the private equity space, are done on an insured basis, meaning that buyers are taking out insurance to de-risk the sellers from warranty claims and from the sellers having to provide security in terms of the transactions.
So, we’re getting less riskier deals for sellers and then they’re more open to meeting the buyers on price. There’s more give and take and more of a balancing act that’s happening currently in our market.

How does this impact the due diligence process?
Insurers require comprehensive due diligence, adding more work upfront. This lengthens the process but ensures robustness.
But the time, effort and pain are bearing fruits. We’re getting more deals done in this space. And that means it’s worth it at the end of the day.

Are you seeing technology being used to streamline these processes?
Definitely. Law firms are keen to adopt the best AI tools. Data rooms, like those provided by Ansarada, help streamline vendor and buyer diligence. We’re also using AI for matter management, such as running CP checklists digitally but checked by humans. This streamlines processes and saves time, although we’re in a disruptive phase that should settle soon.

From a regulatory perspective, what are your expectations for competition approval processes this year?
The Competition Commission has focused on public interest concerns, making it a challenge. However, clients now better understand what the authorities are looking for, thanks to a clearer framework. This has helped ease some nervousness among foreign investors, though it’s not where it ideally should be.

Which regions or countries outside of South Africa are more welcoming to deal makers?
Jurisdictions like Italy, Ireland, the UK, and North America have clearer frameworks. However, the additional public interest concerns tied to BEE in South Africa make it more challenging here. Hopefully, the new administration will address this in a way that balances development goals with market needs.

Finally, if you could give one piece of advice for getting a deal over the line in this environment, what would it be?
Keep at it and don’t give up when things get tough. Focus on the key priorities and critical issues, rather than the small stuff. This holistic approach can help navigate through the challenges.

 

Download the 2024/2025 M&A Outlook Africa report

We turn to the M&A experts for their predictions on dealmaking trends across Africa for the year ahead.
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