I OVERVIEW OF M&A ACTIVITY
Despite a general economic slowdown, certain sectors of the Nigerian economy witnessed appreciable levels of M&A activity in the past year.
In the insurance sector, Saham Finances, a Moroccan insurance holding company, acquired three insurance companies, namely Sovereign Trust Insurance, Law, Union & Rock Insurance and Unitrust Insurance. Other acquisitions in the insurance sector included Sunu Assurances Vie Cote D’Ivoire’s acquisition of Equity Assurance, Hokmah Alliance’s acquisition of Springlife Assurance Limited and Swiss Re’s acquisition of Leadway Assurance.
The energy sector was fairly active, witnessing, inter alia, the acquisition of Oando Plc’s downstream business by Vitol Group acting in partnership with Helios Investment Partners. In other notable oil and gas deals, Eroton Group acquired oil mining lease (OML) 18 from the Nigerian National Petroleum Corporation and The Shell Petroleum Development Company (SPDC), while Aiteo Oil Nigeria acquired OML 29 and the Nembe Creek Trunk Line from SPDC.
There were also a number of private equity deals, including Actis’ trade sale of its equity stake in Mouka Foam to Abraaj Group, Sahel Capital’s acquisition of 25 per cent stake in L & Z Integrated Farms Nigeria Ltd via its Fund for Agricultural Finance in Nigeria and Kagiso Tiso Holdings Ltd’s acquisition of Servest and Me Cure Healthcare. Also notable was Actis’ acquisition of a majority stake in Sigma Pensions.
II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A
The laws that regulate M&A activity in Nigeria are the Investments and Securities Act (ISA), the Companies and Allied Matters Act, and the Rules and Regulations of the Securities and Exchange Commission (SEC Rules and Regulations) made pursuant to the ISA. Amendments were made to the SEC Rules and Regulations in 2013. The Listing Requirements of the Nigerian Stock Exchange also contains provisions that have an impact on M&A transactions.
The Security and Exchange Commission’s (SEC) role is to review proposed M&A to ascertain whether a proposed transaction would result in substantial restraint of trade and give its approval. The ISA provides that it is not necessary for the SEC to be notified prior to the implementation of a small merger (i.e., a merger between entities whose combined turnover or assets are below 1 billion naira), although the SEC must be informed after such mergers are completed. The acquisition of controlling equity in a private or unquoted public company is also only subject to the prior approval of SEC where the consideration for the shares acquired is at least 500 million naira.
Additionally, there are sector-specific laws that regulate M&A transactions in certain sectors. For example, the Banks and Other Financial Institutions Act and the Central Bank of Nigeria’s Guidelines and Incentives on Consolidation in the Banking Industry are relevant to M&A in the banking sector, the Nigerian Communications Act regulates the telecommunications sector, the Electric Power Sector Reform Act regulates the electricity sector and the National Insurance Commission Act regulates the insurance industry. These sector-specific laws operate in addition to the provisions of the ISA and the SEC Rules and Regulations.
The Companies Income Tax Act also requires the consent of the Federal Inland Revenue Service (FIRS) for a proposed merger or acquisition in relation to the capital gains tax payable. Common law will apply to the extent that there is no relevant provision in the statutes.
III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT
The main authority in the regulation of M&A transactions is the SEC. It is important to note that there are plans to enact a competition and consumer protection law, which would bring about a much-needed competition regime in Nigeria and have a significant effect on merger regulation in Nigeria. The law is expected to establish a Federal Competition and Consumer Protection Commission with powers to regulate competition in Nigeria, which will, in effect, assume the merger control powers of the SEC.
IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS
M&A activity has been fuelled by investors seeking business growth through investing in fast-growing economies. Recent years have seen renewed interest by foreign investors in Nigerian businesses. International private equity firms and venture funds have continued to be actively involved in acquisition deals in Nigeria. As economic growth rates in Africa continue to outstrip those elsewhere, it is expected that the interest of global funds in investment opportunities in Nigeria will continue to increase.
V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES
Some of the year’s biggest deals occurred in the oil and gas sector. Notable among these was the US$276 million acquisition of the downstream business of Oando Plc by Helios-Vitol Group.
In another landmark deal, The Coca-Cola Company acquired a 40 per cent stake in CHI Limited, one of Nigeria’s largest juice and dairy producers, for a consideration in the region of US$240 million. Also in the fast moving consumer goods (FMCG) sector, Pioneer Foods acquired a 50.1 per cent stake in Foods Concepts Ltd.
VI FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS
The cost of locally sourced debt funding for acquisitions is very high, with interest rates typically above 20 per cent. As a result, the vast majority of acquisitions in Nigeria are funded using equity or foreign-sourced debt. However, there is expected to be a reduction in the number of deals funded by foreign capital until concerns surrounding exchange rate volatility and illiquidity in the currency markets have been addressed by the government.
VII EMPLOYMENT LAW
There have been no recent changes to employment law in Nigeria relevant to M&A. The legislation governing this is the Labour Act, the Pension Reform Act and the Personal Income Tax Act.
The Labour Act provides, with relevance to M&A, that the transfer of any contract from one employer to another shall be subject to the consent of the worker and the endorsement of the transfer of the contract by an authorised labour officer.
VIII TAX LAW
There have been no recent changes to tax law in Nigeria relevant to M&A. In an M&A context, stamp duty is the relevant tax. Where new share capital is issued, a stamp tax of 0.75 per cent of the value of the newly issued capital is payable to the Stamp Duties Office.
The tax considerations will depend on the manner in which the combination is structured. Where the transaction involves an asset acquisition, the company disposing of the asset would be liable to pay capital gains tax of 10 per cent on the gains realised on the disposal. Where the combination is effected by an acquisition of shares, no capital gains tax will be payable because the Capital Gains Tax Act exempts gains accruing on the disposal of stocks and shares from tax. For tax purposes, the value of an asset transferred between connected companies is deemed to be the amount equal to the residue of the qualifying expenditure.
No merger, takeover or any form of acquisition should be undertaken by a company without obtaining prior direction as to the manner of assessment of its taxable income. Directions are obtained from the FIRS. Clearance should also be obtained from the FIRS with respect to any capital gains tax that may be due and payable as a result of the business combination.
IX COMPETITION LAW
No new competition legislation relevant to M&A was introduced in the past year. Nigeria does not have a competition law, but industry regulatory authorities are generally given the power to refuse to grant consent to mergers if they are satisfied that competition in the sector will be significantly reduced as a result. Thus, the SEC will not approve a merger if it is satisfied that the merger will substantially lessen competition in the relevant sector. Other industry-specific regulators also have this power; for example, under the Nigerian Communication Commission’s (NCC) Competition Practices Regulations 2007, the NCC will review proposed mergers if it determines, based on the preliminary information provided by a licensee in its initial transaction notification, that the transaction may result in a substantial lessening of competition in one or more communication markets, or may result in a licensee or any successor company having a dominant position in one or more communication markets.
However, as outlined above, there are plans to enact competition and consumer protection law, which would bring about a much-needed competition regime in Nigeria and have a significant effect on the way mergers are regulated in Nigeria. The law, when passed, will provide a check on unhealthy competition, and will assuage the fears of foreign investors reluctant to do business in Nigeria due to the lack of competition law.
In view of the projected contraction of the Nigerian economy and continuing exchange rate volatility, the general outlook for inbound foreign direct investment appears to be challenging. We do, however, expect to see more M&A deals in sectors with a high potential for growth, such as the FMCG sector, and in sectors such as oil and gas where favourable asset valuations may make acquisitions attractive.
We also expect some activity in the insurance sector as international companies continue to jostle for position in the Nigerian market.
1 Lawrence Fubara Anga is a partner at Æ´LEX.