I OVERVIEW OF M&A ACTIVITY
The Nigerian economy has been officially in recession for nearly one year. Consequently, there was a slowdown in M&A activity during the period under review. However, despite the continuing lull, there were a few noteworthy transactions, largely driven by domestic regulatory requirements and international consolidation of parent companies.
The technology, media and telecommunications (TMT) sector was fairly active, with a number of deals including Interswitch Limited’s acquisition of 100 per cent equity in security-focused financial technology provider, Value Added Network Solutions (VANSO). Another significant deal in this sector was MTN’s acquisition of Visafone. In another deal, Synergy Capital Managers, an Africa-focused private equity firm, acquired the Nigerian subsidiary of Dimension Data, an ICT solutions company based in Johannesburg.
In the banking sector, AMCON recently announced the acquisition of Keystone Bank Ltd by the Sigma Golf–Riverbank consortium.
Other significant transactions included IFC’s investment in Hygeia Nigeria Limited and NIPCO’s acquisition of a 60 per cent equity stake in Mobil Oil Plc.
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 role of the Security and Exchange Commission (SEC) is to review proposed M&A to ascertain whether a proposed transaction would result in substantial restraint of trade, and to 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 the 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.
The CAC, which is the main regulatory body for corporate organisations generally, has introduced various measures to make the companies’ registry more efficient, with one such measure being the creation of the Companies Registration Portal to facilitate online registration of companies.
IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS
M&A activity in the past was fuelled by investors’ desire to participate in Nigeria’s rapidly developing economy. However, foreign exchange challenges coupled with the economic downturn have caused significant discouragement among investors. More recently, interest in investment in Nigeria has been revived. This is partially connected to the devaluation of the naira, which enabled foreign concerns to acquire Nigerian interests at a much cheaper rate.
V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES
One of the year’s biggest deals occurred in the oil and gas sector. In a transaction worth US$301 million, NIPCO acquired a 60 per cent equity stake in Mobil Plc by way of a cross deal executed on the Nigerian Stock Exchange.
The TMT sector was considerably active, with significant deals including the acquisition of VANSO by Interswitch, Limited and Synergy Capital’s acquisition of Dimension Data’s Nigerian subsidiary.
In banking, Keystone Bank Ltd was acquired by the Sigma Golf–Riverbank consortium in a deal worth about US$81 million.
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, a reduction in the number of deals funded by foreign capital is expected 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.
The National Industrial Court (NIC) has been active in resolving labour disputes. Recently, the controversy surrounding the appellate jurisdiction of the NIC was laid to rest by a Supreme Court decision affirming the jurisdiction of the court of appeal to hear appeals arising from decisions of the NIC.
VIII TAX LAW
There have been no recent changes to the 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 contraction of the Nigerian economy and continuing exchange rate uncertainty regarding foreign currency supplies, the general outlook for inbound foreign direct investment on the face of it 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 TMT sector, and in sectors such as oil and gas, where favourable asset valuations may make acquisitions attractive. Specifically, we expect to see considerable activity in the oil and gas sector, as negotiations are ongoing for Bresson Energy’s acquisition of the 80 per cent stake in OPL 241 currently held by Owena Oil and Gas in order to assume full ownership of the block. Following Owena’s exit, Bresson Energy would seek to bring additional equity partners on board to co-manage OPL 241. We also expect to see new deals in the telecommunications sector in the wake of the Etisalat’s recent crisis, especially as there is strong evidence that Etisalat is set to dispose of its 40 per cent equity stake in Etisalat Nigeria.
The National Association of Securities Dealers (NASD), provides a platform for trade in securities of unlisted public companies, thereby allowing companies to raise capital without being listed on the Nigerian Stock Exchange. The platform provided by the NASD is instrumental in improving liquidity and facilitating private equity exits.
The Central Bank of Nigeria has made moves to mitigate the effects of persistent foreign exchange challenges. The most recent of such moves is the introduction of the investors’ and exporters’ FX window in a bid to improve liquidity. Transactions under this window are to be determined on a willing buyer, willing seller basis. Experts believe that this policy will encourage foreign investment in the equity and bond markets, and on this basis, we anticipate new deals across several sectors.
1 Lawrence Fubara Anga is a partner and Maranatha Abraham is an associate at Æ´LEX.