I OVERVIEW OF M&A ACTIVITY

Nigeria has been on the path to full recovery from the recession that crippled the economy between 2016 and 2017. Following the end of the recession in September 2017, a few notable M&A transactions took place after the lull of the previous year.

The technology, media and telecommunications (TMT) sector was very active, with several significant transactions, including the acquisition of 9mobile (formerly Etisalat) by Teleology Holdings Limited after paying a US$50 million deposit to the trustee of the company's lenders. Another significant deal in this sector was the acquisition by Transsion Holdings (producers of Tecno) of Microstation, a Nigeria-based mobile phone retail chain store. In another deal, GreyCroft Partners, a US-based venture capital firm, made a US$10 million investment In Flutterwave, a fast-growing fintech start-up. Another notable transaction was the acquisition of Konga by Zinox Group, a leading ICT solutions provider.

In the financial sector, FCMB Group recently announced the acquisition of a 60 per cent stake in Legacy Pension Managers, increasing its stake in the company to about 88 per cent.

Other significant transactions include Century Petroleum's landmark reverse merger with Ibeto Cement, in which Ibeto Cement acquired a 70 per cent stake in Century Petroleum Corporation, a publicly traded US petroleum company.

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 (the 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 contain provisions that affect 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., 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 if 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 applies 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.

Following plans to introduce a robust competition and consumer protection regime, The Federal Competition and Consumer Protection Bill 2017 was passed by the National Assembly in December 2017 and is currently awaiting presidential assent. When passed, the law will bring about a much-needed competition regime and have a significant effect on merger regulation. In addition to other provisions, the Bill establishes a Federal Competition and Consumer Protection Commission with powers to regulate competition, which will, in effect, assume the merger control powers of the SEC.

There are also plans to amend the Investments and Securities Act, which is the primary legislation governing M&A transactions. The aim of the amendments is to improve investor protection in Nigeria and, hopefully, encourage foreign investment in Nigerian businesses.

The Corporate Affairs Commission, which is the main regulatory body for corporate organisations generally, has introduced various measures to make the companies' registry more efficient, one 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 partly 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

Arguably the biggest deal for the period under review was Ibeto's acquisition of Century Petroleum Corp in a historic reverse merger deal, making Ibeto Cement the first Nigerian company to be listed on the US Stock Exchange.

Other significant deals include the acquisition of Konga by the Zinox Group and Greycroft's investment in Flutterwave; the latter deal in particular is significant because the fintech space in Nigeria is still in its early stages.

In the financial services sector, Allianz Group, a leading insurer and asset manager, acquired an 8 per cent stake in African Reinsurance 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 the volatility of the exchange rate and illiquidity in the currency markets have been addressed by the government.

VII EMPLOYMENT LAW

There have been no recent changes to employment law that are relevant to M&A. The statutes governing this are the Labour Act, the Pension Reform Act and the Personal Income Tax Act.

The Labour Act provides 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 made by the NIC.

VIII TAX LAW

There have been no recent changes to the tax law that are relevant to M&A. In an M&A context, stamp duty is the relevant tax. When 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. If 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. If 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 has been 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 its Competition Practices Regulations 2007, the Nigerian Communication Commission 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 in Section III, 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. The law, when passed, will provide a check on unhealthy competition and will assuage the fears of foreign investors who are reluctant to do business in Nigeria because of the lack of competition law.

X OUTLOOK

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 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 others where favourable asset valuations may make acquisitions attractive, such as oil and gas. Specifically, we expect to see considerable activity in TMT, especially in the financial technology sub-sector, which appears to be a fast-developing area. The e-commerce space also shows a lot of potential for M&A activity in the wake of Konga's acquisition by Zinox Group and the acquisition of Jumia House (the housing division of Jumia) by ToLet.com.ng. We also expect to see new deals in the telecommunications sector as a result of the uncertainty surrounding 9mobile's recent acquisition by Teleology.

The National Association of Securities Dealers (NASD) provides a platform for trade in the 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 these 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 this policy will encourage foreign investment in the equity and bond markets and, on this basis, we anticipate new deals across several sectors.


Footnotes

1 Lawrence Fubara Anga is a partner and Maranatha Abraham is an associate at ÁELEX.