I OVERVIEW OF M&A ACTIVITY

There was a marked increase in M&A activity during the year in review.

The banking and financial services sectors were quite active, with several significant transactions. These included the merger of Diamond Bank and Access Bank Plc and the acquisition by Polaris Bank Limited of Skye Bank Plc, a Nigeria-based retail bank. In another deal, One Finance Limited acquired Amplified Payments Ltd, a fintech company that builds and facilitates payment solutions and digital financial transactions in Nigeria. Another notable transaction was the acquisition of Primera Africa, a top-ranked brokerage house in Nigeria by EFG Hermes, a leading financial services corporation, as part of EFG Hermes' strategy to penetrate frontier and emerging markets. LeapFrog Investments, an emerging market-focused private equity fund, has taken up a stake in ARM Pension managers, one of Nigeria's foremost pension management companies.

In the manufacturing sector, the Coca-Cola Company recently completed the acquisition of a 100 per cent stake in CHI Limited, one of Nigeria's foremost fruit juice and drinks manufacturers.

Other significant transactions include Jiji's acquisition of its rival in the online marketplace sector, OLX, in a bid to extend the company's footprint in Africa, and Helios Investment Partners' acquisition of Axxela Limited, a Sub-Saharan African gas and power 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, the Rules and Regulations of the Securities and Exchange Commission (SEC) and, more recently, the Federal Competition and Consumer Protection (FCCP) Act. Amendments were made to the SEC Rules and Regulations in 2017 and 2018.

Prior to the enactment of the FCCP Act, the role of the SEC was to review proposed M&A transactions to ascertain whether a proposed transaction would result in substantial restraint of trade. The implications of the new Act are discussed in Section 3. The Nigerian Stock Exchange also plays a significant role in M&A involving publicly quoted companies that are required to comply with its listing requirements.

Sector-specific laws also regulate M&A transactions in certain sectors. For example:

  1. 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;
  2. the Nigerian Communications Act regulates the telecommunications sector;
  3. the Electric Power Sector Reform Act regulates the electricity sector; and
  4. the National Insurance Commission Act regulates the insurance industry.

These sector-specific laws operate in addition to the provisions of the ISA, the Companies and Allied Matters Act, the FCCP Act 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 SEC was the primary regulator with powers of oversight over all M & A transactions involving both private and publicly quoted companies. However, in January 2019, the Federal Competition and Consumer Protection Act 2019 entered into force. The Act repealed the Consumer Protection Council Act, dissolved the Consumer Protection Council and established the Federal Competition and Consumer Protection Commission (FCCPC) in its stead. Consequently, the SEC's powers of oversight and approval of M&A are now vested in the Commission. Rules and regulations governing M&A under the new Act have not been released, and it is unclear whether the extant SEC rules will continue to be applicable during the transition period.

There are some concerns regarding how the FCCPC proposes carrying out its oversight functions over M&A activities in Nigeria. For example, guidance is required as to how the new provisions relating to registration of indirect transfers would be implemented. There are also concerns regarding the role of the Federal High Court under the Act.

On a positive note, 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, including the creation of the Companies Registration Portal to facilitate online registration of companies. Additionally, the National Assembly has passed a bill to amend the current Companies and Allied Matters Act; the Bill is currently awaiting presidential assent. Highlights of the Companies and Allied Matters Bill include the introduction of single member companies, which allows for the formation of private companies with only one member. Under the Bill, small companies can carry on business with only one director, and are exempted from the requirement to appoint a company secretary and to hold annual general meetings.

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, recent uncertainty surrounding the foreign exchange regime, coupled with slower economic growth and the emergence of other frontier markets, led investors to become more cautious with Nigerian investments. 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. The increasing stability of the foreign exchange regime has also had a positive effect on portfolio investment and foreign direct investment.

V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES

Arguably the biggest deal for the period under review was the acquisition of Primewaterview Holdings Nigeria Limited, a large-scale holding company with interests in real estate, oil and gas, health and power, for US$1 billion by Milost Global Incorporated in conjunction with, Isilo Capital Partners (its African subsidiary). This was reported to have been the largest deal in Sub-Saharan Africa in the first half of 2018. The year under review also saw the completion of 9mobile's acquisition by Teleology Holdings Limited after the Nigerian Communications Commission, the regulator of the Nigerian telecommunications sector, approved the transaction.

Other significant deals include the acquisition of Mimee Noodles, the food division of May and Baker Limited, by De-United Foods Industries Limited, makers of Indomie noodles, in a 775 naira million deal. Another notable transaction was the acquisition of a 75 per cent stake in Forte Oil Plc by Ignite Investments and Commodities Limited, a subsidiary of Prudent Energy and Services Limited.

In the e-commerce sector, Zinox Technologies acquired a 99 per cent stake in Konga, the largest online mall in the country. Shortly thereafter, Konga merged with Yudala to form what is now the largest online mall in Africa.

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 cash reserves while the rest are funded with equity or debt, especially foreign-sourced debt.

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.

VIII TAX LAW

Although the legal regime has not necessarily changed, it should be noted that during the year under review there was increased activity by the FIRS, indicating the government's intention to widen the tax net and increase revenue generated from taxes. This development would also mean increased scrutiny over M&A transactions to ensure that the applicable taxes are properly assessed and paid. Thus, potential investors would have to undertake thorough due diligence exercises to ascertain the amounts of back taxes for which a target asset is liable.

No merger, takeover of any form or 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.

The tax considerations will depend on the manner in which a combination is structured. If a 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. 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.

Another relevant tax, stamp duties, is charged at a flat rate of 0.75 per cent of the value of any newly issued capital.

IX COMPETITION LAW

The Federal Competition and Consumer Protection Act received presidential assent in early 2019. The Act aims to promote competition, curb restrictive trade practices and protect the interests of consumers. The Act establishes the FCCPC, which is now responsible for the approval of M&A. The Act divides mergers into small and large mergers, but does not set a threshold for determining which mergers fall into these categories. The newly established FCCPC is responsible for setting the thresholds for each category by regulation but is yet to do so.

The FCCPC is expected to issue regulations that would replace the SEC Rules and Regulations to provide further guidelines for the M&A space in Nigeria.

X OUTLOOK

We expect to see more M&A deals in sectors with a high potential for growth, especially the financial services, retailing and fast moving consumer goods sectors. Additionally, we expect to see continued activity in the technology, media and telecommunications space, as well as the financial technology 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 subsequent merger with Yudala.

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. FMDQ OTC Securities Exchange, registered by the SEC, is a securities exchange for debt capital, foreign exchange and derivatives. Its focus is on deepening the financial market and acting as a self-regulatory organisation for over-the-counter markets.

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. The reappointment of the Central Bank of Nigeria governor for another five-year term suggests that investors can expect some consistency in the monetary policy and foreign exchange regime in the years to come.

In July 2018, the President of Nigeria signed an executive order aimed at preventing persons found guilty of corruption from continuing to control assets acquired from the proceeds of corrupt activities. Additionally, the Presidential Enabling Business Environment Council introduced several initiatives geared towards improving the business environment in Nigeria. Such initiatives include the introduction of simplified registration procedures for new businesses and the development of an online platform for payment of stamp duties. We expect that, following the general elections, recent regulatory changes and the government's commitment to improving the business environment, investor confidence will improve, and with that, M&A activities will continue to increase.


Footnotes

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