On mergers and acquisitions, project financing, and financial technology in Nigeria
Where do you see the biggest opportunities for mergers and acquisitions (M&As) in Nigeria?
ABUBAKAR JIMOH: In recent years, a significant level of M&As have been recorded in the Nigerian economy. In terms of deal size, the sectors with the most M&A activity are oil and gas, and financial services. In the hydrocarbons industry this was largely driven by upstream oil and gas asset disposal by international oil companies. Other sectors with significant M&A activity include telecommunications, food and beverages, consumer goods, construction and manufacturing.
Power sector reforms also resulted in a flurry of M&A activity, as local and foreign investors sought to acquire power distribution and generation companies. Manufacturing has also attracted a lot of international investors in recent years, and there has been some M&A activity in insurance, driven largely by the freeze in issuance of new licences and the proposed introduction of risk-based solvency assessment.
While there has been a slowdown in M&A activity in recent times due to the current challenges, we expect the trend to change as the country comes out of the economic crunch.
What are the biggest challenges Nigerian firms face when undertaking a merger or acquisition?
JIMOH: There are several. These include securing regulatory approvals, as the timing and procedures involved in conducting statutorily required reviews and obtaining approvals from relevant regulatory authorities on M&A transactions sometimes constitute a major hindrance to a successful transaction.
In addition, many Nigerians are quite emotional with their businesses and love to maintain ownership and absolute control. This sometimes leads to business owners being unaccepting of and hostile to M&A offers.
Furthermore negotiations on M&A transactions often result in a deadlock and lead to a breakdown in discussions. It is the most common reason for an unsuccessful M&A transaction. The same happens with negotiations of representation, warranties and indemnification.
For foreign investors, major challenges faced when undertaking M&A transactions include local content and indigenisation requirements, the naira’s high potential for depreciation resulting in possible loss of investment value, concerns over the repatriation of investment proceeds due to previously experienced foreign exchange issues, high levels of corruption, delays in obtaining necessary regulatory approvals, changes in the operating environment due to insurgency and ethnic violence in various parts of the country, the activities of militants, and other security concerns.
Are there any innovative forms of project financing that could be applied?
JIMOH: There are a few noteworthy forms of project financing currently being adopted in Nigeria. One is vendor financing. This method involves leveraging the financing capabilities of a supplier or original equipment manufacturer to fund the acquisition of an asset or the development of a project, with an arrangement put in place for future repayment. The oil and gas, power, and public infrastructure sectors have witnessed a rise in vendor financing in recent times.
Floating an infrastructure bond is another medium being used to finance projects, especially in the public sector. The Lagos State government is currently working on raising around N100bn ($353m) in bond offerings to finance critical infrastructure in the state.
How successful has financial technology (fintech) been in Nigeria so far?
JIMOH:Fintech is gaining significant momentum and causing disruption to the traditional financial services value chain in Nigeria. The fintech drive has seen increased adoption from fast-growing tech start-ups in Nigeria. Organisations are gaining increased revenue through the deployment of alternate digital channels to customers while providing best-in-class financial services in a cost-effective manner.
The retail banking, funds transfer and payment segments will be the most impacted in the next two to three years. The financial services sector will continue to see the deployment of new digital applications that facilitate easier payments and the seamless execution of customers’ transactions in a cost-effective manner. The insurance and asset management sectors will also experience the game-changing impact of fintech in the near term.