Uncertainty Impacted M&A in Africa in 2023, But Growing Demand in Certain Sectors Will Drive Future Growth

Last year was challenging for M&A in Sub-Saharan Africa (SSA). Globally, geopolitical issues, currency volatility and soaring inflation led international investors to adopt a cautious stance, prompting smaller and safer investment choices. Around one-third of the African population has voted or will vote this year, adding to economic policy uncertainty and resulting in reduced investor confidence across the continent.

However, despite the decrease in the volume and value of transactions in 2023, the resilience of certain sectors – most notably finance, technology, media and telecommunications (TMT) and energy – bodes well for future M&A activity. Furthermore, while investor confidence might be low, if election outcomes are stable or positive (as was the case in Senegal earlier this year), confidence is expected to rise quickly.

Several SSA ports are struggling with congestion, a lack of facilities and the existence of red tape, and have failed to capitalise on the redirection of ships around the Cape of Good Hope due to recent tensions in the Red Sea. The transport of goods across the continent is also hampered by a lack of road and rail infrastructure. Investments in transport infrastructure are desperately needed, and capital is already flowing in this direction.

In 2023, there were numerous investments in port infrastructure projects and in railways connecting countries to ports. For example, the South African government recently announced a preferred bidder to partner with Transnet Port Terminals in a joint venture to develop and upgrade the Durban Port container terminal, which handles 46% of South African traffic.

Renewable energy is expected to account for 65% of installed capacity in Africa by 2035 and 95% by 2050. According to a recent report by the International Energy Agency, 43% of the population on the continent (mostly in SSA) does not have access to electricity. Increasing access to a clean, decarbonised and decentralised energy supply is critical for the continent. There is also growing investment in energy infrastructure, including electricity grids, renewable energy power plants and facilities.

Overall, the African energy and power sector announced 13 deals in 2023, including those in the oil and gas and renewable energy sectors. For example, there were investments in a wind farm in South Africa and a portable solar power project in Nigeria last year.

Demand for the critical minerals needed for energy transition globally is also driving investment in SSA, with investors looking at how they can further unlock the continent's vast critical mineral potential. Around one third of the global critical mineral reserves and half of the world’s platinum group metals, cobalt and manganese can be found in Africa. According to the International Monetary Fund, SSA is already at the centre of global critical mineral production. For example, the Democratic Republic of Congo (DRC) accounts for more than 70% of global cobalt output, and South Africa, Gabon and Ghana collectively hold more than 60% of the world's manganese. Along with the DRC, Zimbabwe and Mali also have lithium deposits.

Investment in TMT infrastructure is direly needed across Africa, and continues to gain momentum. The physical structures that enable the efficient transmission, storage and processing of data play a critical role in accelerating economic growth in Africa. Cellular towers that transmit and receive radio signals, terrestrial and subsea fibre cables, and data centres that host servers storing and processing data are attracting investor interest.

There have been new market entries in the digital infrastructure space in SSA, motivated by the ever-increasing demand for internet access and supported by advances made by multinational hyper-scalers in landing additional subsea fibre cables, such as the 2Africa cable connecting the continent to Europe and the Middle East.

A good example of a notable transaction in this sector is Equinix's recent entry into the South African market, with a USD160 million data centre turnkey development and long-term lease transaction in Johannesburg securing the construction of its first data centre in the country, targeted for completion towards the end of June 2024.

The financial sector saw the highest SSA deal volume in 2023. A standout amongst the total of 23 deals was African Bank's ZAR3.2 billion deal to bolster its diversification into business banking in Africa. Many deals in the financial sector in SSA also overlap with those in the technology sector, and the rapid growth of mobile payment systems and digital trading platforms – especially those that support financial inclusion – has led to increased investment in this sector.

Innovative financial service offerings and demand for capacity building in terms of IT skills and infrastructure also lead to more investment in overlapping financial and technology sectors, with large operators recently acquiring the intellectual property, people and customers of African technology companies.

Finally, there is also a growing investor focus on green, low-carbon and sustainable initiatives in Africa. Environmental, social and governance (ESG) elements have been incorporated into general investment considerations for some time, and are now an essential component of most SSA transactions. Black Economic Empowerment is a particularly South African ESG factor that continues to require sustainable forms of implementation to have an effect and, in turn, to assist businesses in increasing their turnover and ensuring they are sustainable.

Overall, transactions that ensure a meaningful focus on socio-economic transformation and sustainable growth, while also filling transport, energy and digital infrastructure gaps, are expected to reap the biggest M&A rewards in Africa in the years ahead.