By Jackson Okoth

Kenya: In April 2013, Mr Paul Kinuthia, the founder of start-up firm Interconsumer Limited sold off its health and beauty division to L’Oreal, a French cosmetic giant.

An interesting twist in the tale is that in Mr Kinuthia’s very early days, L’Oreal had tried to run him out of town.

You see, he had done a very canny thing.

He took L’Oreal’s Dark and Lovely brand and put a clever marketing twist. Kinuthia chose to go with Nice and Lovely, appealing to the women for whom “Dark” carried negative connotations.

And with a strong brand name, appealing pricing strategy and aggressive marketing tactics, Kinuthia flooded salons, retailers and beauty stores and went on to control a good share of Kenya’s cosmetics market.

In 2012, L’Oreal decided enough was enough and started talks to buy out Kinuthia.

For both parties, it was nothing personal, just business.

This deal — whose value is undisclosed but Kinuthia is said to have pocketed at least a billion shillings — has been the forerunner of a very active mergers and acquisitions scene over the last few months.

Good timing

The timing of the deal could not have been better; it came just days after Kenya’s fourth president, Mr Uhuru Kenyatta, was sworn in after the tense March 2013 elections.

Since then, the mergers and acquisitions market in Kenya has been vibrant, mirroring the vibrancy at the stock market.

On record, there are about 15 deals since April 2013, and we are still counting, with 2014 off to a fast start.

Artcaffé has bought Dormans, and Tuskys has absorbed Ukwala. Brookside has an insatiable appetite to buy local diaries, and French firm Danone has waded into the milky wars with a proposal to acquire a stake in Brookside. And South African City Lodge Hotel has increased its ownership of Fairview Hotel to 100 per cent.

So why are Kenyans selling their businesses and why are foreigners so keen on companies listed at the stock market and those privately held?

And when will the Chinese move away from their interest in infrastructure and start acquiring Kenyan firms, especially those in agribusiness? China needs to feed its huge population.

The way to look at it, according to analysts, is that there has been a lot of cheap money circulating in the global economy and looking for a decent return.

This is the cash that is fuelling the deals currently happening in the Kenyan market.

Emerging economies like Kenya present a decent return for many of these investors compared to their home markets, which although recovering from the 2008 great recession, are still not at full throttle.

Another aspect is that Kenyans are waking up and realising that business has become global.

To survive, these businesses need a strong capital base and expertise, and for some of them, the Nairobi Securities Exchange does not seem like the place to raise cash.

A month after Kinuthia sold off his business, the Somen brothers of Access Kenya announced what had long been an open secret — they were finally selling Access Kenya. Only this time, unlike in the past when the rumours swirled in business circles, they had settled on a buyer.

Dimension Data Holdings — a premium provider of IT solutions and services — bought Access Kenya for Sh3 billion in May 2013. The firm finally delisted in November.

The Somen family, whose names also feature on the list of shareholders in CMC Motors and Barclays Bank, walked away with tidy sums from the acquisition deal.

Others acquisition deals pending at the NSE are those of motor dealer CMC Motors Limited — which is now approaching its tail end — and sisal producer Rea Vipingo.

“One of the ways of investing in an economy is through mergers and acquisitions. In the last couple of months, merger deals have been on the increase — one sign that this economy is looking up,” said Mr Wang’ombe Kariuki, the Competition Authority’s director general.

In a gazette notice dated February 7 this year, the authority approved the acquisition of 100 per cent of CMC Holdings by Al Futtaim Auto and Machinery LLC.

It also authorised Artcaffé Coffee and Bakery Limited’s acquisition of seven C.Dorman Limited coffee shops.

An acquisition was the only way Artcaffé, or any other player, would catch up with Nairobi Java House, which was dominating the coffee shop sector. The deal brings Artcaffé’s outlets to 11, against Java’s 17, and gives it a presence in Nairobi’s Central Business District and in Mombasa.

Companies in the foods sector are attractive investments, particularly those with products targeted at middle-income consumers whose disposable income is growing.

South Africa’s Tiger Brands plans to acquire Rafiki Mills — Kenya’s fourth largest miller — and Magic Oven Limited would diversify its food products from chocolates and sauces to baked goods.

Unga Millers is also in talks to acquire Ennsvalley Bakery, which makes bread, cakes and cookies. The acquisition would allow NSE-listed Unga to increase its product offerings from animal feeds and maize and wheat flour products.

Unga Millers’ sales have remained flat in recent years due to increased competition in the milling sector, and it has relied on keeping costs low to grow its profits.

If the deal with Ennsvalley goes through, the makers of Exe flours get to add value to their products, which would help them widen their profit margins.

Unga’s financial muscle and brand presence would help Ennsvalley stave off competition — at least for a while — from minibakeries, coffee chains and retail outlets that also sell baked goods.

Oil find

In other sectors, NSE-listed investment firm Centum is set to acquire 73.35 per cent of Genesis Kenya Investment Management Limited, while Cavendish Square Holdings BV has been authorised to acquire an additional 16.484 per cent shareholding in communications company ScanGroup.

The Competition Authority has excluded the proposed acquisition of 999 ordinary shares of My Kenya Network by Africa Jobs Online. This is because the combined turnover of the acquiring firm is Sh12.6 million, which is less than the Sh1 billion threshold required for mandatory notification.

Mauritius’ Union Assurance wants to acquire 66.38 per cent of Phoenix of East Africa Assurance Company, which would give it a foothold in the fast-growing insurance sector in the region.

And, of course, the oil sector is drawing in its fair share of foreign investors looking for high-return investments.

Premier Oil Investments Limited plans to acquire 55 per cent participating interest in Kenya from Lion Petroleum Corporation, while 55 per cent of participating interest in block 11A is being acquired from ERHC Energy Kenya by CEPSA Kenya..

“While it will take years before oil production begins in Kenya, we are already seeing opportunities in Kenya’s plans to put up a railway, pipeline and port in Lamu. We are already planning a trade mission from the UK to look for opportunities in the oil sector in Kenya in March 2014,” said Mr Greg Gibson, the head of UK Trade and Investments in East Africa.

He made these remarks last week when 14 companies from Scotland toured Kenya on a fact-finding mission and to promote their skills in the oil and gas sector.

The exploration for oil in northern Kenya is expected to pit smaller exploration firms against bigger players, with all keen to get a piece of the country’s oil business before commercial production of crude oil and natural gas begins.

Other deals whose details are still scanty include City Lodge’s acquisition of the remaining 50 per cent stake in Fairview Hotel, and Actis’ purchase of a 36 per cent share in tyre wholesaler and retailer AutoXpress.

The sums of cash involved in Ukwala’s deal with Tusker Mattresses, Danone’s interest in Brookside Dairies and Faulu Kenya’s deal with Old Mutual are also still undisclosed.

Nigerian GTBank’s acquisition of a 70 per cent stake in Fina Bank cost $100 million (Sh8.7 billion), paid out in a combination of shares and capital injection. The deal gives the Nigerian bankers a presence in Kenya, Uganda and Rwanda, markets that West African financial institutions have found difficult to crack.

Experts view recent acquisitions and mergers as a sign of changing fortunes for Kenya as an investment destination.

“A lot of these international firms coming into the country are looking for a foothold in Africa using Kenya as an entry point,” said Mr Kithinji Kiragu, an economist.

Gateway to Africa

Many cash-rich multinationals are looking at Kenya’s strategic location, and its geopolitics and potential.

“Africa is seen as a growth market by many multinationals,” said Mr Kiragu, who sold off his KK Consultants and Associates firm to PricewaterhouseCoopers (PwC) and Solid Investment Securities to NIC Bank in 2002 and 2007, respectively.

“You can only take a company up to a certain level beyond which it begins to give you challenges. This is one of the reasons a new partner or buyer is difficult to turn down,” he said.

Most of the multinationals making these acquisitions have the financial muscle to change the businesses, expand them or change their models to suit their plans.

“For the seller, the offer may be too good to resist or turn down. The company owner may also not be able to realise the firm’s full potential and therefore decides to sell it, making a profit from the investment, such as what is happening at CMC Motors,” said Mr Kariithi Murimi, a risk consultant. “The big boys in CMC Motors are cashing in on their investment after taking decades to build the company’s value, while Brookside is looking for expansion cash,” he said.

Mr Johnson Nderi, ABC Capital’s corporate finance and advisory manager, added: “Times are tough and if you can get a big brother with solid cash then you are good.”

He said many businesses are facing the conundrum of whether to grow naturally or acquire another company.

“Local entrepreneurs are realising the importance of bringing other partners into the business. Why wait 10 years and yet you can achieve the same objective in one year or even less through a merger or an acquisition?” 

Mr Nderi attributed the merger and acquisition spree to the Kenyan corporate market maturing and being alive to more opportunities, as well as the availability of cheap financing options.

The benefits

And the NSE is expected to benefit from the increased investor interest.

“While the appetite for listing has gone down after the Safaricom and KenGen share offers that left investors disappointed, this situation is expected to change as new players get listed,” said Mr Murimi.

In the case of the Faulu Kenya buyout, South Africa’s Old Mutual could be looking for a retail strategy in Kenya and could use this acquisition as a launch pad.

According to data from the Emerging Markets Private Equity Association (EMPEA), Sub-Saharan Africa attracted Sh137.7 billion in private equity investment in 2013, the highest in five years, with the East African region experiencing the biggest increase in deal activity.

However, private equity funds focused on Sub-Saharan Africa raised less money year-on-year, with 11 funds taking in Sh79.3 billion, down 46 per cent from 2012.

As one of the world’s fastest-growing regions, the continent has caught the attention of private equity investors who have been encouraged by rising consumer spending and natural resource discoveries in countries like Kenya, Uganda and Mozambique.

Given the limited number of listed companies and low liquidity in stock markets outside Johannesburg, Lagos and Nairobi, the asset class offers investors greater exposure to fast-growing sectors.

jokoth@standardmedia.co.ke