South Africa Banks Target Africa Power, Road Deals as M&A Drops

November 17, 2011, 6:16 AM EST

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Nov. 17 (Bloomberg) -- South African investment banks, led by Standard Bank Group Ltd., are racing to fund road, port and power projects in sub-Saharan Africa to replace earnings from the biggest drop in mergers and acquisitions in seven years.

“The opportunities are massive,” Theuns Ehlers, head of project finance at Johannesburg-based Absa Group Ltd.’s investment banking unit, said. “The pipeline is there.”

Companies in South Africa announced 235 takeovers valued at 107.7 billion rand ($13.1 billion) so far this year, heading for the lowest level since 2004, when deals totaled 107.6 billion rand, according to data compiled by Bloomberg. There were 273 transactions in 2010 worth 221.8 billion rand.

To compensate for the loss in M&A revenue, lenders are trying to tap into the $93 billion a year in investments the World Bank estimates is needed to build power plants and roads in countries including Nigeria, South Africa, Botswana, Zambia and Kenya over the next decade to sustain economic growth. Governments need private companies to help finance ailing infrastructure as demand for services, including power, roads and rail, fails to keep up with supply in a continent of close to a billion people.

Standard Bank, Africa’s largest lender by assets, tops South Africa’s so-called league tables with three deals valued at 18 billion rand, which includes Jinchuan Group Ltd.’s takeover of copper producer Metorex Ltd. Credit Suisse AG is ranked second and Goldman Sachs Group Inc. is third with seven transactions such as the 9.72 billion rand purchase of Cape Town’s Victoria & Alfred Waterfront shopping mall by Growthpoint Properties Ltd. and the Public Investment Corp.

‘Political Uncertainty’

Deals have been drying up at home amid slowing growth caused by a sovereign-debt crisis in Europe, which accounts for a third of South African trade. Investor confidence is also undermined by calls to nationalize mines and banks by Julius Malema, the president of the ruling African National Congress Youth League, and the government’s attempts to impose more conditions on Wal-Mart Stores Inc.’s 16.5 billion rand purchase of a controlling stake in wholesaler Massmart Holdings Ltd.

“The overall economic framework in South Africa given policy uncertainty, institutional delivery challenges, logistical challenges and uncertainty on the overall political economy -- these are certainly barriers,” Colin Coleman, managing director and head of sub-Saharan Africa, said in a phone interview.

Funding infrastructure projects opens the way for investment banks to raise capital and because they typically involve large sums and commodities, allows lenders the opportunity to reap fees on price-risk management by using derivatives to hedge, Helmut Engelbrecht, the head of investment banking for Africa at Standard Bank, said. It also provides access to decision makers, which could open up other investment- banking opportunities, he said. Fees could also be higher than for M&A because transactions may sometimes take as long as two years to conclude and requires more effort, Absa Capital’s Ehlers said.

Demand for Resources

Demand for Africa’s mineral and energy resources is helping to drive infrastructure development, Kokkie Kooyman, who oversees Cape Town-based Sanlam Investment Management’s $260 million Sanlam Global Financial Fund. The copper belt running through Zambia and the Democratic Republic of Congo holds 10 percent of world copper reserves, while Congo alone has two- thirds of cobalt deposits.

“Africa is still sought after because of its resources,” he said. “To get those resources out cheaper you need infrastructure.”

Botswana estimates it has 200 billion metric tons of coal reserves, enough to supply India’s current import needs for 2,000 years. South Africa is the world’s biggest producer of platinum, while Zimbabwe has the world’s second largest reserves of the metal.

Infrastructure spending totaled $45 billion a year in the mid-2000s, a fifth of which was funded by the private sector and less than half of what is needed for Africa to catch up with the rest of the developing world, according to the World Bank.

Overtaking Leveraged Finance

Revenue earned from power and infrastructure projects at Standard Bank grew 60 percent over the past year and may overtake revenue from the bank’s diversified leverage and lending book in 2012, William Blackie, head of investment banking at the Johannesburg-based lender, said. The lender is working on funding for a rail network and airport in Lagos.

FirstRand Ltd.’s Rand Merchant Bank and rival Absa Capital, a unit of Barclays Plc’s Absa Group Ltd., are advising on the privatization of Nigeria’s electricity industry as the government sells 70 percent stakes in 11 power-distribution companies as part of a program to end its monopoly over the country’s electricity industry.

“We’re looking at providing funding to potentially some of the successful bidders,” Michael Larbie, the head of investment banking and coverage for Africa at RMB, said, declining to give details on the companies involved. “And there are a lot of bidders.”

‘Substantial Pipeline’

Absa Capital is focusing on deals in countries where Absa and London-based Barclays have operations, including Mozambique, Botswana, Zambia, Kenya and Angola, which have been busy markets for infrastructure investments, Ehlers said, adding the lender has two power mandates in Kenya.

While there was a “substantial pipeline of deals,” many of them are taking longer than expected to reach fruition because of political uncertainty and a lack of guarantees from governments and backers for the projects.

“There could potentially be even more deals,” Ehlers said, “if we could just get them over the line from a bankability perspective.”

Courtesy of Bloomberg