AFRICAN IPOS - A DROUGHT OR A DELUGE?
NOVEMBER 2018
Bankers believe that Vivo Energy’s dual listing in May has opened the taps on the IPO pipeline in Africa, but with primary equity markets suffering globally, is the continent really an exception?
When Vivo Energy listed on the London Stock Exchange in May, it marked the largest Africa-focused IPO to list in the UK capital in 13 years. The company, which sells Shell-branded fuels and lubricants in 2,000 filling stations in 15 African countries, raised £548 million from the sale of 30% of the business to international investors.
After the float, the company was valued at £1.98 billion – not bad for a portfolio company, which was bought by Africa-focused private equity fund Helios Partners in 2011 for $1 billion. Vivo is also listed on the Johannesburg Stock Exchange.
Following the IPO, Vivo Energy announced an 11% increase in net income for the first half of the year, with profits hitting $95 million on the back of higher trading volumes.
JPMorgan, Citi and Credit Suisse were joint global coordinators. BNP Paribas, Rand Merchant Bank and Standard Bank acted as joint bookrunners.
The successful listing of Vivo renewed interest in Africa’s equity capital markets, especially for IPOs. Before Vivo, the last dual listing of note took place in April 2014, when Nigerian oil and gas company, Seplat, raised $500 million in an IPO in London and the Nigerian Stock Exchange (NSE). BNP Paribas, Standard Bank, Citi and RBC Capital Markets advised on the London listing, while Renaissance Securities and Stanbic IBTC advised on the Nigerian listing.
“Vivo Energy’s listing stands out because it validates the fact that a foreign listing can be a viable means of exit for private equity funds invested in Africa,” says Afolabi Olorode, deputy head of investment banking at FBNQuest Merchant Bank, a Nigerian-based investment bank.
“And there has been a lot of chatter recently around African companies seeking to tap foreign capital – especially following the dearth of issuance after Seplat,” says Olorode. “Moreover, the IPOs we see coming aren’t confined to one sector or country, but it’s a pan-African development.”
Some sectors and countries are bound to be a greater source of IPOs than others, however. Telecoms companies, the oil and gas sector and any banks in the region that haven’t yet made the foray into ECM are all primed to produce some of Africa’s largest IPOs. And in terms of country of origin, companies from the region’s two largest economies – South Africa and Nigeria – will be the most likely to float.
Nigeria’s economic growth hit a record low in the first quarter of 2016, contracting by 13.98%, but in 2017, that bounced back to 0.83% growth. Stephen Friesenecker, Rand Merchant Bank
“We expect to see a lot more deal activity out of Nigeria across a variety of sectors, given the improving economic prospects on the back of higher oil prices,” says Stephen Friesenecker, co-head of equity capital markets at Rand Merchant Bank in South Africa.
There are a number of promising IPOs on the blocks. There are plans for a dual listing in London and Johannesburg of Liquid Telecom – a unit of Econet Wireless, which provides fibre-optic, satellite and international carrier services for telecoms companies such as MTN, Bharti Airtel and Vodafone.
Liquid Telecom enlisted banks including Standard Bank, Citi and JPMorgan in March to advise on its listing.
Dubai-based Network International, a payment solutions provider in the Middle East and Africa, is said to be working with Evercore and Citi on an upcoming IPO in Dubai and London.
Bharti Airtel, the Asian and African telecommunications company, has plans to list its Africa business in London.
And Dangote Cement, the pan-African firm owned by Africa’s richest man, Aliko Dangote, is said to be looking at a dual listing in London and Lagos after Nigeria’s presidential elections in February 2019.
Companies that have been able to take advantage of Africa’s growing consumer class are also likely to list, say bankers. “Despite the fact that growth in Africa has slowed since 2016, it is still strong relative to other emerging and frontier markets,” says Funmi Akinluyi, director, frontier market equities at Silk Invest, a boutique investment firm based in London. “Investors still buy into this story and there are a number of opportunities in the retail, healthcare and other sectors within the consumer space.”
London calling
African capital markets are small. The value of listed companies across African stock exchanges is just over $700 billion, with South Africa accounting for more than half of this at $475 billion.
“There’s no magic number regarding the amount of capital to be raised,” says Simon Matthews, global head of equity capital markets at Standard Bank, “but in some instances, companies looking to raise significant capital through an IPO may not be able to meet all their requirements domestically.
“The London or Johannesburg stock exchanges boast deep liquid markets and an abundance of emerging market expertise – ideal for African companies looking to capture a more diversified shareholder base.”
Miguel Azevedo, Citi Miguel Azevedo, head of investment banking Africa (ex South Africa and Egypt) at Citi, says: “London is the gold standard. It’s what companies strive for.”
Currently there are 110 African companies listed or trading on the LSE – more than on any other international stock exchange – with a total market capitalization of over $200 billion. Many of them have chosen to list on the Alternative Investment Market (AIM), which gives smaller companies a more flexible regulatory regime.
“Specifically, as it relates to Nigeria, the LSE has been very supportive through its collaboration with Nigeria in allowing cross-border listings,” says Olorode. “A lot of work has gone in on the part of NSE to update its listing requirements and obligations in line with global standards. Improving on governance and transparency remain the key fulcrum of these initiatives. The intended effect has been that, barring a few technicalities, companies listed on the NSE are now more easily able to migrate into an LSE listing.”
After London, South Africa is the next choice because of the limits that the South African Reserve Bank puts on local fund and asset managers in terms of offshore investments.
Matthews says: “In South Africa, we estimate the top 10 institutional investors alone manage around $115 billion of assets under management in equities, of which only $18 billion have a mandate to invest outside of the Johannesburg Stock Exchange.”
“There’s a lot of captive capital looking for attractive investment opportunities in South Africa,” says Friesenecker. “In fact, when an international company inward lists on the JSE, it is considered a domestic asset. The Vivo Energy IPO is a case in point: the company elected to list on both the LSE and JSE in order to access this additional pool of otherwise untapped capital.”
Increasingly, however, regulatory requirements often mean that companies in sub-Saharan Africa looking to raise money through an IPO cannot go straight to London or even Johannesburg. Some might not meet the requirements set out by the LSE or JSE in the first place, but many are forced to list at home first in order to support the local economy.
In Nigeria, investors are still waiting for the local listing of MTN, which was put on hold following a dispute around the repatriation of $8.1 billion to South Africa, which according to the government, depleted the country’s foreign exchange reserves at a time when the oil price was low. (Crude oil accounts for around 90% of Nigeria’s foreign currency earnings.)
Nigeria is MTN’s biggest market and accounts for a third of its annual profit.
Funmi Akinluyi, Silk Invest “The telecommunication sector in Nigeria contributed over 10% to overall GDP in the first quarter of this year, but it’s unfortunate this sector is unrepresented on the stock market,” says Akinluyi. “MTN Nigeria will see tremendous interest from both local and foreign investors when it lists. We expect the government will encourage a business-friendly environment for companies to continue to thrive and look to list at some point.”
International depth
Depending on which country you look at, local demand can vary drastically. In June last year, Tanzania reluctantly allowed international investors to take part in the Vodacom Tanzania IPO after local interest was sluggish. In the end, the deadline for the sale was extended twice and international investors picked up 40% of the offering.
When MTN’s Ghana unit listed on the Ghana Stock Exchange in March of this year only a third of the shares on offer were sold, raising C1.1 billion ($237 million). The listing was a requirement set out by the government when MTN Ghana acquired the right to use spectrum for fourth-generation wireless services in 2015.
“Indigenization and local ownership requirements are expected to be continuing drivers of IPOs on local African exchanges,” says Friesenecker. “But the depth of local markets can be problematic. As with the in-country IPO of Vodacom Tanzania, there just wasn’t the market capacity for the offer size. Opening up local opportunities to international investors is one way to mitigate this issue. Another is to look at a secondary listing in Johannesburg or London, which offer greater market depth and liquidity.”
A third option is to explore an offshore listing after an initial IPO at home. This is precisely what African-focused property company Grit, which is already listed in Mauritius and South Africa, chose to do when it raised $120 million in a London IPO in July this year.
“In deciding on a listing venue or venues, issuers must evaluate the ease and efficiency of the listing process, where its comparable peers are listed and the likely impact on demand from target investors,” says Friesenecker. “Companies will ultimately decide on the exchange that makes good commercial sense for them.”
As Africa grows, so will the continent’s companies; the ways in which they raise capital will evolve as they learn to navigate local and international capital markets.
While debt issuance – dominated by sovereign Eurobonds – characterized the financial development of Africa in the last decade, equity is becoming an increasingly important part of the picture. Simon Matthews, Standard Bank
“It’s an exciting time for African equity capital markets,” says Matthews. “In 2017, 27 African companies listed, raising $2.7 billion. Year to date, 19 African companies have raised $2.4 billion – this is compared to the previous five-year average of $1.5 billion.
“You can’t compare this type of activity with the likes of that out of Asia or Europe, but simply put, equity activity is increasing in Africa. The numbers don’t lie.”
Truth behind rumours
Should we believe the hype?
“There is a significant amount of truth behind the rumours,” says Azevedo. “But will [these African IPOs] happen? Markets have been a little wobbly, to say the least, and nothing is certain in this environment.”
Equity markets are struggling around the world. In Europe, cargo handling company Swissport International, plastics maker Novares Group, integrated downstream company Varo Energy and publisher Springer Nature have all postponed or pulled their IPOs this year.
“Given investor sentiment, many of these companies wouldn’t have been able to achieve the valuations that they would have wanted,” says one ECM banker. “Pulling out was the best option they had, given the circumstances.”
Companies that chose to list have done so at some cost.
“Look at how Aston Martin and Funding Circle have performed since listing,” says the banker. “It’s been abysmal.”
Aston Martin lost 5% of its value on the first day of trading on October 3, while Funding Circle saw shares fall by as much as a quarter on its first day on the same day.
According to Bloomberg, so far this year European IPOs have raised $37 billion, compared with around $44 billion in the same period last year.
Africa-focused IPOs have felt the same pressure as their international counterparts. In March, mobile phone tower operator, Helios Towers, pulled its London and Johannesburg listing. Then in June, another telecoms firm, Eaton Towers, pulled its IPO, which was also to be listed in London and Johannesburg. In the same month, Africa’s largest tower company, IHS, postponed its IPO, with market participants saying that the deal may be affected by the presidential election in Nigeria next February. IHS has made no public comments about the IPO or the election.
Global trade disputes, the uncertainties of Brexit and rising US interest rates have seen funds destined for emerging markets dwindle. Despite the recovery in Nigeria, investors remain skittish ahead of the elections and after the sudden resignation of finance minister Kemi Adeosun, who was forced to step down over allegations of a forged certificate that had exempted her from the country’s mandatory one-year youth service scheme.
In South Africa, even with the political dividend that came with the election of president Cyril Ramaphosa in February this year, investor sentiment turned sour after the resignation of finance minister Nhlanhla Nene when it came to light that he had been in contact with the Guptas – a wealthy Indian ex-pat family accused of large-scale corruption in South Africa. Meanwhile, disputes over farmland ownership continue to cast a shadow on South Africa’s political stability.
“South Africa has historically led IPO activity in sub-Saharan Africa, but new issuances have declined in the face of slowing economic growth, political and policy uncertainty,” says Friesenecker.
The equities banker says: “Emerging market equities are the first to suffer when sentiment turns risk off as investors look for a safer place to put their money. It’s the same reaction every time.”
Nigerian equities had a strong start to the year – buoyed by the all-important oil price – but that has since moved into negative territory. Year to date, Nigeria’s All Share Index (ASI) has declined by 15.2%.
It has been a similar story for Johannesburg, down 8.9% year to date. So far this year, the MSCI Emerging Markets index, which covers the performance of large and mid-cap securities in 24 countries representing 10% of world market capitalization, fell 17%.
There is also a fine balance between wanting to tap the most liquid markets and knowing your audience.
As the ECM banker says: “Private equity funds are chasing multiples, and they believe that the most straight-forward way to do this is to tap opportunities in international capital markets such as those in London and New York.
“But the problem with this is that there can be a mismatch between expectation and reality. The IHS IPO is the perfect example of this – the plan to list on the New York Stock Exchange wasn’t going to work because the company had a Nigerian risk profile that American investors just aren’t familiar with. In the end, the valuation didn’t look good and the players pulled out.”
The banker continues: “Private equity companies looking for a quick exit will do well to assess other options available to them. Just because Helios Partners did well from the Vivo Energy sale, it doesn’t then follow that all other private equity firms will be able to reap the same rewards, especially in the current context.”
Currency concerns
Foreign currency risk has also been weighing heavily on investors’ minds. Exchange rates of the big oil and mineral exporters including Nigeria, Angola, Mozambique and Zambia have seen a lot of depreciation, central bank reserves are dwindling and dollars have become scarce.
“Investors want to feel safe in their ability to repatriate returns made locally, but that’s just not the case right now,” says the ECM banker. “Not all emerging market or frontier investors are going to put all their money in places such as Nigeria or Angola, but they are less likely to invest in countries like these if there are obstacles to taking their money back out.”
But this is where the argument comes around full circle, and why bankers and investors back a dual listing approach.
“List locally and you have an increasingly liquid investor base that are familiar with the story and natural holders,” says Matthews. “Issuers are also considering listing internationally to access a broader emerging market investor base wanting access to the African growth story but who may prefer to invest through more familiar routes such as London and Johannesburg exchanges, especially if raising larger amounts. Indeed, this is why the Seplat dual listing did so well, with both local and international investor demand, and we will see more IPOs taking a similar path.”
Barry Meyers, managing director, equity capital markets at JPMorgan, says: “The fact of the matter is that investor sentiment towards Africa is already getting better. The signs are positive.”
Akinluyi at Silk Invest says: “Overall investor sentiment was risk on at the beginning of the year on the back of positive economic outlook, but this changed quickly as risk appetite was dented as investors panicked following the fall in global equities.
“In the long term, investors will realize that the fundamentals are still there and African equity is a strong buy.”
As African countries claw back foreign exchange reserves, commodity prices settle and political questions that hang over two of the region’s largest economies are resolved, African equity markets could recover.
Africa’s capital markets are evolving and the continent’s equity markets are slowly emerging as a viable channel to raise capital.