Mergers and acquisitions outlook for Kenya, Africa
Tuesday January 24 2023
The peaceful outcome of last year’s Kenyan General Elections has provided the necessary impetus for mergers and acquisitions (M&A) activity in the country.
While politics play a critical role in investor confidence and planning, M&A activity is heavily influenced by other attributes such as tax, commercial, and legal considerations.
Firstly, it is worth noting that the success of the African Continental Free Trade Area (AfCFTA) agreement will be a catalyst for intra-Africa M&A.
AfCFTA targets to create a single African market of over 1.2 billion people and a combined Gross Domestic Product (GDP) of over $2.5 trillion.
Kenya was chosen among eight countries participating in a pilot initiative to test the operational, institutional, legal and trade policy environment under the AfCFTA.
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Also, in September 2022, Kenya shipped its first consignment of locally-made batteries to Ghana.
AfCFTA would likely lead to strategic regional M&A by African-based enterprises looking to increase intra-Africa trade.
Further, there may be increased M&A activity in new frontier markets such as Ethiopia and the Democratic Republic of Congo (DRC), which has recently joined the East Africa Community (EAC).
The entrance of Kenyan-based telco, Safaricom PLC, into Ethiopia, is a positive signal of the opening up of certain segments of the Ethiopian market which previously were under the purview of State-owned monopolies.
The Ethiopian government is keen on liberalizing the banking industry with the latest reports indicating that foreign banks will be allowed to own up to 30 percent of Ethiopian-based commercial banks.
Similar to the witnessed expansion of some of the Kenyan-based banks into DRC, the opening up of Ethiopia’s banking sector will trigger banking-related M&A in Ethiopia.
Following the conclusion of COP 27, and renewed commitment from global leaders to tackle climate change, investments in the green economy will continue to rise.
Kenya has been at the forefront of encouraging M&A into cleaner and renewable forms of energy such as wind, power and solar.
For example, there is an exemption of tax on interest paid on loans from foreign sources for investing in the energy sector, as well as reduced corporate tax for the carbon market exchange at the Nairobi International Financial Center Authority.
Such incentives are a plus in the global push for climate-related M&A activity.
On the flip side, there are a few recent tax changes in Kenya that may result in additional costs for M&A activity.
M&A deals are usually structured in the form of share transactions, asset sale or business transfers. Share sale in Kenya ordinarily attracts capital gains tax.
The capital gains tax rate prior to 1 January 2023 was five percent. The rate, however, has increased to 15 percent effective 1 January 2023.
From a regional perspective, the change in the capital gains tax rate is still lower say as compared to Uganda (30 percent) and Tanzania (30 percent).
While regionally it may seem Kenya is still competitive, the real impact on foreign direct investment (FDI) flows should perhaps be analyzed from a whole different lens.
For instance, Nairobi and Lagos rank amongst the top cities in Africa for the digital economy. Consequently, the two cities get to be characterized by several M&A activities in the digital economy.
Comparatively, the capital gains tax rate in Nigeria is 10 percent. Further, while Kenya has its own exemption regime, the Nigerian one is arguably more inclusive with capital gains tax being exempted for instance on transactions where the aggregate sales proceed is less than 100 million Nigerian Naira (around $222,000).
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It would, therefore, seem that all things constant, Nigeria would be more tax attractive for an equity-type M&A.
The introduction of Value Added Tax (VAT) on the transfer of businesses is another change in the Kenyan tax laws that may negatively impact M&A activity.
Prior to April 2020, the transfer of a business as a going concern was exempt. Effective April 2020, the exempt status of a transfer of a business as a going concern was repeated, resulting in additional VAT constraints for certain M&A transactions.
Investors ought to be aware of the rapidly evolving tax landscape in Kenya and the region. Now more than ever, and with the global economic slowdown driven partly by the Russia-Ukraine war as well as the spillover effects of the Covid-19 pandemic, governments are trying to boost the economy and shore up tax revenues.
This is expected to be driven by various tax changes which will impact M&A activity.
To bolster M&A activity in Kenya, local tax policymakers should ensure reasonable predictability of tax bases and tax rates to enable investors to make long-term and sustainable investment decisions.
Brian is an Assistant Manager at Ernst & Young LLP. The views expressed in are not necessarily those of EY.