More firms eye mergers and acquisitions for turnaround

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More and more companies are planning mergers and acquisitions for the turnaround

Monday 29 March 2021

MERGER

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BY ELIZABETH KIVUVA
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Summary

  • Globally, mergers and acquisitions (M&A) are expected in sectors such as technology, healthcare, pharmaceuticals, and companies such as food and retail.
  • Analysts have forecast the trend from last year to continue, with businesses in the banking and insurance sectors expected to be saturated.

Most companies are expected to continue consolidating their operations this year to strengthen their balance sheets and reverse the trend of subdued operations after a period of lack of capital.

Globally, mergers and acquisitions (M&A) are expected in sectors such as technology, healthcare, pharmaceuticals, and companies such as food and retail.

Analysts have forecast the trend from last year to continue, with businesses in the banking and insurance sectors expected to be saturated.

The activity can lead to foreign investors entering and positioning themselves in the country, even if analysts refuse to mention the actual growth of the planned activity.

The Kenyan Competition Authority (CAK) said it had received applications from manufacturing, financial services and insurance.

“The applications that we received this financial year mainly come from the manufacturing sector. However, we are still receiving requests from other sectors including financial services and insurance, ”CAK – Director of Competition and Consumer Protection Boniface Makongo told Business Daily.

“Due to the Covid-19 pandemic, competition agencies are likely to see an increase in joint venture applications and emergency mergers, particularly in the aviation industry. Merger activity in the online and e-commerce space is also expected to increase. “

In a report on insurance and investment banks, EFG Hermes forecast activity in both the public and unlisted sectors due to recorded losses, lack of capital or poor operating metrics.

The report pointed to a few companies, including Kenya Re and CIC Insurance, though the investment bank said it “would not speculate” on the likelihood of these aforementioned transactions.

RISK REGIMES

Some of the deals of such a transaction between Jubilee Holdings and Allianz SE announced last year are expected to close or get back on track this year.

“We are highlighting viable M&A opportunities in the insurance sector,” said Muammar Ismaily, research analyst at EFG Hermes.

“We believe it is difficult to speculate on the actual number of M&A deals. However, it can be assumed that the M&A activities will continue with the most recent acquisitions or the youngest foreign market participants. “

The anticipated insurance company mergers and acquisitions are expected to be driven by the Risk Capital Policy (RBC) implemented in June 2020. However, the National Treasury Department extended the policy for another six months to support a relief effort during the pandemic.

The regime has increased the standard capital for general business from Sh300 million to Sh600 million, or 20 percent of the net premiums of the previous fiscal year – or whichever is greater.
Long-lived insurers’ capital has increased from Sh 150 million to Sh 400 million, or five percent of the business’s liabilities for the fiscal year or whichever is greater.

A composite insurer offering insurance services such as casualty, fire, health, investment, life and annuity needs to base the capital on Sh1 billion.

In June, the Insurance Commission (IRA) announced that 20 companies, a third of the 56 licensed insurance companies in Kenya, failed to meet capital requirements.

According to analysts at EFG Hermes, the CIC Group may need a partner as losses continue to increase, especially in general business. This came with low prices in a large pool of poor quality policyholders, resulting in decreased underwriting profitability.

The CIC Insurance Group posted a loss of Sh335.5 million in the half-year to June, reversing the 2019 net profit of Sh20.9 million. This was coupled with a 25 percent decrease in investment income to Sh 1.2 billion and claims increase to 7.6 percent to Sh 5.4 billion, with flat net premium growth of Sh 7.1 billion.

“The non-life business is undercapitalized due to new RBC guidelines, which means the insurer will have to raise capital,” the bank said of CIC’s operational concerns.

Kenya Re’s board of directors is considering offering 20 percent or more of the company’s shares to the public.

This would result in the government, which owns 60 percent through the national treasury, selling its shares in order to reduce its stake in state-owned companies as part of government measures to ease tax pressures, support the state budget and increase liquidity in the Increase Nairobi Securities Exchange.

However, this won’t be the first time the government has announced such plans.

In the past, the company had similar plans to privatize 26 companies to private investors, but the bureaucracy delayed the approval of transactions by the executive branch.

Insurance companies in the unlisted sector could also follow this path of consolidation.

This space has been characterized by family or individual players who lack an institutional anchor shareholder.

Part of the company’s ownership is dominated by a large anchor shareholder who has been there a long time and is facing bankruptcy or capital inadequacy issues.

“Assuming that the regulatory authority strictly adheres to the RBC deadline, there could be a multitude of opportunities for interested foreign players to enter the market. However, insurance has been a relatively busy area in M&A, especially with the entry of foreign players, ”added Ismaily.

The industry is also relatively fragmented, a signal that is meant to catalyze businesses.

Last September there were 36 non-life players and 24 life players.

The insurance industry has posted losses in recent periods due to increased claims and provisions, as well as lower premiums, affecting its profitability.

Strict implementation of the RBC regime should push insurers to stabilize investment income and restructure balance sheets towards low-risk assets, which will help the industry improve the sector’s profitability in two to three years.

“Due to the partial inadmissibility of claims, we assume that insurers will set up fewer provisions for bad debts. and improve pricing and claims delivery, which is expected to result in lower net claims, ”he added.

BANKING SECTOR

The banking sector will continue to see mergers and acquisitions this year, according to Genghis Capital, as research director Churchill Ogutu added that it was “a crystal ball expectation shaped by recent trends.”

“This (M&A) has been paramount in recent years and we do not expect this trend to weaken,” said the investment bank in the Genghis Capital Playbook 2021 published in January, and based on that, we expect that the mergers and acquisitions will take place. What has been going on in the banking sector in recent years will remain a dominant theme this year, ”added Ogutu.

Over the past year, banks reported a decline in capital adequacy due to increased provision of non-performing loans, loan interest-paying holidays, and loan restructuring.

This resulted in most banks recalling dividend payouts in order to maintain adequate cash flows.

But even if the lenders, especially Tier 1, are extremely resilient, the situation for small banks, especially for unlisted banks, is not yet known.

“If we get out of the Covid-19 fog, some banks will have weaker balance sheets than they did before Covid-19, which we believe will lead to easy acquisition targets. This is one of the drivers we are seeing to drive the M&A deals, ”added Ogutu.

Kenyan banks like Equity and KCB have looked for acquisitions across borders in the past, but the anticipated mergers and acquisitions could lead to foreign players entering local markets.

The Equity Group has expanded its wings further into the Democratic Republic of the Congo after finalizing the acquisition of the government-owned Congolese lender Banque Commerciale Du Congo (BCDC) last August.

It paid $ 95 million (Sh 10.35 billion) and acquired 66.53 percent of the shares from the majority shareholder, the family of George Arthur Forrest.

The KCB Group is awaiting approval to acquire 62.06 percent of the shares in Banque Populaire du Rwanda (BPR) and 100 percent of the shares in African Banking Corporation Tanzania from Atlas Mara Limited, based in London, for EUR 32 million. USD 8 million or USD 8 million.

Approvals are expected to be completed by the end of next month. The Co-op Bank acquired a 90 percent stake in Jamii Bora in August by injecting Sh1 billion.

There have also been acquisitions by local players, including the Nigerian Bank Access Bank’s acquisition of Transitional Bank, completed in August, which deepened Nigerian banks’ presence in the market with United Bank of Africa (UBA) and Guarantee Trust Bank.

Egypt’s largest private bank Commercial International Bank acquired a majority stake in Mayfair Bank in April.

“We believe that the overseas corporations moving inward into Kenya will take the route of acquiring an existing player rather than starting from scratch. This is the channel we’re going to see, although these deals will be far and wide, ”he added.

KNIGHT IN SHINY ARMOR

The National Bank of Kenya (NBK), which was acquired by the KCB Group in 2019, achieved a net profit of Sh177.7 million in the financial year ending December 2020. This corresponds to a net loss of Sh 336.9 million in the previous year, which indicates the severity of the transactions.

On the other hand, the KCB Group posted a profit drop of 22 percent to Sh19.6 billion due to increased provisions.

The activity can expand to other sectors including manufacturing, aviation and healthcare.

A draft block exemption policy by CAK, if passed, will spark a wave of corporate mergers and acquisitions after a period of financial crisis.

The draft pushes for relaxed restrictive trade practices and allows companies to collaborate on their business operations including supply agreements, marketing and joint sales partnership.

CAK general manager Wang’ombe Kariuki said the move should help companies recover from lockdown effects and capitalize on synergies that would increase their revenues.

“The agency is aware of the current economic situation around the world. The situation is a motivation for mergers and acquisitions, ”Kariuki told Business Daily in February.

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