PE Newsletter: August 2013

Breaking new ground Private Equity News

Acquisition and merger deals sweep Kenya’s oil industry (The East African, 3 August 2013) Kenya’s recent successes in oil exploration are triggering a new round of mergers and acquisitions in the lucrative but high-risk business as the new finds reshape company strategies. Junior exploration firms — companies that do exploration in the hope that a positive find will tempt shareholders to invest more in them or make them an acquisition target — are expected to become prime targets for multinationals seeking a foothold in the country before commercial production of crude oil and natural gas starts. Over the past three months, at least four deals have been closed and another three are expected in the coming months, making this the busiest year in Kenya’s exploration business. The country’s risk profile has been greatly reduced by last week’s announcement by Tullow Oil and partner Africa Oil that their find was commercially viable as well as the discovery of gas by Apache Corporation in offshore exploration area L 8 in September last year. Tullow estimates it has discovered about 300 million barrels of oil.

Elsewhere in Kenya, in the Anza Basin in Block 10A, the Paipai-1 well was drilled in March and encountered light hydrocarbon shows while drilling. The well has been suspended and will be tested in the future. Interest in offshore exploration in Kenya is likely to be raised as Anadarko Petroleum Corporation has high expectations of making a discovery in the Kiboko well being drilled in exploration area L11B in the Lamu basin. The discoveries confirm the existence of hydrocarbon deposits and offer a deeper understanding of the region’s geological features as well as reducing the risks of hitting dry wells by multinationals. “A new wave of mergers and acquisitions is in the offing as relatively smaller explorers with large acreage in Kenya are becoming targets for financially well-endowed firms. They have to sell part of their exploration rights to raise funds to expedite well drilling to comply with work programmes agreed upon with the Ministry of Energy,” said Robert Shisoka, a consultant at Hydrocarbons Management Ltd.

IFC investment Early July, the International Finance Corporation, the private investment arm of the World Bank, said it was investing $60 million in a new UK-based company, Delonex Energy, as part of a $600 million equity line to be used for oil and gas exploration in the East African region. First Oil Plc has acquired a 30 per cent interest of Bowleven’s exploration rights in onshore exploration area 11B in north-western Kenya jointly owned by Adamantine Energy. Simba Energy in May signed a memorandum of understanding for Ajax Exploration to acquire 66 per cent in area 2A near Mandera town in north-eastern Kenya. ERHC Energy Inc has signed a letter of intent for a multinational to acquire part of the firm’s interest in area 11A near Lodwar town to expedite exploration work that requires a well to be drilled by 2015. FAR Ltd and Pancontinental Oil and Gas are seeking to sell part of their exploration rights to a block offshore area L6 to raise funds for well drilling by 2014. (Excerpt of the full story) Deacons risks losing Mr Price franchise (Business Daily, 8 August 2013) Retailer Deacons is at risk of losing its flagship Mr Price franchise barely six months after it lost Woolworths sale deal, an investment firm has disclosed. Standard Investment Bank has disclosed to their clients that Deacons informed it that Mr Price may be looking at ending the franchise deal and forming their own company to feed the Kenyan market with its brands. The loss of Mr Price, which targets the lower end of the market, is likely to hurt Deacons’ earnings because it currently accounts for about half of the retailer’s sales with the exclusion of Woolworth’s proceeds, according to Standard Investment Bank. “Management indicated that one of its key brands, Mr Price, runs the risk of the franchisor wanting to enter into a joint venture agreement,” added the Investment Bank in a research note on Thursday. South Africa fashion retailers have historically preferred trading under the franchise model in the continent.

But they are shifting from this model as they seek more control in their race to reduce reliance on their home market. South Africa’s Woolworths opted to launch direct operations in more African countries and in Kenya it established a firm called Woolworths Kenya Proprietary Limited where it owns a 51 per cent stake with the remaining share held by Deacons.

“We are in the process of engaging potential strategic investors who will bring a portfolio of brands to the table,” said Deacons chairman Peter Gichuru Njoka. Deacons reserved the right to manage the venture despite its minority stake. Woolworths used to account for 49 per cent of Deacons sales before it was hived off from the Kenyan firm, which is associated with former President Mwai Kibaki and was founded 50 years ago. Mr Price Group, which is listed on the Johannesburg Stock Exchange, has 962 Southern Africa stores and 29 franchise stores in Africa including Kenya, Nigeria and Ghana dealing in clothing, footwear, sportswear, sporting goods, and home-wares. It made sales worth Sh300 million (ZAR 30 million) from the Kenyan operations, where it has nine stores, of Sh130 billion the group posted in the year to March. The group in its annual report for the year ended March 2013 said that it would continue to strengthen the franchises but is “testing of alternative operational models to enable growth, despite existing retail infrastructure challenges”. The tinkering with its model comes as more South African fashion houses look to setting shop in Kenya. Actis, a private equity fund, has said that Edgars and Foschini are some of the retailers that have booked space in its Sh12.6 billion real estate development on the Nairobi’s Thika Superhighway that is billed as the largest mall in East and Central Africa at 50,000 square metres. 2

Both firms are looking to spread reach outside Southern Africa with Kenya acting as their launch pad for Eastern Africa. Kenya has witnessed multi-billion shilling shopping malls spring up as real estate investors and retailers seek to tap into a growing middle class with growing disposable incomes and a limited choice of leisure activities. Deacons said in a statement yesterday that it had opened talks with strategic investors to boost its products offering. It has introduced European fashion brand Zara and plans to launch Hong Kong’s Bossini brand by the end of this year in the race to reverse the Sh38 million loss it posted last year. “We are in the process of engaging potential strategic investors who will bring a portfolio of brands to the table,” said Deacons chairman Peter Gichuru Njoka. The fashion store has nine brands including seven franchises — Truworths, Adidas, Identity, Mr Price, Babyshop and Sheet Street — and own products like 4u2 and Angelo. WPP buys controlling stake in ScanGroup for Sh8.2bn (Business Daily, 12 August 2013) Global communications firm WPP on Monday announced it will increase its stake in ScanGroup to 50.1 per cent in a cash and share deal. The London-listed firm currently owns 31.3 per cent and said it would acquire 95.7 million shares of ScanGroup through the creation of 21.3 million new stocks that are equivalent to 33.6 per cent of the Nairobi bourse-listed company. It will offer cash for the 21.3 million shares at Sh85.85 amounting to Sh1.8 billion and cede ownership in nine subsidiaries to ScanGroup in exchange for 72.7 million shares. This values the deal at Sh8.21 billion and values ScanGroup at Sh24.44 billion. WPP, also known Cavendish BV, jointly owns the subsidiaries in east and West Africa including Ogilvy Tanzania, Ogilvy Kenya, and Hill & Knowlton East Africa.

cent premium of ScanGroup’s Monday’s closing price of Sh64.5, which has shed 16 per cent over the past year. The statement from WPP did not indicate whether top shareholders will cede some shares or whether the 72.7 million shares were created and have been issued, which would dilute the ownership of ScanGroup’s current shareholders. WPP acquired a 27.5 per cent in ScanGroup in 2008 for Sh1.3 billion. In 2011, it increased its direct stake to 29 per cent after it acquired 10 million shares from Andrew White — the creative director of Scangroup — after the expiry of the lock in period. Mr White becomes the second executive in ScanGroup to reduce his interest after Koome Mwambia, the former chief executive of Ogilvy East Africa Ltd and Bharat Thakrar, the CEO of Scangroup. Cavendish said Mr Thakrar has committed to remain a shareholder, director and employee of ScanGroup. Mr White currently owns 4.2 per cent of the firm while Mr Thakrar has 18.1 per cent stake. The two are the founders of ScanGroup and they were both barred from selling their shares by the regulator. Satya backs Spanco BPO buyout (Private Equity Africa, 15 August 2013) Satya has financed the acquisition of telecoms services provider Spanco BPO Africa Limited (SPAL), by India’s ISON Growth. Spanco BPO Africa is the African arm of India-based Spanco Limited, a telecommunications and call centre services company that also has operations in Europe and the Middle East. ISON Growth has wholly acquired SPAL, which will be re-branded ISON BPO. The financing will go into growing SPAL operations across Africa, which includes offering more technology, versus voice-based services.

“Cavendish (WPP investment vehicle) therefore has effective control of ScanGroup,” said a statement by the multinational. “Cavendish does not intend to make a takeover of ScanGroup.”

As part of the deal, ISON will use part of the financing to capitalise MARA ISON, a Nigeria-based technology services company it controls through ISON Growth.

The law states that any shareholder with a stake above 25 per cent of a firm listed at the Nairobi Securities Exchange (NSE) must declare if it plans a complete takeover should it acquire more than five per cent of the company. At Sh85.85, WPP has offered a 33.1 per

“ISON is clearly positioned as the leader in the IT and business process outsourcing (BPO) space with significant onshore capabilities, backed with global know-how,” said Tsega Gebreyes, managing partner at Satya Capital. ” 3

“The team has an extensive, on the ground presence across the African continent which allows them to provide local support with timely and high quality response while remaining cost effective.”

Metropolis was founded in 1981 in Mumbai and currently runs 105 diagnostic and 700 collection centres across India, UAE, Sri Lanka, South Africa and Bangladesh.

Based in Kenya, SPAL offers outsourced voice and customer relationship management services to companies across Africa. The company has operations in 10 African countries, employing about 3400 people.

Metropolis, backed by New York-based private equity firm Warburg Pincus, said it would establish a reference lab in Nairobi to act as a regional hub for other markets such as Uganda, Rwanda, Tanzania, Burundi and Somalia.

MARA ISON, on the other hand, focuses on IT services, including data center consulting, network services and contact centre technology. MARA ISON offers services across 21 countries, primarily to companies operating in the telecommunications, financial services and the oil & gas sectors. Satya partners Moez Daya and Samir Abhyankar will join Gebreyes on the board of ISON following the completion of the transaction. Ernst & Young were corporate finance advisors to ISON on the deal. Indian investor in Sh250m laboratories acquisition bid (Business Daily, 18 August 2013) Metropolis Healthcare, a Mumbai-based chain of medical laboratories, is set to spend Sh250 million on acquisition of five additional labs following the firm’s recent entry into the Kenyan market. Chief executive Ameera Shah told the Business Daily in an interview that the Indian firm is also eyeing entry into neighbouring countries as part of a wider expansion plan in East Africa. Metropolis has acquired two laboratories in Nairobi’s Parklands and Upper Hill areas with a capacity to handle 4,500 different medical tests including oncology, genetics and molecular biology. Kenya is the firm’s second base in Africa, having opened shop in South Africa in 2008. “The shift from infectious diseases to non-communicable diseases such as cancer and diabetes necessitates early detection through accurate diagnostics,” said Mr Shah, adding that the firm is targeting the large number of Kenyans seeking specialised tests and treatment abroad, and others sending samples to India and South Africa. The Indian firm acquired two Star Biotech Labs at Sh40 million. It plans to open other clinical laboratories in Mombasa, Eldoret, Kakamega and Kisumu and set up collection points in every county.

World Bank’s private sector lending arm, IFC, is also in talks with AAR to invest Sh382 million in the firm which is also a medical underwriter. Warburg Pincus invested Sh7.3 billion ($85 million) in the health provider in 2010 for an undisclosed stake. The entry of Metropolis comes at a time when Kenya’s healthcare sector is attracting foreign investors. German PE fund African Development Corporation (ADC) seeks to invest a further $3 million (Sh258 million) in Resolution Insurance, equivalent of a 23.4 per cent stake based on the company’s December valuation of about Sh1.1 billion. ADC currently owns 38.74 per cent of the medical insurance provider and the injection may dilute the stakes of the firm’s founders — including CEO Peter Nduati — if they cede their ownership or the firm creates new shares to accommodate ADC. AAR Healthcare in May sold a 20 per cent stake to Stockholm-based PE firm Swedfund for Sh382 million to raise funds and build hospitals in Kenya, Uganda and Tanzania . Alexander Forbes, a financial and risk-broking firm, in May sold its Kenyan healthcare business to a consortium of investors, including Geoffrey Nzau, Kenya’s first actuary and a former senior executive at the company.

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Zuku TV seeks Sh8.7bn expansion capital (Business Daily, 19 August 2013) Wananchi Group, the owner of Zuku TV, plans to launch a fresh funding round of between Sh4.3 billion ($50 million) and Sh8.7 billion ($100 million) for expansion of its cable business in Tanzania and Uganda before the end of next year. The group CEO Richard Bell said in an interview on Monday that the firm intends to raise the funds both locally and internationally, adding that it has drawn an expansion plan in these two markets. The pay TV provider already has cable TV services in Kenya, Uganda and Tanzania, but said there are signs of increasing demand in Uganda and Tanzania hence the need to grow its cable footprint there. “We are looking to grow our cable TV in Tanzania and Uganda to meet the growing demand, that’s why we will be launching this fresh funding round before the end of next year,” Mr Bell Said. In 2011, Wananchi raised Sh4.9 billion in growth capital from investors including Liberty Global, Oppenheimer Funds, Canada-based emerging markets fund manager Sarona Asset Management, and African private equity firm East Africa Capital Partners. Founded in 2008, Zuku has been trying to wrest the pay TV market from market leader DStv through its lowerpriced bouquets, but has recorded little success due to wide popularity of the rival’s English Premier League football show. DStv offers its bouquets for between Sh440 on mobile gadgets and Sh6,900 for premium content, while Zuku’s products cost between Sh999 and Sh3,500. DStv has a loyal following of about three million subscribers across several African markets that it has gained over the past twenty years, compared to Zuku’s 100,000 subscribers across the three East Africa countries.

The new channels include short movies service Shorts TV — the first time the channel has been available in Africa, and Hindi movie channel UTV Movies, which airs Bollywood blockbusters. Zuku also added own-branded channels Zuku Swahili Movies, which will air a wide range of East African movies, and Zuku Movies Max HD, a new HD version of the existing Zuku Movies Max channel. Ethos to exit Alexander Forbes (Africa Assets, 21 August 2013) After a six-year holding period, South African private equity firm Ethos Private Equity is preparing to sell its stake in pension fund manager Alexander Forbes, according to Bloomberg. As South Africa’s oldest buyout firm, Ethos has a proven track record: the firm has done over 100 deals and exited 87 of them for cash, according to Ngalaah Chuphi, a partner at the firm. Alexander Forbes was acquired for USD806m in 2007 by a group of investors that also included emerging markets private equity investors Actis. Ethos’ investment came out of their fifth fund, which closed in 2006. Alexander Forbes said in June it had hired Deutsche Bank AG and Rand Merchant Bank to advise on a potential initial public offering. Ethos are also looking for new deals with their USD800m fund VI that reached the final close in January 2013, exceeding their USD750m target – the second-largest PE fund raised for sub Saharan Africa after Helios Capital’s USD900m. The firm aims at 10 to 12 deal, and will deploy 20% of the capital outside of South Africa. Alexander Forbes have a footprint in Botswana, Kenya, Malawi, Mauritius, Namibia, Nigeria, South Africa, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe. Investor interest in financial services in sub Saharan Africa is strong (also see our AI Brief 02-2013), which will bolster the exit prospects.

In June, Zuku completed the migration of its Zuku TV satellite service from SES’s NSS-12 satellite to SES-5, a move that Mr Bell said gives it more capacity as well as wider reach, with the new satellite having a footprint over sub-Saharan Africa. Its other key strategy has been to increase the number of channels on offer, and especially local content to draw users. 5

Contacts For more information, please contact: Alexander Van Schie Director +254 20 4230 484 [email protected]

Gladys Makumi Director +254 20 4230 331 [email protected]

Ravinder Sikand Director +254 20 4230 805 [email protected]

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