Sub Saharan expansion – Part 2: The entry point – Greenfield, Brownfield, Acquisition?

Updated: Sep 17, 2020

Welcome to the second instalment of our 4-part series on expansion in Sub-Saharan Africa. MɅD Associates have been involved in a number of projects which had the aim to expand into new markets in sub-Saharan Africa (SSA) or to improve traction in SSA. In this series we provide some practical insights to assist those considering entry to, or building growth strategies for SSA countries (excluding South Africa)

Part 2 covers the entry point for expansion into sub-Saharan Africa. Whilst for manufacturing concerns, the easy answer is mostly Greenfields, many regulated industries don’t have the option as new unencumbered licenses are not available. The decision on how to follow the Brownfield approach hinges on:

  1. The corporate view on global or local branding (Brownfields don’t cling to their local brand);

  2. Internal ability and availability of skills to build a business from the ground up. We have seldom encountered South African businesses with the entrepreneurial skills required to do this well;

  3. Time horizons to profitability (shareholder patience); and most importantly;

  4. The chosen market approach.

Brownfields entry points work better than large acquisitions for first-to-market innovation or the unlocking of a specific target group, as they come with little organisational change need that is normally a major impediment to rapid execution.

The acquisition of large or substantial players is preferred where there is a strong need for local product, buying market share and scale in competitive or largely undifferentiated markets, or where the buyer lacks resources to support the local operations from head office.

In all the cases we have been involved in, the buyers overpaid for the assets acquired and did so knowingly and willingly. However, the full extent of “premium” paid for the acquisition almost always only became clear after a year or two of on-the-ground experience. The role of thorough due diligence cannot be stressed enough and should include good detail on current shareholder background, at least three years of full banking and cash reconciliations to the day of take-over, as well as legal standing. We would advise that larger acquisitions in SSA are approached almost from a forensic audit perspective. Claw-back clauses might form part of the terms of acquisition, but the effort required to follow through on them is not worth the cost. If at all possible consider writing off the premium paid for the asset immediately and book it at realistic fair value. These investments should be treated as high risk investments.

There are generally very few large acquisitions available and they come with a hefty price tag. The promised returns in SSA and the shortage of easy opportunities require focus and deep commitment. Building a business from the ground up locally in SSA requires extensive investment, local knowledge, entrenchment in the market, determination to overcome setbacks and long-term commitment from shareholders.

In part 3, we will be analysing the market approach to Sub Saharan expansion.

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