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To acquire or not to acquire in Africa

While the opportunities in Africa are immense, entrance into the continent and its many markets can be a complex, frustrating and risky proposition. Gaining a foothold in a country on your own from scratch, increases the risk of failure considerably.
Many brand manufacturers struggle with the route to market complexities, understanding African consumers as well as high levels of corruption and bureaucracy that hamper business on a day-to-day basis.

If they are serious about tapping into over one billion consumers in Africa, they must know how to navigate in country complexities and ensure relatively quick critical mass in an increasingly competitive environment.

A preferred route these days is to enter the market through acquisition, benefiting from on-the-ground experience and established brands in the eyes of consumers.

The acquisition model offers many benefits, immediate critical mass, local know-how and knowledge, brands that connect to African consumers, the foundation on which to build and accelerate an African business at a faster rate than if they would have gone it alone.

There are some challenges to acquiring an African organisation:
  • There is a lack of available attractive companies to acquire, many companies have based their business model on trading not brand building - products are commoditised, they buy and sell on price alone, whilst volume might seem attractive, these have weak brands and even weaker route to markets.
  • Brands have built their route to market with an over reliance on the wholesale channel, how much route to market capability do they offer potential investors?
  • In some instances accounting practices companies follow do not comply with international standards, this adds complexity when valuing a company. Potential investors need to spend time cleaning up the books before they put a value to their investment.
  • International companies don't always understand the business environment in Africa and the company they are acquiring, they overestimate the potential value and end up paying too much. An eagerness to get in can be a mistake.
  • With the lack of available attractive companies to invest in across Africa there is a strong tendency for price to EBIDTA ratios to multiply, at some point alternative market entry strategies will offer a better return.
The key is to work with someone on the ground who understands Africa and who can complete a comprehensive due diligence evaluating bench strength and the prospects for future growth.

At the end of the day entry into Africa is no easy task, whether you go it on your own or acquire an existing company, what makes acquisition attractive it offers a faster route to establishing a strong foothold in this rapidly growing market.

Diageo bought the beer company Meta Abo Brewery in Ethiopia for 225 million dollars in 2012. This acquisition gave them an immediate platform (15% share of local market) and a strong foothold to enter and expand the Ethiopian market business.

L'Oreal recently purchased Inter Consumer Products a significant player in the beauty market in Kenya. The acquisition broadened their product offering with affordable brands and strengthened L'Oreal's position in the mass market in East Africa.

It's not always easy; some FMCG companies are struggling to get it right. Tiger Brands in Nigeria bought a stake in Dangote Flour Mills in 2012, they discovered a market with intense competition, and the operation is not performing as well as the company expected. The reality is if you make an acquisition of a company based on assumptions of growth and they are wrong it can impact your total business results.

Understand the market and the business you are acquiring; aim to get it right upfront before entering the market.

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About Michael Wood

Michael Wood is co-founder and Director of Aperio, a business consulting company focused on accelerating growth of FMCG brands in South Africa and sub-Saharan Africa. Michael has many years international experience where he held the positions of Marketing Director, Sales Director and Managing Director with the Gillette company and Procter & Gamble.

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    Aperio is a business consulting company focused on accelerating growth of FMCG brands in South Africa and sub-Saharan Africa. We understand the challenges FMCG businesses have on a day-to-day basis and guide multi-national companies to achieve greater results in the region.
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