New opportunities and growing demand driving investment in African TMT investment but there are challenges

The technology, media and telecommunications (TMT) sector in Africa is expected to show impressive growth in 2019, with transactions forecasted to exceed earlier predictions of mergers & acquisition (M&A) investments worth USD 5.9 billion in 2019, according to Baker McKenzie’s Global Transaction Forecast (Forecast) in association with Oxford Economics.

The state of investment in the TMT sector in Africa was under discussion at Baker McKenzie’s African Transactional Summit, held in Johannesburg this week. Janet MacKenzie, a partner in the Corporate/M&A Practice and Head of the TMT Industry Group at Baker McKenzie in Johannesburg said that Africa was considered to be a region of significant investment potential in the tech space.

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“Increasingly, M&A deals and IPOs in the TMT sector in Africa point to the growing reliance of African consumers on technology across multiple platforms. The unabated demand for technology has caused extensive cross-sector disruption in Africa, with, for example the financial, energy, transport, retail, health and agricultural sectors all seeking opportunities to expand their tech infrastructure in order to acquire the necessary skills and innovation needed to keep up with demand,” she noted

“In 2019, fintech will likely remain the most popular tech sector for investment in Africa, with health-tech, mobility and agritech also attracting investment. Tech companies in South Africa, Nigeria and Kenya are expected to secure the biggest funding deals of the year in 2019,” said MacKenzie.

MacKenzie explained, however, that the South African TMT sector faced numerous challenges, which were affecting the sector’s ability to move forward and implement high end, fourth industrial revolution (4IR) technology.

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“According to the Digital in 2018 Report by We Are Social and, HootSuite, South Africa has just 54% Internet penetration and there is a lack of significant broadband services in general, and in rural areas in particular. Improving Internet access and TMT infrastructure is therefore very much a focus in South Africa at present,” MacKenzie noted.

In April this year President Ramaphosa announced the formation of a new commission on the fourth industrial revolution, with the aim of assisting the government to take advantage of the opportunities presented by the 4IR.

“This new commission is a welcome development. It has become critical for South Africa to have the correct policy and regulations in place to ensure we can effectively roll out the TMT infrastructure and services needed to implement 4IR technology. There is significant policy and regulatory work still to be done in this arena before South Africa will be on par with other countries who are much further along in the process than we are,” MacKenzie explained.

“When it comes to policy, certainty is lacking, and needed. MacKenzie noted. The failure to properly implement the regulatory framework for the rapid deployment of infrastructure has resulted in uncertainty on the terms of access, the rights of landowners and the compensation to be paid to landowners for access. A lack of uniformity in the approaches adopted by municipalities with regard to rights of way has led to costly delays in the rollout of infrastructure. All of this has culminated in an unprecedented number of access disputes being referred to our courts for resolution.  

MacKenzie explained that prohibitive data costa are further delaying the implementation of affordable high end technology services, The Competition Commission in South Africa recently released a report on the cost of mobile data in South Africa in April and noted that data costs in South Africa are some of the highest in the world.

“The delay in the digital migration process and the consequent delay in the release of high demand spectrum has negatively impacted on the ability of the mobile operators’ to roll out data rich services and 5G, in particular.  5G is necessary for the implementation of 4IR technology such as blockchain, artificial intelligence, augmented reality and the Internet of Things. Insufficient spectrum and a lack of access to the lower band frequencies is the reason behind high data costs, the big mobile operators have said. 

“If the challenges can be addressed via policy and regulatory certainty, it will provide a catalyst for further investment in TMT infrastructure and services in South Africa, which will enable the country to implement and reap the benefits of 4IR technology,” said MacKenzie.

Akash  Devani, Partner at Anjarwalla & Khanna in Nairobi, Kenya noted that the TMT sector in Africa is , “vibrant with competition-leading businesses maximising economies of scale by merging.”

He said that currently, the major transactions in this sector in Africa involve acquisition of shares in TMT entities, sale of assets, the public listing of TMT entities across various securities exchange and the fundraising of TMT entities – usually through investments into the TMT entities by private equity funds and other investors.

Devani pointed out that challenges to investors in the TMT space in Africa include being required to meet local shareholding requirements in various jurisdictions. For example in Kenya, there is a requirement with respect to telecoms whereby a minimum of 20% of the share capital of the company must  be held by citizens of Kenya.

“In Tanzania, the Finance Act 2016 (as amended by the Finance Act 2017) requires 25% of the shares of a Network Services or Network Facilities license holding company to be listed on the Dar es Salaam Stock Exchange while Content Services Licensees have a minimum 51% local shareholding requirement. Meanwhile in Uganda, while there are currently no legal or regulatory requirements for telecommunications operators to list on the Uganda Securities Exchange, the National Broadband Policy 2018 has proposed that the licensing framework include a requirement for all telecommunication operators in Uganda to list on the local exchange,” he said.

Devani noted that there was currently no country in Africa that allows for  the dual listing of listed companies, which would make it easier for investors to list telecommunication entities in more than one jurisdiction.

A further challenge is the regulatory approval that is needed before transactions can be completed. For example, the Kenya Information and Communications (Licensing and Quality of Service) Regulations, 2010, provides that a licensee is required to notify the Communication Authority (CA) of any proposed change in ownership, control or proportion of shares held in it, at least 30 days before the change is effected.

Devani argued that making more spectrum available in certain markets would also reduce network congestion and Capex expenditure, which would allow the much-needed capital to be spent in the more underserved areas. He noted that the ICT facilities in some jurisdictions in Africa, except for a select few, remain under-developed and result in poor connectivity, quality of service and broadband penetration, amongst other challenges.

“This ultimately hinders the respective jurisdiction from enhancing to a digital economy,” he said.

Devani said that there were many investment and financing opportunities in the TMT sector in Africa, with disruption, innovation and consolidation likely to be the major deal drivers in future years.

“Kenya has seen various investments in telecommunications companies (telcos). The telco sector in Kenya had the advantage of a well-developed market for mobile money services, making it an attractive investment opportunity,” he explained.

“Telcos are merging/consolidating, and the race to provide new broadband and wireless infrastructure is intensifying, which is resulting in increased need for capital and thus an increase in investments. Investment in technology is also driving applications and innovation across all sectors. This includes investment to payment services and infrastructure,” he said.

Devani agreed that the growth of fintech was a big opportunity, “In Kenya, the MPESA mobile money transfer platform, first piloted in 2007 by Vodafone through Safaricom in Kenya, has enabled significant financial inclusion and acted as a stimulus for the establishment of other fintech businesses. These fintech businesses include mobile banking, mobile lending and savings, fundraising platforms, mobile payment systems, and insurance.”.

Mobile lending has also continued to grow on an upward trajectory in Kenya. Devani said there has been a shift from traditional lending from banks since the introduction of the interest rate cap on commercial bank lending in 2016. Mobile lending platforms such as Tala, Branch International and Fuliza which target individuals and small enterprises that require instant, short-term loans are making loans cumulatively in billions of shillings.

He explained that fibre penetration is still very low in most African countries, so huge opportunities exist to get involved in the rollout of intra-regional projects, national projects, and even international subsea infrastructure projects. The global cloud services companies are now putting Africa on their development roadmap, and committing significant investment to several African markets.

“As competition intensifies and growth slows down in Africa, consolidation efforts will begin to drive M&A transactions as smaller players exit. The African teleco sector is controlled primarily the 4 large players, MTN, Vodafone, Bharti, and France Telecom but as the region moves onto more advance networks, new license auctions/ awards can be expected. Further, as Africa transitions to digital television, spectrum availability for the telecommunication sector will increase, which will also boost investment,” Devani added

Editor’s Note: Part of this story is from a Press release

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