Most firms are projected to continue consolidating their operations this year in a bid to strengthen their balance sheets and make a turnaround on subdued businesses activity after a period marked by capital inadequacy.
Globally, mergers and acquisitions (M&A) are expected in sectors including technology, healthcare, pharmaceuticals and businesses such as food and retail.
Analysts have predicted a continuation of the trend from last year, with the deals expected to be saturated in the banking and insurance sectors.
The activity may see entry and market positioning of foreign investors into the country, even as the analysts decline to mention the actual growth in the foreseen activity.
The Competition Authority of Kenya (CAK) said it has received applications from tmanufacturing, financial services and insurance sectors.
“The applications we have received this financial year are mainly from the manufacturing sector. However, we continue to receive applications from other sectors, including financial services and insurance,” CAK - Director, Competition and Consumer Protection Boniface Makongo told the Business Daily.
“Due to the Covid-19 pandemic, competition agencies are likely to experience an upsurge in joint venture applications and distress mergers, more so from the airline industry. It is also anticipated that there will be increased merger activity in the online and e-commerce space.”
In a report on insurance, investment bank, EFG Hermes forecast activity in both listed and non-listed space due to recorded losses, capital inadequacy or bad operating metrics.
The report pointed to some of the companies including Kenya Re and CIC Insurance, even as the investment bank said it ‘would not speculate on the probability of these aforementioned transactions.’
Some of the deals that were announced last year such a transaction between Jubilee Holdings and Allianz SE are expected to close this year or get back on track.
“We are highlighting viable M&A opportunities within the insurance sector,” Mr Muammar Ismaily, research analyst at EFG Hermes said.
“We believe it is hard to speculate on the actual number of M&A transactions. However, it is safe to assume that with recent acquisitions or by recent foreign entrants that M&A activity will continue.”
The expected mergers and acquisitions by insurance firms are expected to be driven by the risk-based capital (RBC) policy that was implemented in June 2020, but the National Treasury extended the policy by six additional months tas a support measure during the pandemic.
The regime has increased standard capital for general business from Sh300 million to Sh600 million or 20 per cent of the net-earned premiums of the preceding financial year- or whichever is higher.
Long life insurers’ capital was raised to Sh400 million or five per cent of the liabilities of the business for the financial year or whichever is higher, from Sh150 million.
A composite underwriter, offering insurance services including accident, fire, health, investment, life, and pensions have to shore up capital to Sh1 billion.
As at June, the Insurance Regulatory Authority (IRA) disclosed that 20 firms, a third of Kenya's 56 licensed insurance companies, were not compliant with capital requirements.
EFG Hermes analysts says CIC Group may need a partner due to continued streak in loss making especially in the general business. This has been tied to low pricing amid a large pool of low quality policyholders leading to reduced underwriting profitability.
CIC Insurance Group made a Sh335.5 million loss in the half year ended June, reversing Sh20.9 million net profit made in 2019. This was tied to 25 percent drop in investment income to Sh1.2 billion and 7.6 percent rise in claims to Sh5.4 billion, with a flat growth on net premiums at Sh7.1 billion.
“The non-life business is undercapitalised based on new RBC guidelines, which implies the insurer will have to inject capital,” the bank said on CIC’s operating concerns.
It adds that Kenya Re board is considering offering 20 per cent or more of the company's shareholding to the public.
This would see the government which owns 60 percent through National Treasury, sell down its shareholding, as part of state moves to cut its ownership in the state-owned enterprises to reduce the fiscal pressures, support government budget and boost liquidity at the Nairobi Securities Exchange.
But this will not be the first time the government has announced such plans.
It has in the past held similar plans to privatise 26 corporations to private investors but has been delayed by bureaucracy in approval of transactions by the executive.
Insurance firms in the non-listed space could be going down that road of consolidation as well.
This space has been characterised having players that are held by family-owned or an individual and lack an institutional anchor shareholder.
Some of the firms’ ownership is dominated by one large anchor shareholder who has been there for a long time and facing insolvency or capital inadequacy issues.
“Assuming the regulator strictly enforces the RBC deadline there could be pockets of opportunities for interested foreign players to get into the market. Having said that, insurance has been a relatively busy space when it comes to M&A, especially through the entry of foreign players,” Mr Ismaily added.
The industry is also relatively fragmented, a signal set to catalyse the deals.
As at September last year, there were 36 non-life players and 24 life players.
The insurance industry has over the last periods posted losses due to increased claims and provisions, and lower premiums hurting its profitability.
A strict roll out of the RBC regime is expected to push insurers to stabilise investment income and restructure balance sheets towards low risk assets, helping the industry make a turnaround in sector profitability in two to three years.
“Due to the partial inadmissibility of receivables, we project insurers to incur less bad debt provisions; and improve pricing and claims provisioning which is projected to result in lower net claims,” he added.
According to Genghis Capital, the banking sector will still record mergers and acquisition activities this year, as head of research Churchill Ogutu added that this is a ‘crystal ball expectation informed from recent trends’.
“This (M&A) has been salient in recent years and we don’t expect this trend to ease,” the investment bank said in the Genghis Capital Playbook 2021 released in January, and based on that, we expect that the mergers and acquisition activities that have played out in the banking sector in recent years will still continue remaining a dominant theme this year,” Mr Ogutu added.
Last year, banks reported a hit on capital adequacy due to increased provisioning of bad loans, interest payment holidays on loans and restructured loans.
This saw most banks recall dividend payouts to maintain adequate capital flows.
But even as the lenders especially tier 1 utter resilience, the situation is yet to be known for small banks especially those not listed.
“As we come out of Covid-19 mist, a number of the banks will have weaker balance sheets than pre-Covid-19 which in our view, will make them easy acquisition targets. That's one of the drivers that we see will propel the M&A transactions,” Mr Ogutu added.
The Kenyan banks such as Equity and KCB have in the past looked beyond borders for acquisitions, but the expected M&As could see foreign players make moves into the local markets.
Equity Group has further spread its wings to Democratic Republic of Congo, after completing the buyout of Congolese lender, Banque Commerciale Du Congo (BCDC) in August last year, a lender where the government is also a shareholder.
It paid $95 million (Sh10.35 billion), acquiring 66.53 percent stake from the majority shareholder, George Arthur Forrest’s family.
KCB Group is awaiting approval for acquisition of 62.06 percent stake in Banque Populaire du Rwanda (BPR) and 100 percent stake in African Banking Corporation Tanzania from London-based Atlas Mara Limited at $32 million and $8million respectively.
The approvals are expected to be completed by the end of next month. Co-op Bank in August acquired 90 percent stake from Jamii Bora by injecting Sh1 billion.
There have also been acquisitions of local players including the buyout of Transitional Bank by Nigerian bank, Access Bank that was completed in August deepening the presence of Nigeria banks in the market with United Bank of Africa (UBA) and Guarantee Trust Bank.
Egypt’s largest private bank Commercial International Bank in April acquired a majority stake in Mayfair Bank.
“We opine that the foreign entities making inward forays in Kenya will take the route of acquiring an existing player, as opposed to building operations ground-up. This is the channel that we see will play out although those deals will be far and wide,” he added.
KNIGHT IN A SHINING ARMOUR
National Bank of Kenya (NBK) which was acquired by KCB Group in 2019 posted a net profit of Sh177.7 million in the year ended December 2020, reversing a net loss of Sh336.9 million a year earlier, indicating the gravity of the deals.
On the other hand, KCB Group recorded a 22 per cent decline in profit to Sh19.6 billion on increased provisioning.
The activity may spread to other sectors including manufacturing, aviation and healthcare.
A draft Block Exemption Guidelines by CAK, if passed, is seen breeding a wave of mergers and acquisitions following a period of financial crisis among businesses.
The draft is pushing for relaxed restrictive trade practices and allows businesses to collaborate their operations including supply agreements, marketing and joint distributorship.
CAK director general Wang’ombe Kariuki said the move was intended to help companies recover from the lockdown effects and leverage in synergies that would increase their revenues.
“The authority is cognizant of the current economic situation across the whole globe. The situation is a motivation for mergers and acquisitions,” Mr Kariuki told Business Daily in February.