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Q1 2020 - (released May 2020)

SA's quarterly Private Equity & Venture Capital magazine


Deals not under complete lockdown

by Michael Avery

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Despite COVID-19 placing most M&A activity into an extended lockdown, some funds are still managing to announce closure on transactions.

Catalyst caught up with Phatisa Deal Principal, Lize Lübbe, to talk about how she sees the current dealmaking environment after Phatisa Food Fund 2 (PFF 2) and a group of co-investors – Norfund, Mbuyu Capital and DEG – announced the acquisition of integrated agricultural solutions provider, Farming and Engineering Services Limited (FES). 

“Due to the tough economic climate and uncertainty, the general attractiveness, or at least perceived attractiveness, of opportunities for acquisition might reduce,” says Lübbe. “However, there are interesting pockets of opportunity that are emerging during these times, such as investments in essential goods and services (including food security) and new disruptive technologies (including distribution and e-commerce).” 

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Lübbe also believes that reduced valuations will pose attractive acquisition opportunities – especially of quality companies with quality management – in the right sectors.


The investment in FES is a case in point, where the company’s unique position in Malawi’s agriculture matches the fund’s mandate to seek out high growth firms in the food sector, and this deal will support FES’s long term growth strategy, assisting the company to expand its successful business model to neighbouring countries.


FES’s roots date back to 1967. It is the single largest investor in Malawi's agricultural equipment industry, and the sole distributor of several well-known and trusted brands including Massey Ferguson, Komatsu, AJ Power and Toyota Forklift. The company provides a wide range of high-tech agricultural solutions, including precision and low-till farming; drone technology for crop analysis and crop protection; irrigation systems, including water management solutions; and contracting services.


AgriLab, an FES initiative, is Malawi’s first independent soil- and leaf-testing facility which allows farmers to test, manage and control their soil, leaf and water quality. This initiative contributes to improved yields and crop quality, increased revenue and reduced input costs.


FES’s impact objectives – mechanising African agriculture, ensuring food security, and enhancing farmer profitability – are aligned with the UN Sustainable Development Goals. Located in a region where resources are limited and input costs high, FES has expanded its offering to include a comprehensive range of climate-resilient precision agricultural solutions.


As part of the new owners’ expansion strategy, FES is acquiring (subject to normal conditions precedent) the business assets of agricultural equipment supplier BHBW Zambia. On the back of this, AGCO has agreed to award FES the Massey Ferguson and Challenger franchises for Zambia. FES intends to replicate its successful model of equipment dealership with precision contract farming and other agricultural solutions in Zambia.


The consortium bought the FES stake held by Phatisa’s inaugural food fund (African Agriculture Fund) while the company’s management maintained their shareholding.


Mbuyu Capital is a specialist African private markets investor, managing segregated accounts of co-investments and funds for institutional investors.


Michiel Timmerman, Managing Partner of Mbuyu Capital Partners, reveals that Mbuyu’s co-investments are focused on agri-business, non-bank financial services, logistics & distribution, and healthcare, which present attractive opportunities for financial return as well as impact, by creating jobs, improved food security, access to finance and greater health and well-being.


“FES is a leader and innovator in bringing precision-farming and agritech to Africa,” says Timmerman. “New product development and expansion in the region can be expected to benefit the company’s growth, as well as its customers – including smallholder farmers – by increasing yields, optimising use of inputs and improving climate resilience.’


At this time of economic stress, debt levels are coming under increasing scrutiny and Lübbe acknowledges that while the leverage model is popular, it is not one that enjoys much success in Africa.


“At Phatisa, we do not believe in high gearing ratios in our portfolio, especially considering the developing status of the economies that we invest in, and a focus on growth investments. As a result, we take a very conservative approach to gearing, and fund growth opportunities through a combination of debt and equity,” adds Lübbe.


That’s not to say that debt stress isn’t emerging. Lübbe is observing a significant increase in debt restructuring across the board, and banks are being forced to exercise patience.


“Generally, valuations will be negatively affected, and some industries might bounce back sooner than others. The average holding period for investments may be extended. We also hope to see a bit more activity in the availability of soft funding, especially for companies in essential goods and services, including those involved in food security and healthcare. It is very likely that PE firms will have to assist companies with further equity, especially in industries that are hit the hardest, such as tourism and hospitality. This might lead to further capital calls to the fund investors. We have generally found that the industry as a whole, and in Africa’s case in particular, supported by a very constructive approach by DFIs, has come together with support to get through this crisis.”


One thing is certain, and that is that the industry will forever speak in terms that mark this as a seminal turning point: pre COVID-19 and post COVID-19.

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