* Africa's economic rise is a draw to investors
* Retailers eye a continent with expanding incomes
* Growth outpaces corporate governance changes
* Investor interest pushes up deal prices
By Duncan Miriri
NAIROBI, Nov 13 (Reuters) - In Africa, foreign investorsbeware: business is often a family affair. Just ask Wal-Mart, the world's largest retailer.
When it sought a foothold in east Africa, it sparked afamily feud in one of its acquisition targets, Kenya's Naivassupermarket chain.
A member of the Mukuha family that controls the firm went tocourt to block the sale of Naivas, whose growth over two decadesfrom a small shop in the Rift Valley to a chain of 30 outletsacross Kenya epitomises Africa's economic rise.
Wal-Mart, which has its own roots in a humble family storein the southern U.S. state of Arkansas, should perhaps have beenaware of how territorial a business can be when it is bound byties of kith and kin.
A judge eventually ruled the transaction could go ahead, butthe deal still collapsed. Naivas executives said in October itwas not time to sell and they would invest in expansion instead.
Massmart, the South African unit of Wal-Mart behindthe deal, did not comment but said it still eyed east Africa.
The deal highlights the attraction of a continent that wouldhave barely registered on a retailer's radar 20 or even 10 yearsago.
It also shows one of the many difficulties lurking forinvestors in Africa's frontier markets where many businesseshave grown from small family-run affairs. Owners are often waryof outsiders and can also set valuations unrealistically high.
"We see a lot of really amazing companies but when we lookat it, the family doesn't want to relinquish control, the wholefamily works in it, it is an ATM for them and decisions are madeat the dinner table," said Ayisi Makatiani, managing partner atKenyan private equity firm Fanisi Capital.
"We don't like that," said Makatiani, who launched hisfirm's first fund worth $150 million in 2010 and whoseinvestments in east Africa include a Kenyan pharmacy chain.
Retail is one of sub-Saharan Africa's hottest sectors,fuelled by expanding populations and fast growing economies. Ineast Africa, the economies of several nations are growing around7 percent a year. Kenyan growth is slower but is picking up.
Real income growth in Africa is averaging 2.3 percent a yearand consumer spending accounts for 60 percent of economicoutput, the World Bank said in April. Deutsche Bank said thenumber of households with discretionary income would reach 130million by 2020 from 85 million now. That's good news for shops.
PAYING A PREMIUM
"It is very clear that Africa is the place to be and Kenyais specifically one of the best opportunities on the continent,"said Jonathan Somen, head of AccessKenya, an Internetaccess provider founded with his brother and his father.
The firm, set up in 2000, was bought this year by Japan'sNippon Telegraph and Telephone Corp at a 42 percentpremium to its market price.
"With massive growth taking place, a fast-growing middleclass and investment into infrastructure, not to mention oil andgas deposits, the opportunities in Kenya are enormous," he said.
Other factors, alongside family differences, can also haltacquisition deals in Africa.
Plans by Nakumatt, a privately-owned chain of 40 stores inKenya, Uganda and Tanzania, to sell a 25 percent stake to astrategic investor were knocked off course by an Islamistmilitant attack in September on the upscale Westgate shoppingmall where it had its flagship store.
Nakumatt lost more than 2 billion shillings ($23 million) inthe assault, which killed at least 67 people and ruined thestore that sold everything from iPads to champagne and Frenchcheese, serving a clientele of wealthy Kenyans and expatriates.
But there are still a queue of suitors out there, keen tocapitalise on an African growth story, the firm says.
"There is one fund or other coming in and asking," AtulShah, Nakumatt's managing director, told Reuters.
Those who line up need to tread warily, as the growinginterest is also pushing up prices, particularly in the covetedretail sector.
"Smaller supermarket chains are in such high demand thatthey would ask for a horrendous price," said Abri du Plessis,chief investment officer at South Africa's Gryphon AssetManagement, suggesting that could have buried the Naivas deal.
Due diligence by investors can also expose tangledshareholding structures as small businesses have grown by leapsand bounds but are still run like rural general traders.
"Many local entities are not bothering to clear up ownershipand control issues, and all the skeletons come tumbling out ofthe closet when a buyer appears and there is money to be made,"said Sunny Bindra, a leading Kenyan business adviser.
"Who wants to buy a company if it entails endless sessionsin court or with lawyers trying to resolve family disputes?"
One Nairobi-based investment banker who did not wish to beidentified said each of six transactions involving family-ownedenterprises that her bank had been involved in had fallenthrough, mainly because shareholders tussled over their stakes.
Naivas Chairman Simon Mukuha insists such wrangles were notwhy he scrapped the sale of his chain, which he said would have60 stores in three years and would also expand outside Kenya.
"We have been able to engage and have a balance betweenmanagement, the family and the support of consultants," he toldReuters at the opening of the firm's newest store, beside a neweight-lane highway on the edge of the capital Nairobi.
Nevertheless, he said the company planned to introducenon-family directors to the board.
Such changes, if repeated across other businesses, couldhelp foreign suitors. But they will still need to study theirtarget market closely on a diverse continent where reliance on aone-size-fits-all strategy can come unstuck.
South Africa's upmarket retailer Woolworths, whichhas said its shops in Kenya are thriving, was forced to shut itsstores in Nigeria, where it did not have the right brand image.
"This is not a place you can come from anywhere, set up andgrow," said Mukuha about Kenya. "You need to involve the (local)citizens. They believe in home-grown companies."
- Investment & Company Information
- east Africa