* 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 investors beware: 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 a family feud in one of its acquisition targets, Kenya's Naivas supermarket chain.
A member of the Mukuha family that controls the firm went to court to block the sale of Naivas, whose growth over two decades from a small shop in the Rift Valley to a chain of 30 outlets across Kenya epitomises Africa's economic rise.
Wal-Mart, which has its own roots in a humble family store in the southern U.S. state of Arkansas, should perhaps have been aware of how territorial a business can be when it is bound by ties of kith and kin.
A judge eventually ruled the transaction could go ahead, but the deal still collapsed. Naivas executives said in October it was not time to sell and they would invest in expansion instead.
Massmart, the South African unit of Wal-Mart behind the deal, did not comment but said it still eyed east Africa.
The deal highlights the attraction of a continent that would have barely registered on a retailer's radar 20 or even 10 years ago.
It also shows one of the many difficulties lurking for investors in Africa's frontier markets where many businesses have grown from small family-run affairs. Owners are often wary of outsiders and can also set valuations unrealistically high.
"We see a lot of really amazing companies but when we look at it, the family doesn't want to relinquish control, the whole family works in it, it is an ATM for them and decisions are made at the dinner table," said Ayisi Makatiani, managing partner at Kenyan private equity firm Fanisi Capital.
"We don't like that," said Makatiani, who launched his firm's first fund worth $150 million in 2010 and whose investments 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. In east Africa, the economies of several nations are growing around 7 percent a year. Kenyan growth is slower but is picking up.
Real income growth in Africa is averaging 2.3 percent a year and consumer spending accounts for 60 percent of economic output, the World Bank said in April. Deutsche Bank said the number of households with discretionary income would reach 130 million 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 Kenya is specifically one of the best opportunities on the continent," said Jonathan Somen, head of AccessKenya, an Internet access provider founded with his brother and his father.
The firm, set up in 2000, was bought this year by Japan's Nippon Telegraph and Telephone Corp at a 42 percent premium to its market price.
"With massive growth taking place, a fast-growing middle class and investment into infrastructure, not to mention oil and gas deposits, the opportunities in Kenya are enormous," he said.
Other factors, alongside family differences, can also halt acquisition deals in Africa.
Plans by Nakumatt, a privately-owned chain of 40 stores in Kenya, Uganda and Tanzania, to sell a 25 percent stake to a strategic investor were knocked off course by an Islamist militant attack in September on the upscale Westgate shopping mall where it had its flagship store.
Nakumatt lost more than 2 billion shillings ($23 million) in the assault, which killed at least 67 people and ruined the store that sold everything from iPads to champagne and French cheese, serving a clientele of wealthy Kenyans and expatriates.
But there are still a queue of suitors out there, keen to capitalise on an African growth story, the firm says.
"There is one fund or other coming in and asking," Atul Shah, Nakumatt's managing director, told Reuters.
Those who line up need to tread warily, as the growing interest is also pushing up prices, particularly in the coveted retail sector.
"Smaller supermarket chains are in such high demand that they would ask for a horrendous price," said Abri du Plessis, chief investment officer at South Africa's Gryphon Asset Management, suggesting that could have buried the Naivas deal.
Due diligence by investors can also expose tangled shareholding structures as small businesses have grown by leaps and bounds but are still run like rural general traders.
"Many local entities are not bothering to clear up ownership and control issues, and all the skeletons come tumbling out of the 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 sessions in court or with lawyers trying to resolve family disputes?"
One Nairobi-based investment banker who did not wish to be identified said each of six transactions involving family-owned enterprises that her bank had been involved in had fallen through, mainly because shareholders tussled over their stakes.
Naivas Chairman Simon Mukuha insists such wrangles were not why he scrapped the sale of his chain, which he said would have 60 stores in three years and would also expand outside Kenya.
"We have been able to engage and have a balance between management, the family and the support of consultants," he told Reuters at the opening of the firm's newest store, beside a new eight-lane highway on the edge of the capital Nairobi.
Nevertheless, he said the company planned to introduce non-family directors to the board.
Such changes, if repeated across other businesses, could help foreign suitors. But they will still need to study their target market closely on a diverse continent where reliance on a one-size-fits-all strategy can come unstuck.
South Africa's upmarket retailer Woolworths, which has said its shops in Kenya are thriving, was forced to shut its stores in Nigeria, where it did not have the right brand image.
"This is not a place you can come from anywhere, set up and grow," said Mukuha about Kenya. "You need to involve the (local) citizens. They believe in home-grown companies."