UGANDA M&A ACTIVITY RISES AS POLITICS SETTLE AND ECONOMY RECOVERS

By Daniel Gantungo Thursday, June 01, 2017
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Renewed political stability, investor-friendly tax relief and slowly recovering commodity prices have seen Uganda enjoying an uptick in merger and acquisition activity so far in 2017.

“The economy is looking up and the M&A environment is quite active compared to this time last year, with some major deals either completed or reaching completion,” says Daniel Gantungo, partner at Bowmans in Uganda.

Among the transactions announced are Tullow Oil Uganda’s USD 900 million asset sale to a joint venture between Total of France and the China National Offshore Oil Corporation (CNOOC), and Japanese paint company Kansai’s USD 87.5 million acquisition of Sadolin Paints Uganda.

Deals are also under way in Uganda’s insurance, healthcare and renewable energy sectors, Gantungo says, adding that the heightened M&A activity partly reflects the country’s improved economy and greater political stability since last year’s elections.

“There has been a slight recovery in commodity prices, mainly in oil prices, which has injected excitement into the energy-related market, especially in oil and gas, as we have seen from the Tullow Oil megadeal.”

Uganda’s improving political stability is also helping the M&A environment.

“Election and post-election fever has cooled off and we are now in a settled period, which has contributed to the recent increase in transaction activity. We do still have some unpredictability in that this is supposed to be the last term of the President, and it is not yet known if he will seek to change the constitution to continue after turning 75 or if there will be a change in President - but that is still four years away.”

Tax breaks back for industrial investment

Government is hoping to stimulate investment in Ugandan industrial parks and manufacturing as a whole by reintroducing tax incentives, Gantungo says. “The tax incentives that were repealed in 2014 are coming back, according to the draft Tax Amendment Bills published in the Uganda Gazette on 30 March 2017.”

The tax breaks are specifically for investment in industrial buildings and plant machinery.  Subject to a few exceptions, a person who puts plant and machinery into service for the first time outside a 50km radius of the capital city of Kampala is entitled to a 50% deduction on gross income before tax. Similarly a person who puts a new industrial building into service (irrespective of location) for the first time is entitled to a 20% deduction of the cost base of the building.

“The tax incentive is being reintroduced to stimulate industrial development, interest in which has not been as great as government had perhaps hoped,” Gantungo says.

Tax relief is also in the pipeline for Uganda’s fast-growing casino and sports betting sector, where growth has been exponential in the past 10 years. “The tax on these operators is being reduced from 35% to 20% and government is reintroducing 15% withholding tax on gambling winnings.”

Labour and pension issues in the spotlight

Gantungo says two issues that should be on the radar of companies undertaking mergers or acquisitions in Uganda are labour law matters and pending changes in the country’s pension laws.

“Although unionisation is low and the unions in Uganda are quite weak, labour issues keep coming up and have even led to delays in transactions. Usually, this has been about pension or employment benefits, or job security, prompting a few employees to act.”

In 2012 four Shell Uganda employees went to court to block the sale of the company, saying they had not been consulted. Then in 2014, more than 400 Uganda Orange were granted an urgent injunction halting a transfer of a majority stake to Africell until a dispute over retirement benefits had been settled.

As far as pensions regulation is concerned, liberalisation is on the agenda. “Pensions liberalisation legislation is going through parliament at the moment to remove the monopoly of the National Social Security Fund and make provision for private pension providers,” Gantungo says.

Currently, even when companies operate private pension schemes, they are obliged to contribute to the National Social Security Fund unless they obtain a special waiver from the minister concerned. This will no longer be the case under the new dispensation.

Another new development, this time in the insurance sector, is the overhauling of the entire Insurance Act, which is being repealed and replaced. “The new Act, which is intended to bring about stronger regulation in the insurance sector, awaits Presidential assent.”

All in all, business is brisk in Uganda as an integral part of the dynamic, vibrant East Africa region.