Special report: South Africa
26 November 2012 | By Joanne Harris
The southern African region is developing quickly and its vast promise is attracting a flock of foreign law firms
South Africa and the surrounding countries have almost unlimited potential in natural resources and other developments. More and more international law firms are now trying to take advantage of these developments, but the local firms remain positive.
We all know birds head south for the winter - but lawyers? If recent movements are anything to go by, an autumnal migration to southern Africa is clearly the in thing.
Two years ago, in November 2010, Norton Rose announced it was tying up with South African firm Deneys Reitz. This October Canada’s Fasken Martineau confirmed a merger with Johannesburg-based Bell Dewar, while Norton Rose added Tanzania to its South African offering and Slaughter and May made an effort to tighten its links with sub-Saharan Africa through a symposium with independent African firms.
DLA Piper has also added to its African capabilities, with firms in countries such as Botswana joining its Africa group.
There are also persistent rumours that Linklaters is eyeing up an alliance, or more, with South African independent Webber Wentzel.
The influx of foreign firms does not surprise the local independents.
“Clients are keen to have people on the ground in Africa,” says Webber Wentzel senior partner David Lancaster. “Having a presence of some sort in Africa is quite useful.”
“It was always bound to happen, it’s part and parcel of globalisation,” says Bowman Gilfillan corporate head Ezra Davids. “It’ll pose a challenge to independents like us, but you can’t stop it - it’s happening.”
Two years on from the announcement of the Norton Rose-Deneys Reitz merger and 18 months from its inception, market perception remains positive. Saying that “proper due diligence” always needs to be done in the case of a merger, Davids adds: “Norton Rose did it right. I’m not surprised it’s working.”
Lancaster praises the way Norton Rose has managed to integrate the merger, particularly by ensuring the firm is seen as an integrated outfit in the region.
Most see Fasken’s move as playing to the same sort of strengths as Norton Rose - mining and natural resources.
“Some international firms are trying to follow the Norton Rose example and that’s a pure resources play - a mining play,” says Edward Nathan Sonnenbergs (ENS) chief executive Piet Faber. “Unless you’re clear about your objectives in this market you’ll struggle.”
Several independent firms point to the imminent break-up between Eversheds and its South African ally Routledge Modise as an example of what can happen when things go wrong.
The two firms entered into an alliance in 2008 and Routledge Modise rebranded as Eversheds the following year. Eversheds then found itself embroiled in a court battle over the use of its name after the -local law society said the firm had broken bar rules. In 2011 Eversheds triumphed, but now the alliance is breaking up, with the firms citing client conflicts as the reason.
Eversheds’ South Africa chairman Lavery Modise says the firm’s reputation has not suffered from the breakup, with clients continuing to come to the firm.
“Our plans continue unchanged and include growing the business both in terms of our local and global client base as well as remaining competitive in recruiting professional staff,” adds Modise.
The place to be
However, the withdrawal of Eversheds is a rare example of a firm leaving South Africa, while the reasons for staying are many.
Lancaster says Webber Wentzel has had a solid year, although there have been no transactions of the size of 2011’s $2.2bn (£1.4bn) acquisition of South African supermarket Massmart by US giant Walmart.
“The statistics indicate that M&A activity is down, but what’s happened is that the big five South African firms tend to be really dominant,” Lancaster adds.
Faber agrees that M&A has been slow, although he says it has picked up in the second half of the year. Other practice areas are doing well, he adds, such as ENS’s employment team, which has been involved in the unrest in South Africa’s mining sector recently.
Bowman Gilfillan chairman Jonathan Schlosberg reports the year has been “ahead of expectations”, suggesting that being an emerging economy in the present global financial climate is a bonus.
“We like where we are, what we’re doing, and the market is very interesting but at the top end, activity has slowed,” agrees Davids.
Much of the work South African firms are doing now relates to outbound investment, say lawyers, although domestic work in the country’s most active sectors - natural resources, banking and telecoms - continues.
“South African banks are making acquisitions in the rest of Africa and there is consolidation in some industries,” says Lancaster. “We’re a relatively mature market even though we’re still a developing economy. Many South African companies are looking at moving into other African countries.”
“The majority of our work is domestic but there’s a significant amount that comes from outside the country,” agrees Faber, adding that he cannot single out any single jurisdiction.
“There are 12 countries that attract most of the inward investment into Africa and we act in all of them,” he adds.
South African firms point to countries such as Nigeria and Ghana as being prime investment locations, but closer to home there may also be opportunities in the future.
On South Africa’s borders lie the geographically large but economically small countries of Botswana and Namibia. While relatively undeveloped, things are beginning to change in both jurisdictions.
Once again, the story is mainly about natural resources, says Peter Koep, partner at Namibian firm Koep & Partners.
“There’s huge interest in oil and gas in Namibia at the moment - we have a partner almost exclusively working on oil and gas-related matters,” he reports.
Koep points to the development of the Kudu offshore gas field which has immense potential but has been plagued by investors pulling out. Reports from earlier this year suggest that negotiations between various energy companies are now progressing, and production could begin in 2016.
Once production has begun on the field, the gas will be funnelled into a regional grid, says Koep.
“As far as electricity and power’s concerned everybody in the region is looking to develop electricity to supply it into a grid that will feed electricity to all the southern countries,” he explains.
Mining is another growth area in Namibia. The China Guangdong Nuclear Power Corp (CGNPC) took over Kalahari Minerals and Extract Resources in a mammoth $2.3bn deal earlier this year. The uranium mine at the centre of the deal, which is said to be the world’s biggest, should start operating within three years.
“That’s a massive investment - the purchase alone from companies that held shares in London and Australia was a huge amount of money,” Koep says.
The development of the mine also means Namibia is due to tender work on the construction of a desalination plant to provide water to the mine.
Koep is enthusiastic about all these developments: “It gives us fantastically interesting work and exposes us to the type of transactions that we otherwise would not have seen. We now have the opportunity to specialise more than we’ve been able to do in the past because we have the stream of work now.”
The flow of investment into Africa is also prompting interest from different types of firms. In January this year, Patrick Colegrave, a counsel at offshore firm Harneys, moved back to his native Zimbabwe after several years in London and the Cayman Islands to set up a representative practice for the firm. Colegrave’s remit is to strengthen the firm’s presence and expertise on Africa, specifically sub-Saharan.
“A theme you’ll find when doing business in Africa is that there’s no substitute for local knowledge,” Colegrave asserts. “You can’t speak of doing business in Africa as a single place - you need to look at it either on a regional or country basis.”
He reports that the move has been successful.
“Since this initiative, we’ve seen an uptick in business for the firm on the African front,” Colegrave says.
He says work is derived from two sources. The first is advice for South African fund managers running African investment strategies who are wanting to expand their investor base. The second is foreign investment into Africa, typically through a British Virgin Islands (BVI) holding structure.
“One reason for this is that it’s not uncommon for such companies to seek a listing on an exchange,” Colegrave explains. “AIM is a good example and a BVI holding company allows them to do that fairly easily.”
Much of this investment goes into countries such as Cameroon, Sierra Leone, the Democratic Republic of the Congo, Kenya, South Africa, Tanzania and Zimbabwe. While not advising on Zimbabwean law, Colegrave’s base in Harare allows him to observe the market, which still has its risks.
“There’s foreign investment in Zimbabwe but there are a number of challenges there,” he says. “Indigenisation is a challenge and property rights uncertainty is too, but at this stage it’s fair to say that Zimbabwe as a jurisdiction hasn’t reached its potential for attracting foreign investment.”
South African lawyers agree. “Zimbabwe is still relatively high-risk, but people are positioning themselves,” says Lancaster.
Bowman Gilfillan’s Davids says Zimbabwe will open up.
“We believe that it’s only a question of time - we’re keeping our eyes firmly focused on the situation,” he says.
In the meantime, there are plenty of opportunities to be explored within South Africa and further afield in the southern African region, and this is likely to keep drawing in foreign businesses and their lawyers.
“When growth has slowed in the developed world it’s good to be in a place where there’s opportunity - to my mind, that’s not going to end,” concludes Lancaster.
Key facts - South Africa
GDP (US$, 2011): 408.2bn
Annual inflation (September 2012): 5.50%
Population (2011): 50,590,000
Life expectancy at birth: 52
Unemployment rate (2nd quarter 2012): 24.90%
Source: World Bank, Statistics South Africa