Financial restructuring and asset disposal are among options for businesses says global consultancy
UAE businesses look at transformation strategies to weather challenging market conditions
Businesses in the UAE are looking to overhaul internal processes, and may consider asset disposal and financial restructuring. They are seeking to evolve in the wake of softer economic conditions and lower oil prices that continue to pressure working capital and cash flows.
“Transformation is the buzzword,” said Raj Mehta, a partner and head of advisory firm KPMG’s restructuring and performance improvement business in the lower Gulf region. “There is a strong realisation that businesses operating in sectors such as oil and gas, construction and consumer, need to evolve to remain competitive”.
The UAE, the region’s second biggest economy, like its Arabian Gulf peers, relies heavily on the sale of hydrocarbons for revenue. A slump in oil prices from the mid-2014 peak of US$115 per barrel has forced the government to cut public spending, which has slowed the pace of economic growth.
Consumer spending has been sluggish, affecting retail and consumer businesses in the country, while properties and related construction sectors, which recovered well from the 2008 financial crisis, have also faced some headwinds in the past two years.
Abu Dhabi, which accounts for about 6 per cent of the world’s proven oil reserves, has already consolidated some of the banking and financial assets and has made sweeping changes in the emirate’s oil and gas sector. Abu Dhabi National Oil Company (Adnoc), among other efforts at reorganisation, has streamlined its operations by combining two of its largest offshore operations to drive efficiencies.
Smaller companies related to oil and gas along with the petrochemicals sector are also trying to find ways to weather what is expected to be a prolonged period of lower oil prices.
“You pick any name within the oil and gas or related sectors and it will almost definitely be going through some form of transformation,” Mr Mehta said.
Adnoc’s new corporate strategy includes consideration of public flotation of shares in its select service business units and the formation of new partnerships. The company is considering the share sale of Adnoc Distribution, which includes more than 300 service stations throughout the UAE. Media reports in July suggested that the partial sale of the company to the public could value it up to $14 billion.
However, despite low oil prices and weaker revenues, governments in the region are unlikely to sell the core oil and gas assets as part of their efforts to unlock value and raise alternative financing to support their economies. Non-core assets outside the Arabian Gulf where minority positions are held are a different story. They are under scrutiny and could come to market for sale, according to Mr Mehta.
“The focus is now on driving efficiencies within the larger government-backed assets. These companies have large and diverse portfolios,” he said, adding that the drive to change the business verticals and in-house scrutiny is strong. “We are at the early stages of that. Are they taking a closer look, absolutely? Have they worked out what they want to do with it? That’s in process.”
The need to find ways to change the business models is equally intense in construction and consumer sector businesses that are plagued by capital constraints and cash flow issue, he noted.
“There’s a lot of pressure on working capital within the consumer businesses including retail, food and beverage and hospitality industry. Businesses with a demographic element attached to them are also facing a lot of financial, sales and operational challenges,” he said.
“Banks are also taking a very hard look at the numbers not only on their books but also on the re-financing they might have to do and see if there is a justification for that.”