Abu Dhabi, UAEFriday 14 December 2018

Rosy outlook for regional M&A

Despite the tumble in the price of crude, mergers and acquisitions experts are confident deal making in the Middle East will remain robust. Activity last year was well above average and the hope is this year will be no different.
Mashreq has shown an interest in Citigroup’s plan to sell its consumer banking business in Egypt. Rich-Joseph Facun / The National
Mashreq has shown an interest in Citigroup’s plan to sell its consumer banking business in Egypt. Rich-Joseph Facun / The National

Regional mergers and acquisitions (M&A) activity is forecast to remain as buoyant this year as 2014 despite the oil price drop as governments continue to spend, corporates focus on growth and international investor interest in the energy-rich region rises, M&A advisors say.

The value of announced M&A in the Middle East in 2014 rose 23 per cent to US$50.3bn from 2013, the highest annual total since 2010, according to Thomson Reuters. M&A advisers expect a similar level this year.

Despite the fall in the price of crude to near six-year lows and its oscillation between $40 and $50 a barrel, Arabian Gulf governments — including Oman and Saudi Arabia — have announced budgets with increased spending, which is expected to trickle down into the private sector and maintain the M&A momentum. Most Gulf governments have also accumulated surpluses from oil sales over the past decade, which will help them weather the oil price rout.

“Probably on balance, people will continue [to do M&A deals] because there is enough of a surplus to do so,” says Richard Rollinshaw, a Dubai-based partner at advisory PwC. “There are still some good deals to be had and I don’t think anybody thinks that the recent decline in oil price represents a fundamental and permanent shift to $40 oil.”

Sovereign wealth funds, which are mandated to invest the oil dollar surplus for future generations, will continue to be active, as they were in 2014. Last year saw sovereign wealth funds eyeing international investments, which helped outbound M&A activity rise 74 per cent to US$26bn, led by investments from Qatar. The Qatar Investment Authority, the country’s sovereign wealth fund, last year led a bid to acquire Songbird Estates, the owner of the Canary Wharf financial district in London for about $4bn. It was the biggest announced M&A deal in the Middle East last year.

“Because of their existing capital base and generally diversified investment portfolio, sovereign wealth fund entities are well positioned to ride out the current low oil-price environment. They still have capital to deploy,” says Patrick Delivanis, Morgan Stanley’s head of investment banking for the Middle East and North Africa.

Sovereign wealth funds could take advantage of the depressed oil prices to snap up international assets. The UAE Oil Minister has indicated some Abu Dhabi entities such as the sovereign wealth fund Mubadala Development and the energy firm Taqa could be some of these opportunistic buyers.

“What we have seen is that sovereign entities in this part of the world tend to be quite opportunistic and the declining oil price creates a number of very interesting opportunities in other parts of the world,” says Chris Lester, an Abu Dhabi-based counsel with the law firm Latham & Watkins.

“In particular, I would expect sovereign entities to be eyeing cheaper oil and gas assets in the US and other parts of the world.”

Corporates are also expected to favour M&A as they seek to grow their businesses and shed non-core assets.

Although domestic and inter-regional M&A fell 12 per cent last year to US$14 bn based on Thomson Reuters data, local M&A activity is forecast to be robust this year.

For example, the financial services sector was busy last year with continued consolidation in Bahrain and with international banks shedding non-core assets. Abu Dhabi Islamic Bank, the capital’s biggest Islamic lender, bought Barclay’s retail banking operations for £119 million (Dh656.1m) last year. The US lender Citigroup is planning to sell its consumer banking business in Egypt and Dubai’s Mashreq is one of the lenders interested in the sale.

Family Businesses are also expected to be active this year, as well as greenfield firms such the UAE retailer Marka, which listed in the UAE last year.

“You will see more and more of the large family groups looking at their portfolio and making strategic decisions around what they will do with all they’ve got,” says Mr Rollinshaw. “It may involve them selling assets, may involve them making acquisitions to double down on certain assets they got in certain sectors or maybe transfer some of the assets for succession purposes.”

Dubai Inc firms are also expected to continue to shed assets as they restructure debt that will be maturing in the next few years. As part of an asset reshuffle, the ports operator DP World bought Economic Zones World for US$2.65bn from DP World’s parent firm, Dubai World. Dubai World agreed in 2011 to restructure about $25bn of debt, which will include assets sales. The investment firm Dubai International Capital is also expected to divest assets to help pay off its $2.5bn debt.

“I think there are other parts of Dubai that may continue to look at monetising some of the assets they have,” says Mr Rollinshaw.

“You may see more monetisation of some of that in 2015 and 2016 than you saw in 2013 and 2014 because these assets may attract international investors and there is more confidence generally in the world than there was a couple of years ago.”

International private equity firms remain keen on the region, although inbound M&A declined 30 per cent last year to US$4.2bn, based on Thomson Reuters data.

The Dubai-based private equity firm Abraaj Capital and US private equity firm TPG Capital made a bid last year for the Saudi fast-food chain Kudu.

Meanwhile, the Kuwaiti food company Americana has attracted the likes of KKR and CVC Capital Partners in a potential sale. The UAE’s Gems Education attracted capital last year from a group of investors that included the US private equity firm Blackstone.

“I think the region last year matured or began to mature for investors globally, in the sense that it was no longer perceived simply as an exporter of capital but also as an importer of capital,” says Mr Delivanis.

“Firms globally, including private equity firms among other investors, are now increasingly looking to deploy capital into the region,” he says.

“There are also a number of businesses locally that are leaders in their space that require capital to grow and to manage generational transitions. Such firms may also be looking to provide some diversification to their shareholder base in terms of adding more investors into a company’s capital structure.”

Private equity firms and corporates generally are getting increasingly interested in Egypt, the Arab world’s most populous country, where recent political stability has attracted high-calibre names.

The American firm Kellogg was engaged last year in a bidding war with Abraaj over Egypt’s biscuit maker BiscoMisr that ended with the US cereal and biscuits maker winning.

“We think Egypt will grow faster than anywhere else because there was a lot of activity last year,” says Mr Rollinshaw.

“The stock market has performed very well and people are more comfortable that political stability has been reached. The demographics and economics for Egypt continue to be favourable.”

But there are hurdles facing M&A activity in the region. Foreign ownership rules persist, dissuading some international firms from looking more closely at deals in the region.

M&A laws are not very clear and often deter inter-regional activity. Also, shareholders’ valuations expectations are sometimes overblown, scuppering potential deals.

“The challenges or stumbling blocks for local-to-local M&A can often include differences in shareholder expectations around valuation as well as governance issues. Such issues can potentially put a dampener on more activity,” says Mr Delivanis.


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