“OIL PRICE DROP WILL NOT IMPACT DEALS”
Deals pertaining to Mergers and Acquisitions (M&A) in the Middle East, Qatar in particular, are unlikely to be affected despite wobbling oil prices and political unrest, says Leif Zierz, KPMG’s Global Head of Deal Advisory.
Deals pertaining to Mergers and Acquisitions in the Middle East, Qatar in particular, are unlikely to be affected despite wobbling oil prices and political unrest, says KPMG's Global Head of Deal Advisory Leif Zierz.
Zierz says uncertain conditions are nothing new for the region which has witnessed financial downturn and political crisis following Arab Spring and now is in the grip of oil price related issues. While everyone is cautious, that has not changed the government's spending plans or investments going abroad.
“We don't know whether the current events will change the situation dramatically,” says Zeirz.
“However, there is nothing to suggest that they will impact the spending plans or slow down infrastructure projects, especially in areas on which the governments want to focus, like outbound investments. However we do know that Qatar will continue to diversify its economy in line with the Qatar National Vision 2030 and this will have a positive impact on the M&A landscape,” says Zierz, who was in Qatar to address Heads of Deal Advisory from across the Middle East and South Asia (MESA).
Qatar leads GCC
According to Zirez, Qatar led the GCC in terms of the growth rate of M&A deals as the number of completed inbound transactions increased by 63%, from 8 to 13, compared with 20% in Kuwait, a 7% decrease in the UAE and a 23% decrease in Saudi Arabia from 2013 to 2014.
Qatar's number of completed outbound transactions rose by 85% in 2014, from 14 to 26, compared with 38% in Saudi Arabia, 12% in the UAE and a 18% drop in Kuwait. The total value of outbound acquisitions rose from QR5.24 billion ($1.44 billion) in 2013 to QR14.49 billion ($3.98 billion). These investments were mostly in commercial real estate, financial, hospitality and energy-related sectors and some of the trophy assets that Qatar has invested in the past where the government found more cash flow and yield-driven appetite rather than in green field or manufacturing industrial businesses.
“The increase in transactions in Qatar is representative of the rest of the world, where we can see the return of deals market, and it's safe to say that progress in Qatar has been significant. Although M&A spend in the energy sector is high, it's clear that, as oil prices remain low, Qatar's infrastructure spend will have a positive impact on ensuring that the frequency and value of transactions remain high,” he says.
Giving a global perspective of M&A deals, Zierz says the latest trends clearly indicate that there has been an upward movement in the markets in the last 12-15 months compared with the “jam of transactions” caused by financial turmoil a few years ago.
Due to a lack of debt financing and confidence in the economic environment, many transactions that ought to have taken place all these years for strategic and restructuring reasons, were happening for the last one and a half year. The main drivers for this are strategic interests of the corporates from around the world.
“There have been fast developments in the global technological environment and this, combined with abundant liquidity and solid profit levels in the corporate
“There have been fast developments in the global technological environment and this, combined with abundant liquidity and solid profit levels in the corporate environment in both mature and emerging economies, have resulted in a significant increase in the deal activity across the world.”
LEIF ZIERZ Global Head of Deal Advisory KPMG
environment in both mature and emerging economies, have resulted in a significant increase in the deal activity across the world,” Zierz says.
According to him, these deals are mostly happening in sectors like healthcare, pharmaceuticals and chemicals and in everything that is affected by the impact of the technological advancements. It is also happening in the energy sector which in some major economies affected important regulatory changes.
“As far as the Middle East is concerned, I would say that the activity is also higher in two countries – the UAE and KSA. We have a lot of outbound deals happening from Sovereign Wealth Funds or large institutions. Even family wealth is going into outbound deals,” he says.
Within the GCC, there is some activity in limited sectors like food, retail industry, medical care and education. The rest is outbound, with Europe being the favourite destination. While it is limited in extent to the US, investors are exploring new opportunities in the East.
Saudi Arabia and the UAE governments are expecting more IPOs as Morgan Stanley Capital International is likely to upgrade Saudi Arabia from frontier to emerging market in June this year. “With Kuwait already opening up its market and allowing 100% foreign ownership in the companies recently, we have to see how these measures will create a more conducive atmosphere for a surge in M&A deals in the region,” he says.
Qatar, obviously on the back of high oil prices and surplus reserves, has been acquiring strategic assets overseas, mainly in Europe through SWF, HNWIs and institutions. Venkatesh Krishnaswamy, Head of Deal Advisory with KPMG Qatar, says: “There are high expectations from the region, and more specifically Qatar, with regard to outward investments and it will be interesting to see whether lower oil prices will impact such plans in the coming years.”
Qatar's revenues are mostly from LNG sales which should be invested in assets which give good returns. The government will continue to look for strategic trophy assets that meet their investment objectives as they have done in the past. But given priorities in the local markets and in terms of infrastructure spend, they will be more cautious in view of the lower oil prices. “This caution will extend to where and how much they invest, as compared with when the oil price was $100. They will continue to look for good investment opportunities in markets they are familiar with,” Krishnaswamy says.
Leif Zierz feels that the government should now look at new emerging markets like China, India and South & East Asia countries. However, Europe will remain a favourite destination for investments and that will not change.
More IPO activity is expected this year, not only in Qatar but also globally if you look at how strong the stock exchange markets are, mainly driven by huge liquidity, and in the economies like the US and Europe, where volatility is at a very reasonable level, Zierg feels.
As far as new IPOs are concerned, Zierz says that for any company to raise equity from the market, it should have a good reason besides investors' appetite. “The regulators are keen to see more companies get listed, but Qatari firms have full access in terms of liquidity from banks and it is not difficult for large businesses to borrow money from traditional sources. Hence, money is the not key driver for the companies to go for an IPO; they wait for right time,” he adds