Why merg­ers and ac­qui­si­tions are back on the rise

Gulf Business - - CONTENTS -

Zeid Hana­nia and Nadim Kayyali dis­cuss the re­turn of M&As and why we can ex­pect to see more ac­tiv­ity in Africa in the com­ing years

As we ap­proach the 10-year an­niver­sary of the 2008 global fi­nan­cial cri­sis next year, busi­nesses in the Gulf re­gion as a whole – and the United Arab Emi­rates in par­tic­u­lar – ap­pear to be more re­silient, ro­bust and op­ti­mistic than be­fore.

De­spite – or per­haps partly as a re­sult of – wider geopo­lit­i­cal and eco­nomic re­gional is­sues af­fect­ing the Mid­dle East, in­clud­ing fluc­tu­a­tions in the price of oil and po­lit­i­cal in­sta­bil­ity, the UAE has in the last few years man­aged to en­hance its po­si­tion as a re­gional hub for in­vest­ment ac­tiv­ity across the re­gion and be­yond.

Re­gional merger and ac­qui­si­tion ac­tiv­ity last year wit­nessed a healthy jump in both deal value and vol­ume (as com­pared to 2015, with ap­prox­i­mately 75 re­ported trans­ac­tions hav­ing been com­pleted ac­cord­ing to Merg­er­mar­ket). The fi­nan­cial ser­vices sec­tor in par­tic­u­lar wit­nessed a cou­ple of land­mark deals with the $14.8bn merger of First Gulf Bank and Na­tional Bank of Abu Dhabi be­ing in the fore­front of such ac­tiv­ity.

As the re­gional eco­nomic en­vi­ron­ment sta­bilises, it is likely that deal ac­tiv­ity will slowly in­crease across the re­gion. While po­lit­i­cal in­sta­bil­ity and mar­ket volatil­ity has gen­er­ally ham- pered in­vest­ment ac­tiv­ity, it has also con­versely con­trib­uted to some notable trans­ac­tions by pre­sent­ing buy­ers with cost sav­ing and con­sol­i­da­tion op­por­tu­ni­ties across cer­tain sec­tors. One key is­sue that still lingers as a lim­it­ing fac­tor to trans­ac­tions is the val­u­a­tion gap be­tween sell­ers and buy­ers al­though it is ex­pected this will slowly dis­si­pate as more re­al­is­tic val­u­a­tions ul­ti­mately take hold in light of eco­nomic and geopo­lit­i­cal re­al­i­ties.

In­vest­ment ac­tiv­ity for cer­tain sec­tors such as fin­tech, tech­nol­ogy, e-com­merce and TMT has picked up over the last year and is gen­er­ally ex­pected to ex­hibit fur­ther growth across the re­gion, in line with changes in the global econ­omy. The re­cent ac­qui­si­tion of Souq.com by Ama­zon is a sig­nif­i­cant mile­stone in the re­gion in this area.

Ac­cord­ing to var­i­ous mar­ket stud­ies, the re­gion has the po­ten­tial to be­come one of the world’s fastest grow­ing e-com­merce/on­line mar­kets. While cur­rently e-com­merce only oc­cu­pies a tiny sliver of the Mid­dle East re­gion’s to­tal GDP, there is mas­sive in­vest­ment po­ten­tial and growth in this sec­tor.

The Ama­zon-Souq deal could be an in­di­ca­tor of this trend as the tra- di­tional model of brick and mor­tar re­tail will likely see fur­ther dis­rup­tion in the fu­ture across the Mid­dle East. Ac­cord­ingly, a larger vol­ume of deal ac­tiv­ity is likely to oc­cur in this area in the com­ing years.

In the en­ergy arena, we are see­ing grow­ing in­vest­ment in the re­new­able en­ergy space as state ac­tors across the re­gion (in­clud­ing the GCC and coun­tries like Jor­dan and Egypt) roll out re­new­able en­ergy pro­grammes for the de­vel­op­ment of so­lar and wind power projects.

In 2016, more tra­di­tional con­sumer sec­tors such as hospi­tal­ity, re­tail and F&B saw stronger in­ter­est than in 2015 from both fi­nan­cial spon­sors and strate­gic buy­ers as in­vestors looked to take ad­van­tage of favourable val­u­a­tions and con­sol­i­da­tion op­por­tu­ni­ties. This is de­spite rel­a­tively un­even and slug­gish deal im­ple­men­ta­tion.

The ed­u­ca­tion and health­care sec­tors con­tinue to see strong in­ter­est, par­tic­u­larly in Saudi Ara­bia, which has seen a num­ber of trans­ac­tions in the space, in­clud­ing some in­volv­ing pro­cesses with mul­ti­ple bid­ders.

As a gen­eral mat­ter, over­all in­vest­ment in­ter­est in the Saudi mar­ket will likely grow fur­ther af­ter a few slug­gish years in view of the ag­gres­sive in­vest­ment strat­egy of the gov­ern­ment, en­hanced flex­i­bil­ity in ac­cess to the cap­i­tal mar­kets and the fact that the oil price has slightly re­bounded from the lows of the last few years. Ac­cord­ingly, an in­creas­ing num­ber of es­tab­lished Saudi fam­ily busi­nesses have be­come open to the idea of part­ner­ing with for­eign in­vestors via di­rect eq­uity in­vest­ments, joint ven­ture ar­range­ments or other­wise. The UAE’s po­si­tion as a lead­ing busi­ness hub for M&A ac­tiv­ity is likely to be fur­ther con­sol­i­dated in the short and medium terms. Many of the emi­rates have en­acted for­ward-look­ing and busi­ness friendly leg­is­la­tion in or­der to con­tinue to at­tract busi­nesses and in­vest­ments, with Dubai in par­tic­u­lar lead­ing the way.

As the lead­ing cen­tre for fi­nan­cial, le­gal and con­sult­ing ad­vi­sory ser­vices in the re­gion, Dubai’s po­si­tion as a hub for cross-bor­der ac­tiv­ity across the re­gion and into other grow­ing in­vest­ment des­ti­na­tions such as Africa is un­likely to be ri­valled in the near fu­ture.

In ad­di­tion to its world-class in­fra­struc­ture and busi­ness-friendly reg­u­la­tory en­vi­ron­ment, sev­eral re­cent de­vel­op­ments are likely to en­hance Dubai’s po­si­tion as a base for in­vest­ment and deal-mak­ing ac­tiv­ity through­out the re­gion. These in­clude more so­phis­ti­cated and reli­able dis­pute res­o­lu­tion mech­a­nisms; in­creased flex­i­bil­ity to use lo­cally in­cor­po­rated cor­po­rate ve­hi­cles as in­vest­ment hold­ing ve­hi­cles for for­eign and re­gional in­vest­ments and more de­vel­oped anti-com­pe­ti­tion reg­u­la­tions.

In ad­di­tion to its po­si­tion as a cen­tre for deal-mak­ing across the GCC and the wider Mid­dle East, the use of Dubai as a hub for in­vest­ments into Africa is well-doc­u­mented and is only ex­pected to grow as more and more multi­na­tional cor­po­ra­tions, fi­nan­cial in­vestors and spon­sors and re­gional in­sti­tu­tional in­vestors base their Africa in­vest­ment and busi­ness de­vel­op­ment ac­tiv­i­ties out of Dubai.

This in­cludes a num­ber of im­por­tant Asian and In­dian-led busi­nesses with strong in­ter­ests in both North Africa and sub-Saharan Africa. As the economies of sub-Saharan Africa con­tinue to grow, it is likely that Dubai’s unique geopo­lit­i­cal po­si­tion and sta­tus as a busi­ness hub con­nect­ing east and west will help it fur­ther ce­ment its po­si­tion as one of the world’s key gate­ways into the African con­ti­nent.

In the last few years there have been a num­ber of im­por­tant pri­vate eq­uity and in­sti­tu­tional in­vest­ments by GCC in­vestors into Africa – mostly led out of Dubai. This in­cludes In­vest­ment Cor­po­ra­tion of Dubai's in­vest­ment in Dan­gote Ce­ment back in 2014, the Kharafi Group’s ho­tels in Gam­bia and South Africa, Eti­salat’s op­er­a­tions in Nige­ria, Ar­baaj Group’s var­i­ous in­vest­ments across African mar­kets in health­care, dairy and other sec­tors and Al Fut­taim Group’s own­er­ship of Kenyan au­to­mo­tive dis­trib­u­tor CMC Hold­ings, to name a few.

Al­though eco­nomic un­cer­tainty as a re­sult of cur­rency fluc­tu­a­tions and oil price in­sta­bil­ity over the past year have un­doubt­edly slowed down and checked in­ter­est in the con­ti­nent to a de­gree, the long-term hori­zon is un­likely to be af­fected and the pace of GCC and Asian in­vest­ments into the con­ti­nent is ex­pected to grow. As a re­sult we should ex­pect a grow­ing level of M&A ac­tiv­ity and cap­i­tal out­flows from the re­gion into Africa over the next few years.

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