INTERCONTINENTAL JORDAN WINS CLEF D’OR

Private equity (PE) is increasingly being accepted as an alternative to traditional bank financing or potential initial public offerings (IPOS) in the Middle East, with companies turning to these firms for growth capital or to monetize their stakes in their businesses. Regional merger and acquisition (M&A) activity slowed in 2016 on the back of low oil prices and market fluctuations. However, it has maintained momentum in the F&B sector across the broader MENA region.

F&B on firm footing

While investments led by banks in the MENA region have been slow to recover to pre-recession levels, F&B is one of a few key industries that has shown more promise, particularly within the GCC countries. In 2014, F&B ranked third in terms of value per investment among industries in MENA. By 2016, F&B had catapulted to second in average investment size in the region.

M&AS surge in 2016

M&A deals rocketed in MENA during the second half of 2016 to USD 30.5 billion, up almost threefold on the value of those made in the first six months of the year. The activity was largely driven by megadeals, including four transactions above USD 1 billion. In March, Amazon agreed to purchase the Dubai-based Souq. com, a deal described by Goldman Sachs advisors as “the biggest ever technology M&A transaction in the Arab world”. The arrival of Amazon in the MENA region is likely to spur both the digitization of retail and the overall economy. The company will have a major impact on restaurants and foodservice in the GCC. Though currently small when compared to the global average, regional e-commerce is seen as having high growth potential. Investors have already taken note of the trend towards digital. In April, Gulf Capital, one of the largest alternative investment firms in the region, said it had invested over USD 135 million in technology and e-commerce across the GCC. CEO Karim El Solh said the firm forecasts a substantial increase in technology investments in the GCC and significant returns for the early backers: “The digital economy is having a transformational impact on our lives and economies, and ecommerce is at the heart of it,” he noted. “It is perhaps the top mega trend that will have a profound impact on every business in the GCC in the coming years.”

The biggest F&B deals in recent past

The MENA region saw 15 PE deals between 2010 and 2015, 10 of which were F&B group-involved and six of which were concentrated in the UAE.

Quick service restaurant (QSR) brands were among the most popular investments, including: Carlyle Group’s acquisition of a 42 percent stake in Saudi Alamar Foods, the region’s master franchisee of Domino’s Pizza and Wendy’s; and Tharawat Investment House’s acquisition of a 49 percent stake in Hungry Bunny, a Saudi fast-food chain with outlets across the GCC. Global Capital Management, an arm of investment group Global Investment House, fully acquired the Bahrain-based QSR manager Yum Yum Tree Food Court in 2016, which currently operates across Bahrain, the UAE, Qatar and the KSA. The company operates more than 20 international and regional brands including: Vanellis; Subway (in Bahrain only); Teryaki, Pad Thai; and Al Mangal. Alghanim Industries and The Wendy’s Company had signed a master franchise agreement aimed at expanding the Wendy’s brand throughout MENA. Alghanim acquired the rights to develop Wendy's from the Saudi outfit, Alamar Foods. As part of the deal, Alghanim acquired all operational outlets in the UAE, with plans to open additional stores over the next 10 years. The company acquired Costa Coffee Kuwait in 2013. Fajr Capital, a major player in the Middle East PE investment, acquired Uae-based Cravia Group in May 2016, which operates some of the most recognizable F&B franchises across the MENA region. These include: Cinnabon; Carvel ice cream; Five Guys;

The region’s digital economy is set to double over the next three years, with the GCC’S e-commerce sales expected to reach USD 41.5 billion by 2020

and Zaatar w Zeit. Meanwhile, Gulf Capital took advantage of F&B potential in the KSA through its acquisition of Multibrands Trading Co, an industry leader with products serving KSA through franchised chains, hotels, cafes, bakeries and restaurants. Early in 2016, NBK Capital Partners (NBKCP) invested in Amo Hamza, a seafood casual dining chain in KSA. With six additional investments in the region, including Shakespeare & Company and Al Faysal Bakery, NBKCP is an important player in the GCC/MENA region’s F&B sector.

Diversification bodes well for the region

There is clearly regional demand for the expansion of both homegrown and international brands. Still, while optimistic, investors remain cautious, due to macroeconomic conditions. As oil prices stabilize, PE in the region is also expected to pick up. Early stage venture capital (VC) style deals with technology startups will attract international and local interest, helping to increase M&A activity in the region. Countries and cities throughout MENA are playing their part, targeting economic diversification through the development of national vision plans. Dubai implemented an Industrial Strategy 2030, containing initiatives not only in F&B, but also in aerospace, maritime, pharmaceuticals and medical equipment, among others. Through recent investments in construction and tourism, the region hopes to leverage its infrastructure and airports to serve growing demand for food, specifically halal products. In KSA, a National Transformation Plan will be implemented through 2030. With so many plans in the offing, the region is widely touted as a growth opportunity, including the F&B market, which is projected to expand by 6.5 percent annually over the next four years. Given the number of regional incubators accelerating, the GCC’S VC industry will continue to grow.

What the future holds

The GCC’S foodservice industry is set to grow at a compound annual growth rate of almost seven percent to USD 24.5 billion by 2018, up from an estimated USD 18.8 billion in 2014. QSR players represent the largest segment, at just over 58 percent. Still lagging, but with much potential, the full-service segment stands at just over 31 percent.

Major expansion is expected in retail e-commerce, a trend that is already beginning to impact restaurants. The region’s digital economy is set to double over the next three years, with the GCC’S e-commerce sales expected to reach USD 41.5 billion by 2020. Consequently, demand for food delivery and mobile payments will definitely increase. As economies in the region diversify and household income levels rise, the F&B industry stands to benefit, especially in casual dining and fast food. Evolving demographics, including younger populations and working expats, will also fuel F&B growth in the region. Tourism will drive further growth. The World Travel & Tourism Council expects travel to the region to grow at an annual rate of 7.8 percent over the next seven years. Based on recent investment activity in the F&B sector, coupled with the need for major partnerships between international brands seeking new markets and national companies looking for new ventures, the MENA region will remain a hotbed of M&A activity.