JEDDAH — Given the macro economic challenges, M&A activity has remained subdued, but there are some interesting trends emerging which should be key to both buyers and sellers, TransAct Middle East said in its annual Deals publication which gives insights into the Middle East deals market, what is driving deal activity, and the emerging trends.
The report noticed a change in the M&A landscape as well as the priorities of the players who constitute this market.
“Consolidation activity across the financial services sector has continued with strong momentum and it won’t be surprising to see further consolidation activity gathering pace across some other sectors which are also battling with demand/supply imbalance,” it said.
PwC’s second TransAct Middle East edition titled “What’s shaping M&A in the Middle East?” shows a market decline in M&A activity from 2017 - 2018, with the total number deals decreasing from 267 in 2017 to 214 in 2018. Overall, M&A activity continues to remain slow in the current year, with 44 deals reported in Q1 '19 (vs. 56 deals in Q1' 18) and only 1 IPO reported in Q1’19 (vs. 4 IPOs in Q1’18). Private equity activity also saw a decline, dropping from 26% to 21% of all deals in 2018. Corporate acquirers however increased their share of deals from 54% in 2017 to 60% in 2018, with energy, financial services and healthcare among the most active sectors.
These figures reflect the generally bearish sentiments of Middle East business leaders as shown in our latest global CEO survey, where only 28% of the region’s CEO’s said they were “very confident” about their company’s revenue prospects over the next 12 months, compared with 35% among their global peers.
Romil Radia, Deals Client & Markets Leader at PwC Middle East, noted: “Our 2019 TransAct Middle East report reveals a varied landscape across markets and sectors, with several prominent themes emerging despite macro-economic challenges and a slowdown in the 2018 deal market.
He added: “We are positive that inbound interest in the region will continue, as evidenced by some iconic deals that have marked the start of 2019, and ongoing interest in the energy/infrastructure sector. We expect to see a positive outlook in M&A activity for some sectors over the next 12-18 months.”
Another trend to look forward to is tech driven activity. “We have already seen a number of deals completed in the sector in the last year and we expect this to continue going forward as businesses will look to acquisitions to expand their digital footprint in the region and protect their existing services and market share from start-ups or new entrants,” he pointed out.
Ovais Chhotani, Transaction Services Partner at PwC Middle East, said: “It is not surprising to see the number of completed deals down come down this year given where we are in the macro economic cycle. And this is to a large extent was driven by subdued financial sponsor activity. But we are clearly seeing corporates/family businesses looking at acquisitions more actively and this is understandable as organic growth slows down across a number of sectors.
He further said: “We are seeing consolidation in the financial services sector and I won’t be surprised to see consolidation gathering momentum across certain other sectors. Interestingly, Egypt is back on the radar and offers some interesting opportunities for investors, particularly in the consumer facing sectors.”
As organic growth continues to slow across a number of sectors, the incentive to drive EBITDA growth through an inorganic route or through achieving operational efficiencies (including digitization) is likely to stimulate future M&A activity. Transformational reforms (including privatization initiatives) taking place across the region are expected to continue to provide interesting opportunities, particularly for international inbound investors.
“We have seen some landmark deals in the recent period, including Uber’s acquisition of Careem, Saudi Aramco’s $100 billion bonds sale, and Network International’s IPO on the London Stock Exchange etc. which further reinforce our view that the market will continue to offer interesting deal opportunities with a particular focus on technology and digital transformation.”
The evidence from our second TransAct Middle East report indicates a marked decline in M&A activity since 2017. Macro-economic headwinds and geo- political concerns continue to foster a cautious approach to dealmaking among both buyers and sellers, as they focus on operational efficiencies amid slow growth in many sectors.
The total volume of deals in the region fell from 267 in 2017 to 214 in 2018, led by a slowdown in the region’s largest markets, notably in Egypt and Saudi Arabia. Overall M&A activity continues to remain slow in the current year, with 44 deals reported in Q1'19 (vs. 56 deals in Q1'18) and only 1 IPO reported in Q1'19 (vs. 4 IPOs in Q1'18).
These figures reflect the generally bearish sentiments of Middle East business leaders as shown in our latest Global CEO survey, where only 28% of the region’s CEOs said they were “very confident” about their company’s revenue growth prospects over the next 12 months, compared with 35% among their global peers.
By sector, retail and consumer goods drove the overall decline, including a steep fall in food and beverage activity
Yet beneath the headline results, our 2019 TransAct Middle East report reveals a varied landscape across markets and sectors, with several prominent themes emerging:
Consolidation continues to be a major driver of M&A activity in 2019 across the MENA region, especially in the banking and financial sector, where the region has seen a series of national and cross-border mergers, and also in retail and consumer goods, where online and traditional retailers continue to seek efficiencies to build scale.
Private equity (PE) activity saw a decline from 26% to 21% of all deals in 2018. Abraaj going into liquidation dampened the private equity sentiment in the region (at least temporarily) and has also had ramifications for regional players looking to raise new funds. In addition, exit opportunities continue to remain challenging given the muted activity in Capital Markets and limited demand for secondary sales (except for a few instances including the sale of The Entertainer to GFH and Middlesex University to Amanat Holdings by the Abraaj Group). This has driven the need for value creation, as private equity investors focused on deals offering a secure exit strategy on a three-to-five year horizon.
Despite the decline in the number of inbound deals from 74 in 2017 to 53 in 2018, international interest in the region continues to remain strong. Governments have continued to make efforts with greater diplomacy to attract international inflows and also acquire interest in international strategic assets. In addition to the opportunities in the KSA and the UAE, we expect the upcoming privatization program in Oman to generate a lot of interest from international investors.
Corporate dealmakers remain open to new strategic alliances and joint ventures, in line with the Middle East findings of our Global CEO survey. In total, corporate acquirers increased their share of deals from 54% in 2017 to 60% in 2018, with energy, financial services and healthcare among the most active sectors. Key drivers of corporate activity was the need for efficiencies, new technologies, and expansion of the value chain.
Valuation multiples appear to have corrected themselves given the overall sentiment of the market, the geopolitical headwinds and regulatory risks across the region. Average PE multiples for both UAE and KSA indices, have decreased from highs in 2016.
On the transaction side, whilst a valuation gap exists, we have noticed some sign of change in the market whereby buyers are financing transactions through vendor loans and also building in earn out mechanisms to bridge the valuation gaps (given the challenges for buyers in forming a view on earnings trajectory in the current environment).
Despite macro-economic challenges and a slowdown in the 2018 deal market, international interest in the region is seeing positive signs with some iconic deals already taking place in 2019:
In March 2019, Uber agreed to acquire the Middle East ride-hailing service Careem for $3.1 billion, in a deal the two companies billed as the largest-ever technology industry transaction in the region.
In April 2019, this year, Saudi Aramco’s first bond sale was significantly oversubscribed, with orders exceeding $100 billion.
In April 2019, Dubai- based payments company Network International raised $1.4 billion in an IPO on the London Stock Exchange.
M&A landscape: sectors and countries in focus
MENA-based investors continue to dominate activity throughout the region, with domestic deals accounting for 80% of all transactions in Egypt, 57% in KSA and 49% in UAE, the three largest markets. These figures are consistent with the regional results from our latest Global CEO survey, which show that a smaller proportion of Middle East business leaders are focused on organic growth and launching new products than their peers worldwide. M&A offers an opportunity to companies struggling for organic growth amid an uncertain global economy.
Volume of domestic deal transactions in key markets
Volume of domestic deal transactions in key markets
Sectors in focus
Against this background, the current deal-making landscape includes four notable sector trends:
1. Oil and gas: acceleration of petrochemical deals
The energy sector has witnessed a modest pick-up in activity, although a significant portion of deals came from asset disposals to foreign companies. One outstanding example was the sale of three concessions by the Abu Dhabi National Oil Company (ADNOC) to European and Chinese acquirers, including Petrochina, Total and Italy’s ENI as well as a stake in its refinery and pipeline assets to international investors.
Increasingly, national oil companies (NOCs) in the region are focusing on expanding their output and developing their downstream operations to reduce the risks associated with rising competition from US shale and slowing global demand for oil. This strategy also reflects these companies’ declared commitment to increasing domestic value creation and reducing national reliance on crude export revenue and the wider energy sector.
Many NOCs are emphasising petrochemicals – in particular, olefins (alkenes) and aromatics – as key areas for increasing long-term demand for crude oil.
As a result, there has been an acceleration of deal-making activity along the petrochemical value chain, including Saudi Aramco’s planned acquisitions of a 70% stake in the state-controlled petrochemical group Saudi Basic Industries Corp and potential acquisition of a minority stake in the refining business of Reliance Industries Limited (India).
2. Financial services: the drive to consolidate
In total, financial services accounted for 23% of all deals in 2018, approximately the same proportion as in 2017. Beneath the headline numbers, the results in this year’s TransAct Middle East report underscore the consolidation theme across the financial services sector, principally in banking.
In recent years, a sustained period of lower oil prices has reduced government budgets and thus bank deposits, creating an overbanked regional market which needs to consolidate to remain competitive. Recent national and international mergers have reinforced the drive by major banks in the region to build scale to remain competitive and diversify their asset base.
In 2018, the fintech deal count surpassed e-commerce to account for 12% of all start up acquisitions in the Middle East. Unsurprisingly, banks were the principal dealmakers, given the disruption caused to their business models by fintechs and the opportunities created by artificial intelligence (AI) applications and other emerging technologies. A striking illustration came in November 2018, when the partnership between Abu Dhabi’s Al Hilal Bank and the fintech Jibrel allowed Al Hilal to settle a $500 million Sukuk transaction (financial certificates similar to bonds which comply with Shariah law) on the secondary market, using blockchain technology.
Beyond the financial services sector, large companies across the region are looking for acquisitions and partnerships with digital/tech businesses to provide additional services to their existing customers, as well as protecting their market share from start-up challengers.
In October 2018, for example, the regional retail group Majid Al Futtaim (MAF) invested $30 million in the Saudi e-grocery provider – Wadi.com. In November 2018, MAF bought the UAE operations of the mobile payments platform Beam in order to strengthen the retailer’s multi-channel payment offering. — SG
