Merge, acquire and grow

After three years of consecutive decline, the activity in the mergers and acquisitions market picked up in 2012 and will continue to improve this year.

While stagnant capital is dead capital, the lifeline of assets and cash is movement perfectly demonstrated by mergers and acquisitions. Increased activity in the Middle East and North Africa’s M&A sector last year has helped boost business confidence. Firms in the region are gearing up for big transactions in 2013 indicating the end of deal drought caused by financial meltdown in 2008.

Even during the years when most economies were cash-strapped, liquidity was not a major issue in the region. However, low risk appetite resulted in regional investors holding back from loosening pockets.

The collapse of credit market in the United States and Arab Spring-led economic uncertainty were the two major reasons behind the metaphorical nervous breakdown of investors.

With recovery of the world’s largest economy and reasonable stability in countries such as Egypt and Libya, M&A deal brokers are back in meeting rooms brainstorming over making a perfect match of target firms and their buyers.

According to the UK-based Zephyr, which tracks M&A and IPO deals, the value of mergers and acquisitions targeting Middle Eastern companies soared 76 per cent in 2012 ending a consecutive three-year decline. Value was boosted by eight blockbuster deals each worth more than $1 billion and together representing 68 per cent of the region’s total value of $25.3bn, said Zephyr in a report published by Bureau van Dijk.

“While value improved significantly over the 12 months, it was still 53 per cent down on the $54.3bn recorded in 2008, the last year before the decline started (2009: $19bn; 2010: $17.7bn; 2011: $14.37bn).

“Similarly, the value of private equity and venture capital investment targeting Middle Eastern companies also stymied a consecutive three-year decline after a total of 13 deals worth a combined $805 million were signed off in 2012.

“However, volume failed to follow suit. There were just 13 private equitybacked deals during 2012, down by almost a quarter from 17 transactions in 2011 to the lowest level in the last five years under review.

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“M&A volume in the region also slipped 25 per cent over the 12 months, falling to 315 deals from 418 in 2011 and was down by two thirds on the sixyear high of 932 transactions recorded for 2010,” said Zephyr.

The market that had already hit the bottom is seeing an upswing, says Phil O’ Riordan, partner, corporate affairs, at international law firm Clyde&Co. It is still difficult to bring banks on board to finance M&A transactions, but if the lenders see a potentially good deal they compete with each other to get on the bus as there is no paucity of cash in the region, he says.

Without giving details, the Dubaibased partner of Clyde&Co says his firm is working on two deals in the region which are in excess of $600m. Spelling out the increased trend in methodology of M&As, O’Riordan says in the past 18 months the mergers and acquisitions in the region have been shifting toward auction process.

“Rather than Company A selling to Company B, we have seen more aggressive financial advisors putting in a formal auction process in M&A deals. The advisors gather data from different sources and allow statistics of different companies to compete against each other. The seller of a company or stake invites bidder in a very organized manner,” he says, adding financial advisors are trying an impetus in the market to generate momentum, which after all is not a bad thing.

While Clyde&Co’s partner is of the view that in 2013 the region will see more inward M&A deals where regional investors will be investing within the region, Bank of America Merrill Lynch’s Wadih Boueiz says the investment will be largely outbound.

“We will see more investors starting to look at the United States and some frontier markets but that does not mean investors will stop looking opportunistically at Europe and Asia. Within the frontier markets, Africa, Turkey, Brazil and Mexico will continue to see increased interest from Investors,” says managing director and co-head of corporate and investment banking at BofAML Middle East and North Africa.

“We expect some of the sovereign wealth funds, large family businesses and regional corporates to be more active in outbound M&As, whether it’s out of their countries into the GCC/Mena or globally as we have seen with Qatar going into Egypt, Turkey or Kuwait, and Saudi and Abu Dhabi investing internationally,” says Boueiz.

Within the region, Boueiz of BofAML expects to see continued consolidation among large corporates across Middle East and North Africa as governments continue to push for reforms in key sectors, one example being merger of Aldar and Sorouh.

“In addition, large government-related entities and corporates will benefit from their solid liquidity position to tap regional markets at compelling valuation levels, and with Arab Spring event, governments are also pushing ahead with reforms by promoting privatizations in important sectors and inward investments,” he says. In terms of industry, financial firms, telecoms, healthcare, insurance and education sectors are likely to be the major beneficiaries of the optimism in the M&A market.

The focus of government-related enti-ties, regional and international investors will be financial institutions, healthcare, education and telcos, while energy, power and infrastructure will also see increased activity, says Boueiz.

Clyde&Co’s Phil O’Riordan says everybody is talking about the activity in healthcare and education but the insurance sector is likely to see more consolidation in the coming years. “There are too many insurance companies in the region and most of them are thinly capitalized. There are a lot of foreign insurance firms looking to come in and as the sector is a highly regulated, the relaxation on foreign ownership model will bring in more investment in countries such as Saudi Arabia.

Western European and American companies are looking for growth markets due to lukewarm economic situation back home, and the Middle East has emerged a growth market,” he says.

Looking back at 2012, there were eight blockbuster deals involving Middle Eastern targets in 2012, all of which were valued at more than $1bn and were worth a combined $17.26bn.

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The data collection firm Zephyr said the region’s largest deal of the year was Qatar’s General Retirement and Social Insurance Authority buying a 19 per cent stake in Industries Qatar, a listed Qatari steel-to-petrochemical conglomerate, from Qatar Petroleum for $3.91bn. It was one of two transactions worth more than $3bn in 2012, the second of which involved Kuwait Finance House, and was one of nine investments which favored the form of minority stakes.

In contrast, the largest private equity and venture capital investment targeting Middle Eastern companies was worth $445m and involved EFG-Hermes Holdings backing the acquisition of UAE-based jewelry retailer Damas International. This one deal alone accounted for more than half of the total value of private equity investment in the region for the 12 months (2012: $805m) and helped the UAE secure first place in terms of the total value (2012: $695m), said the UK-based Zephyr.

In monetary terms, M&A in seven Middle Eastern countries rose over the 12 months but weakened in four, including Jordan, Lebanon, Bahrain and Syria, it said adding Jordan led the way by volume with 106 deals compared to the 69, which targeted businesses in second-placed UAE. However, 52 per cent fewer transactions were signed off in the Hashemite kingdom over the 12 months (2011: 223). The volume of deals in the UAE, Saudi Arabia, Kuwait, Qatar, Lebanon and Iran improved year-on-year.

Viewed as a defensive sector, the telecommunication industry has been creating quite a buzz lately. Standard & Poors Capital IQ data included Qatar Telecom’s offer as one of the major developments in the telecom M&As. Qtel has showed interest to acquire the remaining 47.5 per cent stake in Kuwait’s National Mobile Telecommunications Co. from Kuwait Investment Authority and other sellers for $2.2bn.

Other notable telecommunication deals in the region include Qatar Telecom’s agreement to acquire a 30 per cent stake in Iraq-based Asia-Cell Telecommunication for $1.5bn, and France Telecom’s mandatory tender offer to acquire a 95 per cent stake in The Egyptian Co. for Mobile Services from Orascom Telecom Media and Technology Holding , MobiNil Telecommunication, and other shareholders for $4.5bn, it said, adding that France Telecom’s bid was the largest foreign acquisition in the MENA region in 2012.

Recently, global law firm DLA Piper conducted a survey on M&A sentiment in the region. The results showed UAE, Saudi Arabia and Qatar markets would continue to see an increase in mergers and acquisitions.

The popular sectors for business leaders offering greatest M&A opportunities were financial services and insurance (47 per cent), real estate and construction (46 per cent), and hospitality (41 per cent), said DLA Piper survey, adding the increased availability of bank lending is regarded as being the type of finance of the most potential benefit to the Middle East according to 56 per cent of respondents, while 42 per cent felt that the increased availability of private equity would help.

While the general sentiment in the M&A market remains positive, ease in regulatory framework and cash accessibility would act as a shot in the arm of the sector which has been witnessing dryness until 2011.