By: Jerome Souied
The second half of 2016 was a record time for mergers and acquisitions (M&A) in MENA, with $30.5 billion in deals—almost three times the first half of the year. Megadeals drove this exceptional activity with four transactions above $1 billion, stacking up to $24.2 billion.
The largest transaction of course was in financial services. First Gulf Bank and National Bank of Abu Dhabi agreed on a merger worth $14.8 billion—creating the U.A.E.’s’ largest bank with assets of $182.5 billion.
The remaining megadeals were in shipping and interest acquisitions in companies engaged in oil and gas concessions in Egypt and the U.A.E. However, the number of transactions dropped 53% compared with the first half of 2016 to reach the lowest level in the past four years, with 76 transactions announced.
Corporate buyers have increased their share in the MENA M&A market, as the largest MENA financial investors seek opportunities mainly outside the region. In the second half of 2016, corporations represented 82% of the MENA deals compared with 64% to 75% in previous periods.
International corporations were particularly active during this period with a record investment of $11 billion.
The second largest transaction in the first half of 2016 is one example of corporations resorting to M&A to enhance competitiveness: Hapag-Lloyd and United Arab Shipping Company announced a $5.4 billion merger to counter an industrywide downturn caused by a faltering global economy and overcapacity of vessels.
The combined company is expected to generate significant cost savings and optimize networks and infrastructure.
In the international M&A market, MENA investors maintained an appetite comparable to precedent periods, with 55 deals announced in the second half of 2016.
However, in terms of value, the second half of the year recorded $17.8 billion—52% more than in the first half. Financial investors, mainly GCC sovereign wealth funds, have been instrumental in driving international M&A from a value perspective as they searched for enhanced and diversified financial returns.
The main investors in the number of transactions were Qatar Investment Authority and Abu Dhabi Investment Authority, which made a combined total of six investments across the energy, real estate, and transportation sectors.
MENA investors are also using active portfolio management to maximize the value of their investments, albeit at a somewhat slower pace compared with the previous four periods.
We anticipate the MENA and international M&A market to remain dynamic throughout 2017 as market players carry out initiatives to enhance competitiveness, including through M&A transactions. We expect investors to focus on transactions that have scale and impact to achieve synergies with the core business.
Four factors are expected to drive the market in the next 12 months.
The downward pressure on oil prices is expected to continue, sustaining the need for GCC governments to optimize their fiscal budgets. In the current low-growth market, acquisitions provide opportunities to improve bottom lines or give access to new markets or customers.
Refocusing on core activities is a major trend in the region to maximize the value of company resources, increasing the supply of assets up for divestment and feeding the M&A market.
For instance, several oil and gas companies are seeking opportunities to divest assets either far from their core businesses or not needed to support their long-term strategies.
The transition to a knowledge-based economy envisioned by MENA countries is expected to incentivize transactions that secure access to new technologies, innovation, and skills.
Joint ventures and strategic alliances are attractive partnership opportunities as they serve a dual purpose in this transition: transferring know-how and reducing capital requirements for new projects.
The opportunity to acquire assets with attractive valuation enabling access to the region’s long-term growth potential is compelling for international corporate investors.
We witnessed this trend in the second half of 2016 with corporations enhancing their participation in the overall MENA M&A market. The high availability of dry powder for financial investors can also lead to opportunistic investments by such investors in the region, where global financial investors have historically been cautious.
Jerome Souied, Partner, Europe, Middle East, and Africa, A.T.Kearny