26 April 2012

Reasons to be cheerful - Middle Eastern M&A

Despite ongoing political conflict in the region, deal activity in the Middle East has shown remarkable resilience, with figures from Zephyr for the first quarter of this year actually showing a marked increase.

While deal making in current hotspots Syria and Bahrain has become stagnant, which is perhaps not surprising given the current climate of instability and unrest in those nations, particularly the former, other countries in the area have seen relatively healthy levels of investment. Even Iran managed to chalk up one deal.

Much of the M&A activity has been internal, with the biggest deal being United Arab Emirates-based Centurion Investment’s purchase of a 40 per cent stake in UAE Exchange Centre for USD 2,000 million. The fund previously bought a minority interest in NMC Healthcare for USD 1,089 million around the same time in 2011, which may make it one to watch as a key player in driving high-value deals in the kingdom.

There was also some overseas interest in the Middle East, as UK-based Citigroup Venture Capital International partnered with Dubai fund Levant Capital to take a controlling stake for USD 100 million in Saudi supermarket chain Al-Raya For Foodstuff Company.

The two investors said the deal represented an opportunity to take advantage of the rise in consumer-driven demand and the increasingly attractive middle income section of the largest economy in the Gulf region.

In fact, Zephyr’s data shows that there are good grounds for optimism over M&A in the Middle East, as this quarter’s USD 5,710 million of deal making is higher than the two previous quarters. It isn’t easy to tell what the next big growth sector will be, as numbers across all industries have shown considerable fluctuation.  Banking and wholesale and retail were the biggest winners this quarter, while construction and health and education – previously high-value sectors – dropped right down.

However, while general M&A activity has remained relatively healthy, private equity deal making in the Middle East has shown a marked decline. Figures from Zephyr showed that in March companies based in the UAE were the only ones to receive investment, while in February only Saudi Arabia managed to attract any kind of significant private equity funding, which was the Al-Raya deal. And at the start of the year, not one single country from the region featured in the top 20 nations targeted by investment firms.

Perhaps this shouldn’t cause undue concern, as private equity companies worldwide have reigned in spending and reduced their deal making activity since the global credit crisis took hold, opting instead to stockpile cash in funds ready for deployment at some unspecified time in the future.

However, according to Reuters, citing the chief executive of BDO Corporate Finance Middle East, private equity could provide the boost that the region needs, as he predicts an increase in secondary buyouts following the trend set by more established investment houses in the US and Europe.

The fact that private equity firms have been sitting on their cash for so long means that they are coming increasingly under pressure to start spending this money on behalf of investors and limited partners, and the Middle East’s relative ability to weather the global financial storm may make it a prime target for deals in the near future.

Another area that has seen a decline is initial public offerings (IPO).  The last major flotation in the region was Saudi Arabia’s United Electronic Company in Q4 2011, valued at USD 32 million. UAE-based Eshraq Properties Company was the largest IPO of the year, raising USD 224 million. Tellingly, there has only been one IPO in Dubai in the last three years, which was when engineering group Drake & Scull raised USD 324 million in an offering on the exchange in March 2009.

Many Middle Eastern businesses seem to be turning increasingly to other forms of fundraising, such as Islamic bonds and rights issues. Indeed, the latter ranked as the second-highest value deal in Q1 2012 according to Zephyr, when Qatar Telecom raised USD 1,885 million by selling a 34 per cent stake to existing shareholders.

However, there are IPOs on the horizon, as Oman Arab Bank, Bank Nizwa and Tokio Marine Saudi Arabia are all in the process of becoming publicly-listed companies, and there may be more in the pipeline, according to National Commercial Bank.

It noted that the region’s largest bourse, Tadawul, has seen an upsurge in activity not witnessed since 2008, and the index has gained around 19 per cent  since the beginning of the year after suffering  a 3 per cent decline in 2011 as global pessimism and market jitters abounded. The bank added it was of the opinion that increased investor confidence will almost certainly permeate the primary market, and it anticipates that most of the IPOs announced so far will take place this year.

So perhaps the optimistic outlook for Middle Eastern M&A activity will be a beacon of hope, not only for the rest of the world, but also for the region itself, in otherwise uncertain and difficult times.

© Zephus Ltd