TransAct Middle East

What’s shaping M&A in the Middle East?

TransAct Middle East is our annual Deals publication which gives you insights into the Middle East deals market, what is driving deal activity and the emerging trends.

Given the macro economic challenges, deal activity has remained subdued but there are some interesting trends emerging which should be key to both buyers and sellers. We are also seeing 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.

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 digitisation) is likely to stimulate future M&A activity. Transformational reforms (including privatisation 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 bond 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.

Romil Radia

Romil Radia
Deals Markets Leader and Regional Valuations Leader

Consolidation drives deals as caution prevails

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.

All numbers within this report are based on deal information reported in Mergermarket or Thomson Reuters for the given year.

What’s driving the decline in Deals across the Middle East?

What’s driving the decline in Deals across the Middle East?

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 privatisation programme 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 (see below).

  2016 Dec 18 Mar 19
DFM 14.47x 10.14x 11.49x
ADX
16.75x 13.62x 15.07x
Tadawul 18.02x 17.71x 20.1x

 

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).

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.

Financial services: the drive to consolidate


3. Digital and technology: acquiring the disruptors

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.

Other examples of recent regional digital and tech transactions include:


4. Health and education: maintaining momentum

Both the healthcare and education sectors continued to attract interest from investors, with a combined total of 24 deals in 2018, only a slight fall from 2017 (27).

An increased interest was noted in longer-term Healthcare strategic assets, with PE investors focusing on value-building deals that potentially offer exit strategies after five years. In addition, a growing number of investors are seeking to create regional value-for-money healthcare businesses aimed at a wider population. Lastly, deal-making opportunities are shifting from the competitive UAE to KSA, where the healthcare market remains largely untapped and there are upcoming opportunities as the Government seeks to privatise a number of healthcare assets.

Education continues to attract private equity investors seeking to grow their schools and university portfolios and build Pan-GCC portfolios. There are increased deal making opportunities in the KSA education space because of the need to consolidate a fragmented market and the government’s drive to improve the quality of education with the help of private investment.

Countries in focus

We are seeing both regional and international investors getting excited about the opportunities in Egypt. With a relatively stable political landscape and currency situation, strong underlying fundamentals and relatively healthy forecast GDP growth, Egypt is back on the radar and presents attractive opportunities for investors in search of the most attractive opportunities across the emerging markets. We currently see all consumer facing sectors in Egypt, particularly food manufacturing, getting a lot of attention with investors also considering the export opportunities from Egypt. In addition, we believe opportunities also exist in the energy, infrastructure and non-bank financial institution space. The Government’s long awaited IPO programme, which would involve 20-25 public sector companies getting listed, seems to be gaining momentum - this should also provide interesting opportunities for investors looking into Egypt.

The National Transformation Plan continues to offer investment opportunities across a number of sectors (e.g. healthcare, education, energy, agriculture and others) and market entrants are therefore considering joint ventures or affiliations with local partners. We also expect the privatisation agenda to gather more momentum over the nearer team.

In addition, domestic private sector led M&A activity which started recovering during the last 6-9 months is showing further signs of resurgence and we are seeing a number of businesses gearing up for potential merger or IPO in the next year or so.

Looking ahead: where do the opportunities lie?

We expect the following trends to have the biggest impact on deal making activity in the region’s main markets over the next 12 to 24 months:

Contact us

Antoine  Abou-Mansour

Antoine Abou-Mansour

Deals Leader, PwC Middle East

Romil  Radia

Romil Radia

Deals Markets Leader, PwC Middle East

Zubin Chiba

Zubin Chiba

Corporate Finance Leader, PwC Middle East

Tel: +971 (0) 50 298 3765

Blaise Jenner

Blaise Jenner

IPO structuring Leader, PwC Middle East

Tel: +971 4 304 3067

Jochem Rossel

Jochem Rossel

Tax & Legal Services Leader, PwC Middle East

Tel: +971 50 225 6909

Imad Matar

Imad Matar

Transaction Services Leader, PwC Middle East

Tel: +966 (11) 211 0400 (ext 1501)

Maye  Ayoub

Maye Ayoub

Partner, PwC Middle East

Tel: +20 100 666 6240

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