M&A activity is limited but some are hopeful for a return to form next year
In early October the UAE healthcare group Al Noor Hospitals confirmed that it was in talks to merge with South Africa’s Mediclinic International. On the same day it emerged that Saudi Aramco had hired Deutsche Bank to work on a possible multi-billion dollar acquisition of assets owned by China National Petroleum Corp (CNPC).
Such deals might suggest that the M&A market in the region is in good health, but that’s far from the case. Some firms continue to make investments where there is a good fit for their strategic plans, but overall the market is very weak across the region and the advisory fee pickings for investment banks have been relatively meagre. “When it comes to the M&A market, there isn’t much M and there isn’t much A,” says John Sfakianakis, Riyadh-based Middle East director for the Ashmore Group. “There are a few deals here and there but not enough to justify a presence of a large operation on the ground.”
As with other parts of the investment banking landscape, it is a combination of low oil prices, subdued sentiment within the region and volatility in emerging markets more generally that is blamed for the lack of activity. It’s an environment in which many potential actors prefer to stand on the sidelines and wait. That’s particularly been the case in Qatar, says Aasim Qureshi, managing director of QNB Capital. “There has been some consolidation within the country and there has been talk of corporate restructuring and divesting of non-core assets. Government-backed companies are looking to sell some non-core businesses or tender more projects on a competitive basis to allow the private sector to participate. It’s predominantly state-owned companies like Qatar Petroleum talking about it. Large private companies are watching the space.”
Even so, as the flurry of news in early October demonstrated, some deals are getting done. Among the major deals announced this year have been a $5 billion bid by two Qatar companies, Hamad bin Suhaim Enterprises and Qatra for Investment & Development, for 49 per cent of Chinese firm Sandong Dongming Petrochemicals. In the UAE, the Emirates National Oil Company bid $2.8 billion for 46 per cent of Dragon Oil, while Saudi Arabia’s Public Investment Fund has also bid $1.1 billion for 38 per cent of South Korean construction firm Posco Engineering.
Others that are currently in progress include the ongoing sale of the Kuwait Food Company (Americana). Qatar National Bank has also been linked to a possible purchase of Finansbank in Turkey, which is being sold by National Bank of Greece. The market for such large, cross-border deals tends to be dominated by the big international investment banks, such as Citi, Barclays, JP Morgan and HSBC. According to Thomson Reuters, the highest ranked bank for M&A deals from within the region is Egypt’s EFG Hermes, which is ranked in 18th place on the basis of its deal flow so far this year.
If oil prices stay low and sovereign wealth funds start to come under pressure to exit some of their investments to help ease the fiscal pressure on their governments, there may be more M&A deals in the pipeline. “Before the summer there was an expectation that some SWFs would consider monetising some of their big stakes in listed entities,” says Alberto Palombi, head of the Middle East & North Africa at UBS. “The correction in the markets in August put a lot of those situations on hold, but if the markets recover then we expect to see more monetisations and that is definitely a very interesting area of activity for investment banks to tap into.”
Appetite for such moves at the moment remains limited. If the M&A arena is to heat up what is needed more than anything is market stability, whether or not that means high or low oil prices. “We hope to see stable oil prices. I don’t think it will make much of a difference at which level they stabilise,” says Ahmed El Guindy, head of investment banking at EFG Hermes. “Once the level of volatility is reduced, once the impact of the potential slowdown in emerging markets is much clearer than it is today, then investors will find it easier to make decisions and to execute their strategic plans. We hope that will happen by the beginning of next year. We would like to see the minimum level of volatility.”
In the meantime, there is at least still some advisory work for investment banks to be getting on with, to prepare their clients for a time when the market is in better shape. “From a capital markets and corporate finance perspective, we are preparing various feasibility models, financing options and capital raising strategies—things we would classify as strategic financial advisory,” says Qureshi. “Over the past few months that has become one of the mainstays of our work.”
Copyright: UMS International Fz LLCTheme