GCC entities dominate M&A activity in Mena
Deal activity increases in consumption-led sectors
The global economy witnessed a modest recovery in 2015 as improving economic activity in the developed world was offset by deceleration of growth in emerging markets, especially China, the world's second largest economy.
Cross-border M&A activity has been one of the key features of 2015, reaching $1.1 trillion during the first nine months and accounting for 35 per cent of overall M&A volume that is expected to have recorded $1.66 trillion for the full year 2015, an increase of 30 per cent compared to 2014 levels.
A number of factors have played out in witnessing robust M&A activity in 2015, but the two main attributes were low borrowing costs and subdued corporate earnings. As a result, global M&A value reached record levels in 2015, with around $4.78 trillion worth of deals announced, making it the best year ever for the M&A industry.
Global M&A activity increased 37.4 per cent in 2015 compared to deals worth $3.48 trillion recorded in 2014, on the back of a number of mega deals concluded during the year. In terms of volume, the number of deals reached 43,302 in 2015, an increase of seven per cent compared to 40,462 deals recorded in 2014.
The M&A activity in the Mena region has gained traction over the years, primarily driven by improving fundamentals and favourable demographic profile of the region. Regional M&A activity during the past six years (2010-2015) remained robust, barring the year 2015 which witnessed a significant drop in both value and volume.
Causes of dip
The decline in 2015 can be attributed to the rapidly changing macroeconomic environment and anticipated decline in spending by the government on the back of weakening oil prices. Additionally, companies also utilised the slowdown to rationalise their operations and focus on core drivers in an uncertain environment.
The total deal value reached $7,783 million in 2015, a drop of 67.3 per cent compared to $23,822 million in the previous year, mainly due to some mega deals announced during the year. The deal volume in 2015 also declined by 32.8 per cent to reach 193 compared to 287 deals in 2014.
Qatar, Egypt and the UAE cumulatively accounted for 62 per cent of the total deal value of $105,505 million during the past six years. Deals in Qatar worth $22,373 million (21.2 per cent) were recorded during the period, followed by Egypt with $21,726 million (20.6 per cent) and the UAE with $21,290 million (20.2 per cent).
In the wider Mena region, Egypt has also emerged as one of the most preferred M&A destinations, especially for GCC countries. On an average, Egypt accounted for around 10 per cent of the deal activity in the Mena region, with 2013 being an exceptional year as the country accounted for around 63 per cent of the total deals. Although Egypt is undergoing its own share of problems, it still presents an exciting opportunity for companies in the region. In 2015, Egypt recorded 50 deals, the largest in the region, followed by the UAE with 47, Saudi Arabia (31), and Jordan (21).
In the Mena region, GCC-based entities led M&A activity, as they accounted for approximately 88 per cent ($6,858 million) of total deal value in 2015 compared to 54 per cent ($12,809 million) for the previous year. In terms of numbers of deals, the six countries recorded a total of 122 deals in 2015, accounting for around two-thirds of the total.
The dominance of GCC entities can be attributed to accumulated liquidity, especially in periods of high oil prices, and growing risk appetites to achieve higher returns for shareholders. Moreover, the wider Mena region augurs well for companies in the GCC to expand their footprints beyond domestic markets.
Oil and gas and real estate and construction sectors led M&A activity in the region, as they accounted for 60.8 per cent of the total deal value in 2015. The total deal value in the oil and gas sector reached $3,604 million in 2015 compared to $620 million in 2014, making it the most attractive sector for M&A in the region.
Regional energy firms have created strong balance sheets over the years and it was an opportune time to utilise the current environment to take advantage of the cost benefits and strengthen their competitive positioning in the industry.
Real estate and construction have also gained traction despite subdued activity across the region as it recorded a deal value of $1,130 million in 2015.
Although, the deal size in the F&B space is much smaller when compared to capital-intensive sectors such as telecom, banks, real estate and energy, it has been one of the most prominent sectors for M&A activity, especially by private equity players. As a result, the sector recorded 99 deals worth $5,727 million in 2015.
Cross-border deals decline
The Mena M&A cross-border outbound deal activity during the past six years (2010-2015) has witnessed a decline on a yearly basis. During the years 2012, 2013 and 2014, the total outbound deal values (deals targeting non-Mena countries) hovered around $9 billion, but it dropped to $644 million in 2015.
The Mena region in general and GCC in particular will continue to gain traction in the M&A space. Despite the slowing economic activity amid lower oil prices, the region is expected to grow at 3.8 per cent in 2016.
Additionally, government initiatives and reform measures either introduced or in the pipeline are likely to change the M&A landscape in the region. Both regional and international investors are likely to capitalise on this new phase of expected transformation.
Moreover, there are signs in the market that valuation expectations are becoming more reasonable and aligned to changing macroeconomic environments. Notably, deal activity has increased considerably in consumption-led sectors such as real estate and construction, consumer goods and services, F&B, healthcare and education.
Looking ahead, mid-market deals in these consumption-led sectors are expected to continue to dominate M&A activity in the region.
The writer is founder and CEO of Al Masah Capital. Views expressed are his own and do not reflect the newspaper's policy.