Headlines

  1. Cross-border deals targeting the Middle East reached US$7.7bn in 2015 – its highest value since 2012 – based on 40 deals
  2. This remained steady in H1 2016, hitting US$5.6bn from 20 deals – up from 15 deals worth US$3.7bn in H1 2015
  3. Outbound deals set a new record in 2015, with US$32.9bn on the back of 83 deals – the highest value of any year covered by the Baker McKenzie M&A Index (which goes back to 2009)
  4. Asia Pacific and North America were the most active cross-regional buyers of Middle East targets by volume in 2015-16, with a total of 29 deals between them

Volatile oil prices, geopolitical uncertainty and a shifting M&A landscape have not constrained dealmaking in the Middle East. Following a record-breaking 2015, cross-border M&A in the region remained solid through the first half of 2016, with strong deals in the pipeline.

“It’s been a relatively robust year thus far, off the back of a very busy 2015,” says Will Seivewright, Corporate Partner with Baker McKenzie Habib Al Mulla in Dubai. “The underlying economic fundamentals, such as anticipated GDP growth in the UAE and Saudi Arabia, continue to draw investors.”

Hot spots 
The UAE and Saudi Arabia attracted the most interest over the past 18 months, with 40 deals between them – 12 coming from the US and 10 of those going to the UAE. China’s three cross-regional deals (two in the UAE and one in Jordan) generated the highest value, at US$1.4bn.

It’s a similar story on the outbound side as markets look to diversify their portfolio beyond oil, with the UAE driving activity with 58 deals during 2015-16, followed by Qatar (21 deals), and Saudi Arabia (16 deals). One of the highest value outbound deals in the region reflects this trend: the Public Investment Fund, controlled by the Saudi Arabia government, acquired a 5.6% stake in Uber Technologies, the US-based online car booking service, for US$3.5bn.

The oil question 
Substantial oil-based cash reserves have maintained healthy cross-border M&A activity in the Middle East for over a decade. This has allowed countries in the region, particularly those of the Gulf Cooperation Council, to become key strategic investors around the world. But oil is a finite resource and, as alternate energy strategies take hold and oil prices remain depressed, these countries increasingly look to diversify their investments.

“Low oil prices have already affected M&A activities in some sectors in the GCC region,” says Zahi Younes, Corporate & Securities Partner at Baker McKenzie’s associated firm in Riyadh. “For example, the Saudi government cut spending, which had a negative impact on sectors like construction, infrastructure, and oil and gas, and by extension on M&A activity.”

However, Younes also feels that the price drop may have a positive impact in the long run: “We’re already seeing more strategic and focused outbound investment. I expect Saudi Arabia to take a path similar to the UAE and Qatar, following the launch of its ‘Vision 2030’ strategy in April 2016, designed to diversify its investment portfolio. This will change the M&A landscape and allow international investors to capitalize.”

Consumer-driven M&A
The young, affluent and growing populations of the Middle East are attracting M&A activity, particularly on the consumer side. For example, in the first half of 2016, two-thirds of inbound deals targeting the UAE were in consumer and TMT (telecoms, media and technology).

It’s a similar story in Saudi Arabia, where there is increased activity in pharma, healthcare and leisure – “anything that touches the consumer,” says Younes. In response, some are using M&A to shift from a distribution model – which relies on distributors and suppliers representing a business or a brand on the ground – to a direct presence model. “This usually involves joint ventures with local partners and has been the trend in the retail sector and in the fashion industry in particular for a few years now, in an effort to stay competitive,” says Younes.

“We’re also seeing a greater flow of M&A from family businesses in Saudi Arabia,” he adds. “These deals are increasingly sophisticated, possibly because new generations are more open to foreign investors acquiring a stake in order to grow further and develop their businesses.” 

Image titleValuation is a challenge 
While demographics and buy side demand are driving M&A activity, assets are limited, which is pushing up valuations. At the same time, buyers are scrutinizing those higher valuations more than ever – “and this can be the biggest impediment to getting deals across the line,” says Seivewright.

Handled badly, there is a risk of post-deal disappointment. Seivewright adds that international investors are already finding it difficult to build investment models in the region because of ongoing changes in subsidies, utility prices and exchange rates.

“This is all causing some hesitation,” he warns.

Buyer beware
For inbound investors, finding investment partners who understand the local landscape and regulatory regimes can make all the difference.

“There are complexities here around foreign ownership and beyond that do not exist elsewhere,” says Seivewright. “Understanding and managing the expectations of inbound investors is essential.”
Exiting a joint venture in this region is not as easy as in Western jurisdictions so it pays to plan ahead: “Where possible, structure the deal in a way that allows a soft exit,” says Younes. Regulatory changes, such as those being implemented in Saudi Arabia, need to be taken into account when planning any new investments.

Future drivers 
Overall, anticipated GDP growth in the Middle East through to 2020, coupled with regional demographics, point to a gradual growth story in cross-border M&A.

“There has been some slow down but I’m positive about the rest of the year – as well as next year,” says Younes.

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Eye on the future: three key trends to watch 

  1. Buying in tech and talent: The Middle East is looking for investment that can transport know-how and new technology to the region, opening the door to further M&A. “For example, Abu Dhabi’s investment and development company, Mubadala, entered into a joint venture with IBM in 2015 to bring cognitive software to the region,” says Seivewright. 
  2. Saudi Arabia in the long term: Saudi Arabia’s Vision 2030 promises long-term benefits. “One of the key elements is opening the Saudi market to foreign investment. Laws and regulations are being introduced that could improve M&A, but because everything is happening at the same  time, some foreign investors may be waiting for the dust to settle,” says Younes.
  3. Inbound private equity: While international PE firms are interested in the region’s growth story, they face some hurdles due to local laws and foreign ownership restrictions, and are at a competitive disadvantage compared to local corporates when it comes to bidding for assets. “Some international PE firms are partnering with local PE firms to overcome some of those challenges,” says Seivewright. “The Blackstone Gems deal with Fajr Capital is a prime example. But there is no ‘one size fits all’ solution for these transactions.”