Sep 11 2012 |
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A fine line between optimism and pessimism over MENA M&A landscape
By Ghassan Ashkar of Cedrus Invest Bank
11 September 2012
After a poor 2011, our view is that the deal landscape in the Middle East and North Africa (MENA) region for the short to medium term will be characterized by: 1) an improvement in 2012; but 2) a slowdown in deal volumes and values, in general, mainly due to political uncertainty and global and regional political trends.
However, this view is sprinkled with some cautious optimism that the region's macroeconomic indicators, robust demographics and investment opportunities will continue to make it an attractive deal market and that a significant turnaround in deal making will always be a possibility.
As such, we prefer to take a balanced view about the region's M&A prospects, one that is neither too bearish nor too bullish. If we were to describe the views of other keen observers of MENA M&A activity, the word that comes to mind would be "cautious".
Given the gloomy view that many analysts have painted, the first quarter of 2012 could have been considerably worse. According to Ernst & Young's MENA Mergers and Acquisitions update, the volume of deals announced in the MENA region increased by 7%, from 98 deals in Q1 2011 to 105 deals in Q1 2012.
Looking at the types of deals that took place in Q1 2012 (i.e. PE vs. Corporate vs. Sovereign Wealth, cross-border, regional, etc.) provides a limited view on long-term trends so we will not delve into that area in great detail.
He foresees a fair amount of investment banking activity in Qatar going forward driven mainly by energy and infrastructure. Mixed views are the rule. For example, some observers describe North African deal activity as having slowed down considerably as investors take a wait and see approach. In contrast, Deloitte sees increasing signs that the more active funds in the region have begun to redirect their focus to target the wider MENA region including North Africa (Morocco, Tunisia), Levant (Lebanon, Jordan, Iraq), and Turkey.
From an industry perspective, we continue to see consistent deal activity in oil and gas, health care, education, consumer goods, infrastructure, telecommunications, financial services and real estate. As the situation stabilizes in the region, these sectors are poised to create further opportunities for investors.
Some trends we see on the horizon include:
- More spending by sovereign wealth funds and revisions of their investment strategies towards more domestic investments
- Increased consolidation activity through mergers and acquisitions
- More joint ventures, public to private deals and other types of non "pure-play" M&A
- Saudi Arabia, Abu Dhabi and Qatar to continue to drive a large portion of M&A activity as liquidity is generally not a constraint for these countries
- More activity from private equity players who are generally first movers in riskier environments
- Increases in regional asset sales as part of additional refinancing plans
- Depressed international interest in regional investments due to ongoing political uncertainty will mean that regional investors will continue to dominate the regional M&A market
- A reduction in big-ticket deals with the bias towards small and mid-cap transactions
- Frontier markets such as Iraq will continue to attract interest
In conclusion, there will continue to be deal activity in the MENA region going forward, but at lower rates than we have seen in the past, at least in the short term. The truth is that this region will always have attractive deals in certain sectors for opportunistic investors even though the political dynamics may take years to settle down.
This is in part due to its attractive demographics and macroeconomic indicators. This may leave some with great cause for optimism but we believe that real growth will only come with substantive resolution of regional conflicts.
Ghassan Ashkar recently joined Cedrus Invest Bank as a managing director and head of investment banking. Most recently, he spent six years with PwC's transaction services group in New York working on behalf of large corporate and private equity clients on more than 60 deals including several multi-billion dollar public to private deals.
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