Uptick in M&A in Mideast to continue in current year

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Marco De Leo and Roberto Flammia, both local Partners at BonelliErede Dubai, provide a comprehensive projection of potential deal flows across the M&A, project finance and PPP in the Middle East pipeline this year

Following positive developments in 2017 and the increase of the mergers and acquisitions (M&A) in the Middle East to a total of $18.7 billion, we are cautiously optimistic to see this trend continue in 2018. While we anticipate increased M&A activity across industries, it will be interesting to closely follow the IT and logistics sectors, where we expect to see the volume of transactions surge the most. Artificial intelligence (AI) will also play a critical role within the Middle East’s economy, and both the UAE and Saudi Arabia have demonstrated their commitment towards implementing AI and have developed dedicated strategies.

Significant investments are expected, with a strong focus on the financial sector, especially in light of the support of local governments seeking alternative revenue and growth sources considering the volatility in oil prices. While global uncertainties, such us Brexit, the US presidential election and the US tax reform affected the volume of healthcare transactions in 2017, in 2018 we expect healthcare M&A deals in the Middle East to rise significantly, due to an increasing consumer demand as well as a clear acquisition and diversification strategy of the main healthcare providers. M&A activity will also be boosted by busy debt capital markets where refinancing and restructuring at both corporate and bank level is expected.

With regards to project finance, the renewable energy sector has seen the most interesting developments in the Middle East in 2017, and we expect this development to continue in 2018 with a constant flow of important deals. The renewable energy sector is particularly interesting, considering the cooperation between Jordan, UAE, Saudi Arabia and Egypt as well as the announcement of the Saudi Vision 2030, which was initiated by the Crown Prince of Saudi Arabia, Prince Mohammed Bin Salman Al Saud, which includes ambitious plans to build an innovative industrial centre at the Red Sea to boost economic diversification and help reduce the country’s dependency on oil.

While project finance is less widely used for oil and gas projects in the Middle East where the preference for equity investments prevails, the sectors that have the most potential to see strong margins in project finance and Public Private Partnerships (PPP) in 2018 are healthcare, education and transport infrastructure.

In recent years, regional governments have already started to implement private investments in these sectors (formerly exclusively state-funded) using PPP structures to emulate private sector efficiencies. We can see regional governments developing their PPP laws to align to international standards and make foreign investment more attractive, by ensuring the implementation of efficient dispute resolution mechanisms, amongst other things. This will likely fuel an increase in PPP deals in the region structured on project finance sourced from commercial banks and export credit agencies by providing guarantees and/or direct loans.

While traditionally not been used in transactions, it would be interesting to observe how Islamic finance can work for the infrastructure sector, as it seems to offer the ideal financing structure here. The most important international M&A, project finance and PPP transactions in 2018 are likely to see deals involving the UAE and Saudi Arabia as the two largest economies in the region, as well as Iraq as an emerging market and Egypt, which traditionally is preferred investment destinations for UAE investors.

Additionally, Egypt has ceded two strategic islands in the Red Sea to Saudi Arabia and the two countries have signed important agreements for further developments and investments into Egypt. This will likely see these two countries tie up more closely over the coming months. Finally, the UAE, Dubai specifically, plays an important role as a hub for directing international investors into Africa.

In this regard it will be interesting to observe developments in Sudan, as recently and after two decades of sanctions, the US has decided to revoke the restrictive measures against this country and the local government has announced important financial reforms. In summary we optimistically look ahead towards a dynamic 2018, with increasing deal activity expected in the region and growing appetite from international investors for the Middle East and Africa as emerging economies.