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Companies in the Gulf Cooperation Council (GCC) region are expected to consolidate as the downturn caused by the coronavirus pandemic continues to deepen, global audit, tax and advisory firm KPMG said on Tuesday.
Several small and medium enterprises (SMEs), as well as large companies in the region are likely to raise cash to keep the business going, hence merger and acquisition (M&A) activity in Saudi Arabia and other Gulf countries will pick up, according to Ali Maabereh, head of M&A at KPMG in Saudi Arabia.
“The current pandemic is creating a lot of uncertainties and contradictions in what to expect after the dust settles. The expected key impacts on companies are shortages of liquidity and working capital requirements. Though companies might be running a healthy profit and loss, there will be significant pressure on working capital requirements,” he added.
The deals will most likely be in favour of the buyers, and companies who are looking to consolidate will likely accept a low valuation.
“The need for immediate cash could drive the acceptance of low valuation multiples offered by buyers,” Maabereh said.
“Deal making going forward will favor buyers, but such assumptions are heavily dependent on investors being bullish in seizing investment opportunities,” he said.
M&A growth sectors
Buyers, however, will need to be creative when it comes to valuation approach, evaluating companies based on historical performance and post-COVID-19 plans, writing off and normalizing the impact of the pandemic.
During the first half of 2019, the M&A sector in the Middle East and Africa recorded 220 transactions worth $115.7 billion.
Saudi Aramco’s 70 percent stake acquisition in SABIC was said to be the biggest deal during the period in the GCC region, followed by Abu Dhabi National Oil Company’s deal with BlackRock and and Kholberg Kravis Robert & Co (KKR).
The coronavirus pandemic has decimated revenues of companies and investors could be looking at deals in sectors that have been heavily impacted.
“[A] major change in the M&A landscape will be the sectors of focus for investors in Saudi Arabia and the region as sectors such as aviation will suffer from the pandemic and will require years to recover. Other sectors, such as healthcare and food and beverage, will emerge as defensive,” KPMG said.
For investors eyeing the F&B industry, the focus will be on backend business, such as food production and supply (F&B) logistics, rather than retail.
“Driven by the turmoil in oil prices, investors in Saudi Arabia will continue to focus on sectors that would emphasize economic diversification and sustainability as identified by the government. Sectors such as industry and manufacturing will continue to attract investors, driven by the Saudi government’s push for local satisfaction of economic needs,” said KPMG.
(Writing by Cleofe Maceda; editing by Seban Scaria)
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