Consolidation drives M&A deals as caution prevails: PwC

There has been a marked decline in M&A activity in the region since 2017, according TransAct Middle East, a report published by PwC. Macro-economic headwinds and geo-political concerns continue to foster a cautious approach to dealmaking among both buyers and sellers, as they focus on operational efficiencies amid slow growth in many sectors, the report stated.

The total volume of deals in the region fell from 267 in 2017 to 214 in 2018, led by a slowdown in the region’s largest markets, notably in Egypt and Saudi Arabia. Overall M&A activity continues to remain slow in the current year, with 44 deals reported in Q1’19 (vs. 56 deals in Q1’18) and only 1 IPO reported in Q1’19 (vs. 4 IPOs in Q1’18).
“These figures reflect the generally bearish sentiments of Middle East business leaders as shown in our latest Global CEO survey, where only 28 per cent of the region’s CEOs said they were “very confident” about their company’s revenue growth prospects over the next 12 months, compared with 35 per cent among their global peers,” the authors of the report noted.
“Given the macro economic challenges, deal activity has remained subdued but there are some interesting trends emerging which should be key to both buyers and sellers. We are also seeing a change in the M&A landscape as well as the priorities of the players who constitute this market,” said Romil Radia, Deals Markets Leader and Regional Valuations Leader, PwC.
“Consolidation activity across the financial services sector has continued with strong momentum and it won’t be surprising to see further consolidation activity gathering pace across some other sectors which are also battling with demand/supply imbalance,” he remarked.
Yet beneath the headline results, the 2019 TransAct Middle East report reveals a varied landscape across markets and sectors, with several prominent themes emerging. Consolidation continues to be a major driver of M&A activity in 2019 across the MENA region, especially in the banking and financial sector, where the region has seen a series of national and cross-border mergers, and also in retail and consumer goods, where online and traditional retailers continue to seek efficiencies to build scale.
Private equity (PE) activity saw a decline from 26 per cent to 21 per cent of all deals in 2018. Abraaj going into liquidation dampened the private equity sentiment in the region (at least temporarily) and has also had ramifications for regional players looking to raise new funds. In addition, exit opportunities continue to remain challenging given the muted activity in Capital Markets and limited demand for secondary sales (except for a few instances including the sale of The Entertainer to GFH and Middlesex University to Amanat Holdings by the Abraaj Group). This has driven the need for value creation, as private equity investors focused on deals offering a secure exit strategy on a three-to-five year horizon.
Despite the decline in the number of inbound deals from 74 in 2017 to 53 in 2018, international interest in the region continues to remain strong. Governments have continued to make efforts with greater diplomacy to attract international inflows and also acquire interest in international strategic assets. “In addition to the opportunities in KSA and the UAE, we expect the upcoming privatisation programme in Oman to generate a lot of interest from international investors,” the report said.
Corporate dealmakers remain open to new strategic alliances and joint ventures, in line with the Middle East findings of the Global CEO survey. In total, corporate acquirers increased their share of deals from 54 per cent in 2017 to 60 per cent in 2018, with energy, financial services and healthcare among the most active sectors. Key drivers of corporate activity was the need for efficiencies, new technologies, and expansion of the value chain. Valuation multiples appear to have corrected themselves given the overall sentiment of the market, the geopolitical headwinds and regulatory risks across the region. Average PE multiples for both the UAE and KSA indices, have decreased from highs in 2016.
“On the transaction side, whilst a valuation gap exists, we have noticed some sign of change in the market whereby buyers are financing transactions through vendor loans and also building in earn out mechanisms to bridge the valuation gaps (given the challenges for buyers in forming a view on earnings trajectory in the current environment),” the report noted.
MENA-based investors continue to dominate activity throughout the region, with domestic deals accounting for 80 per cent of all transactions in Egypt, 57 per cent in KSA and 49 per cent in UAE, the three largest markets. These figures are consistent with the regional results from our latest Global CEO survey, which show that a smaller proportion of Middle East business leaders are focused on organic growth and launching new products than their peers worldwide. M&A offers an opportunity to companies struggling for organic growth amid an uncertain global economy.