What started as a reaction to falling oil prices has spread from energy to banking and other sectors of the regional economy.
From Dubai to Riyadh to Kuwait City, consolidation is the talk of the town. In the first nine months of 2019, the total value of announced mergers and acquisitions (M&A) involving the Middle East and North Africa (MENA) soared to a record of more than $120 billion, according to London-based financial data provider Refinitiv.
That figure is modest compared to the $3 trillion of M&A deals announced worldwide in the same period; but while regions like Europe and Asia are slowing down, the Middle East stands out for its forward momentum. Compared to the same period last year, the value of transactions with a Mideast involvement increased 160%, making it the world’s fastest growing M&A market. However, most transactions still required foreign legal and technical assistance.
The Mideast M&A ramp-up started in 2014 as a reaction to the fall in oil prices. The sudden economic slowdown pushed energy-centered economies to cut costs and seek efficiency. Today, the countries of the Gulf Cooperation Council (GCC) are where most of the M&A activity is taking place, with the United Arab Emirates (UAE) and Saudi Arabia accounting for most of the deals.
“Over the past few years, the number of M&A has substantially increased, with 2018 being a rocket year,” says Abdulrazzaq Razooqi, assistant vice president of investment banking at Kuwait Financial Centre (Markaz). “2019 was a bit slower, but there were some very strong deals and growth in a number of sectors.”
Energy at the Forefront
Energy and power sector transactions are driving M&A in the region, accounting for 78% of the total value of deals last year. Saudi Aramco led with its $69.1 billion purchase of a 70% share in petrochemical company Saudi Basic Industries (SABIC). This megadeal—one of the largest ever recorded in the global chemical sector—came months after the world’s biggest oil producer finalized its acquisition of Arlanxeo, a Dutch synthetic rubber company, for $1.7 billion. Saudi Aramco is working to diversify its portfolio by investing in downstream businesses such as refining and petrochemicals, in hopes these could constitute new markets for its crude oil, but its long-awaited IPO was largely shunned by international investors.
Sitting on the world’s largest oil and gas reserves, some GCC states spent decades letting their energy companies be run with no real incentive to maximize efficiency. The result has been a plethora of small competitors; more than 50 oil and gas companies in the UAE, for example, and more than 16 in Saudi Arabia.
When oil prices fell in late 2014, fossil fuel companies had new incentive to embrace efficiency. That prompted Qatar to merge the world’s two biggest liquefied natural gas producers, state-owned Qatargas and RasGas, which saved hundreds of millions of dollars a year in operation costs. Energy companies increasingly seek to form mega-entities that can compete globally. GCC countries also opened wup the sector to foreign investors. US-based Kohlberg Kravis Roberts and BlackRock took a 40% stake in the Abu Dhabi National Oil Company’s pipeline business for $4 billion early last year. “The valuations at the moment are very attractive for larger players who know how to extract value out of companies that operate in similar sectors to theirs but are distressed or not optimally run,” says Razooqi.
The other sector seeing major M&A transactions—although trailing energy by a long way—is financial services, with 14% of deals in the first nine months of last year, according to Refinitiv.
This comes as no surprise, many Mideast countries are overbanked. Bahrain tops it all with 382 financial institutions for only 1.7 million inhabitants, according to the central bank, while the UAE has over 50 banks serving just under 10 million people. Until recently, these banks were able to prosper, thanks to generous public sector deposits backed by oil revenues. “The most obvious country for bank M&A in the GCC is Bahrain, with a large number of banks resulting in strong competition and weak pricing power. The Bahraini authorities support M&A, but sound profitably and a lack of common shareholders prevents obvious tie-ups,” says Redmond Ramsdale head of Middle East bank ratings at Fitch Ratings. “The UAE also still has a large number of banks with weak franchises and weak pricing power, who are excluded from some of the best quality deals.”
GCC banks remained relatively resilient. The cumulative weight of low oil prices and consumer spending, newly introduced value-added taxes across the region, increased regulation against money laundering and financing of terrorism, and the necessity to invest in digital tools is squeezing profit margins even at major institutions. With small lenders struggling to remain relevant, many banks are choosing to merge.
Last year’s headline deals included the linkup between Abu Dhabi Commercial Bank, the UAE’s third biggest lender, Union National Bank and Al Hilal Bank to create a $115 billion entity. In Saudi Arabia, SABB finalized its acquisition of Alawwal Bank, forming the country’s third biggest bank with over $67 billion in assets.
Banks are also looking across borders to expand. Take Kuwait Finance House’s purchase of Bahrain’s Ahli United Bank: The new entity is expected to go live in the first quarter. It will be Kuwait’s biggest bank and one of the region’s largest Islamic lenders, with a presence in the UK, Egypt and Libya.
In the UAE, Dubai Islamic Bank and Noor Bank are in the final stages of merging. Invest Bank, United Arab Bank and Bank of Sharjah are holding discussions.
The banking consolidation frenzy may be slowing, according to some close observers, due in part to the banks’ ownership structure. Government entities and royal family members often own majority shares. Most transactions registered over the past couple of years had the same shareholders on both sides of the table. “These transactions are rather akin to shareholders reorganizing their assets, rather than pure M&A operations,” says Mohamed Damak, a senior director in financial services at S&P Global Ratings. “We are not questioning the economic added value of such transactions, though, which has proved to be significant in some cases.”
Nevertheless, future deals may be more difficult to close because most remaining banks don’t have strong common ownership. “There could be a couple of other operations [that merge],” says Damak. “A second wave of mergers and acquisitions, that would be primarily driven by the economic added value, is yet to start—and might not see the light in the next one to two years.”
Thus far, Mideast M&A attracted relatively few foreign players. By Q3 2019, local buyers accounted for 67% of all closed transactions in the GCC, according to Markaz.
But with the region—and especially Saudi Arabia—opening up, big-value international deals should increase; and more foreign players may look to tap into a market with a population of over 400 million at low cost.
In March, Uber’s acquisition of Dubai-based ride-hailing company Careem for $3.1 billion established a milestone. Instead of building its own network, the US firm will benefit from Careem’s 1 million-plus drivers, who already operate in more than a dozen countries. The deal took place two years after Amazon.com bought the UAE e-commerce platform Souq.com and partner fintech PayFort for more than $650 million. Germany’s Rocket Internet has also made several six-figure investments in the region’s fast-growing food-delivery sector, most recently acquiring UAE’s Zomato.
Political and security tensions remain, of course, particularly as the recent US air strikes in Iraq and renewed tensions over Iran once again risk plunging the region into uncertainty.
“Though 2019 witnessed some megatransactions, the current geopolitical tensions will definitely have an impact on the appetite and growth of M&As in the MENA region in 2020,” says Ahmed Hafez, Qatar-based business director at Refinitiv.
Oil-price fluctuations spurred the M&A boom, but that could also put a stop to it. Major sectors like insurance, transport, retail, and food and beverages are expected to undergo efficiency-driven consolidation in coming years. But if oil prices pick up again, will there still be enough incentive for deals?