Gulf M&A deals shrink 70% in Q3

Merger and acquisition deals in the GCC are seeing recovery in terms of volume but their value continues to decline.

There were 131 announced and closed GCC deals in the first eight months of this year, 22 per cent higher than the 107 registered last year, figures from Capital IQ show.

However, transaction value dropped from $18.6bn to $18bn, despite the inclusion of Etisalat’s $11.8bn bid to buy 46 per cent of Zain Saudi.

Zeroing in on the third quarter, data from Zephyr shows that Q3 2010 deals dropped by only 8 per cent from 40 in Q3 2009 to 37, but the value has shrunk by 70 per cent from $2.6bn to $830m during the same period.

If the search includes the wider region including Jordan, Iraq, Lebanon, Yemen, Iran and Syria, the results reflect the same conclusion. Zephyr’s data, published by Bureau van Diijk (BvD), shows that the number of M&A transactions in the Middle East nearly tripled
from 72 in Q3 2009 to 201 in Q3 2010. Values, however, were slashed by 90 per cent from $15.64bn to $1.48bn.

There were no deals in Q3 2010 valued at more than $1bn and only three were worth over $100mn. The largest deal by value, worth $542mn, involved a 65 per cent interest in Lebanese bank Credit Libanais, which Egypt’s EFG Hermes Holdings agreed to buy in August,
followed by the $331m minority acquisition by Savola of supermarket operator Al Azizia Panda United and Saudi Arabian sugar refiner and edible oils producer Savola Foods Company.

There was very limited private equity (PE) activity targeting the Middle East in Q3 with just two deals with undisclosed values. The investors were National Net Ventures of Saudi Arabia and the Netherlands-registered Sahara International Ventures targeting UAE-
based bride-to-be website Yebab.com and Saudi Arabian internet service provider Sahara Al-Jazirah Network Trading Establishment, respectively.

Last year, only two transactions were greater than $50 million and going forward, M&A deals by PE firms are not expected to feature the multi-billion figures seen in 2007.

Abu Dhabi-based The National Investor is looking at closing a $200m acquisition of a majority stake in a consumer services firm by mid November, while Invest AD plans to divide $150m in three opportunities in the UAE, Egypt and Turkey.

The slow investment momentum in the private equity sphere is in line with what the Gulf Equity and Venture Capital Association forecast earlier this year. The group projected there will be limited activity due to a dearth of acquisition finance on the back of private owners
either being reluctant to sell or having higher value expectations than the stock market.

Private equity average transaction size decreased for the first time last year with average deal size of $30mn compared to $67m in 2007.

PE investments faced two-prong dilemma. On one hand, the limited access to and an increased cost of financial leverage has impaired the ability of large funds to complete major transactions in 2009, And on the other, family businesses who control most of the businesses in the region are reluctant to relinquish control.

“Because of the absence of liquidity, there has been a dearth of good deals in the origination level, Mark Yassin, National Bank of Abu Dhabi’s (NBAD) senior general manager of corporate and investment banking, said. “It is either there are no funds to raise or there are funds but no deals in sight.”

Arif Naqvi, vice chairman and group CEO of Abraaj Capital stresses that good deals have been more difficult to close because of the crowded space. “Remember everything that is not public equity is within the private equity domain,” he said, adding that family businesses have been equally active in the M&A arena.

The banking industry was the most important sector by both volume and value with 64 transactions worth $617m, accounting for 32 per cent of the value, data from Zephyr shows. It was followed by deals targeting wholesalers and retailers with a total value of $375m, despite low volume.

Notable activities in the sector include the $255m acquisition by Dnata of Alpha Flight UK Limited and Landmark Group’s series of acquisitions. According to Mergermarket, Dubai-based Dnata agreed to acquire the UK-based provider of food catering services to the airline industry, from Autogrill, the listed Italy based operator of retail food and beverage outlets, for 160m pounds including net debt of $60m.

Meanwhile, UAE-based Landmark Group has also acquired the Middle East franchise business of Fitness First, from Awwal Fitness Ltd (part of the Alhokair Group) for an undisclosed amount. The Fitness First Middle East franchise generated annual turnover of GBP55mn and has 18 clubs across UAE, Qatar, Jordan, Bahrain and Saudi Arabia.

Landmark Group has also agreed to buy Carluccio’s,  a UK-listed group which operates Italian restaurants and food shops, for $117mn. Landmark Group currently holds 3,002,000 Carluccio shares, representing about 5.1 per cent stake. The acquisition will be conducted through C1 Acquisitions Limited, Landmark's investment vehicle incorporated in the UK.

Q3 also a number of M&A deals in the oil and gas sector, mostly in the UAE. Maritime Industrial Services (MIS) has agreed to acquire Litwin PEL, another UAE-based firm engaged in oil and sector.  Schoeller-Bleckmann Oilfield Equipment, an Austria-based designer and manufacturer of drilling equipment has agreed to acquire Drilling Systems International, a UAE-based oil and gas service provider which generates annual sales of about $30mn.

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