More restructuring in store for Gulf firms: experts

GCC firms to witness more restructurings. (EB FILE)

The region is set to see more restructuring activity as the financial crisis subsides and this would set the stage for more merger and acquisition opportunities.

Typically, the tremendous amount of restructuring activity happens 18 to 24 months after the draw of the crisis thus more talks are expected in the sale side, said Peter Fort, Executive Director, M&A at Morgan Stanley.

He said companies would need to pay off their creditors and a major means to do it is to sell some of their assets.

"That is a key driver of M&As going forward," Fort said, adding the firm, itself, is advising a number of restructuring deals in the region.

The oil-rich region has not been immune from the crisis and has had to face big refinancing obligations against the backdrop of a tight credit market. The International Monetary Fund recently stressed the importance of the operational restructuring of the Dubai Government-owned entities at the heart of the debt problem.

Kuwait's Global Investment House and The Investment Dar are also undergoing restructuring, with plans believed to include asset disposals.

Saudi's Saad Group and Ahmad Hamad Al Gosaibi and Bros Co (Ahab) are also in the midst of restructuring.

"The current phase that is characterised by uncertainty and heightened risk aversion that investors are wary of putting cash into deals or new funds. And this phase of the current business cycle is more conducive to M&As, because it requires pervasive restructuring," Dr Nasser Saidi, DIFC Chief Economist told an economic workshop.

Despite the growing opportunities, the volume of global M&As has dropped by 40 per cent last year compared to 2008 and is continuously declining. "We hope that the trend will turn around. There are now talks about restructuring in the buy side and hopefully see fruition next year," Fort said.

Most of the deals, he said, will be driven by sovereign wealth funds who were the most active players last year. Out of the top 10 M&A deals last year, five were related to Abu Dhabi SWFs and three to Qatar SWFs.

"This trend will continue going forward," he said. "However, there will be a shift from external to internal or regional deals as we have seen in the Arabtec-Aabar deal."

Restructurings, however, are stifled by many obstacles such as the lack of regulations and the lack of political will.

"Most jurisdictions here don't have a clear take over code," said Fort. "Governments also tend to want as many players as possible hence are often times reluctant to approve consolidation that may result in a removal of a listed firm from the exchange."

The expected spur of consolidation after the Emirates NBD merger did not happened primarily, due to this culture. "We are hopeful that the long way to consolidation will start to materialise," said Fort.

The ease of financing, which had been the theme two years ago, is also no longer there making M&A deals harder to conclude. This is compounded by the fact that buyers and sellers find it hard to meet eye to eye on the issue of valuation.

"There are some who are in the middle of a dialogue but had to stop because of valuation," Fort said. "The issue is the intrinsic valuation is lower than the market valuation and this is stalling a number of conversation."

Another obstacle is the absence of the restructuring culture.

"Insolvency laws are outdated and inconsistent with modern business needs," Dr Saidi said.

"Many countries still view the purpose of insolvency legislation as being limited to winding-up bankrupt companies, without providing an opportunity to revive them through restructuring."

He said there is a strong stigma attached to the use of formal insolvency proceedings. As such, informal proceedings are often preferred leading to a lack of transparency.

 

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