A Renewed Search for Value as Confidence Begins to Recover
Our third TransAct Middle East report is published as COVID-19 vaccination programmes across the region are helping to restore investors’ confidence, after a year of unprecedented market disruption. There is a realistic prospect the Middle East M&A landscape will be easier to navigate by the end of 2021, as companies gain greater clarity about what their future business models may need to look like, after the rapid transformation forced on them during the pandemic.
Across the region, deal activity picked up slightly during the second half of 2020. This modest recovery was mainly driven by consolidation or public sector-led investment and monetisation, in contrast to North America and Europe, where private equity-led activity helped to fuel a surge in dealmaking. Looking ahead, the Middle East’s dealmaking landscape will continue to be shaped, like the rest of the world, by the pandemic’s ongoing impact, creating challenges as well as opportunities.
Importantly, investors are also now comfortable with virtual dealmaking, building on their rapid, imaginative response to the sudden shift to home-based working in the first wave of COVID-19.
In the short term, however, investors in the Middle East will continue to face significant pandemic-related challenges when seeking deals, with the region still being buffeted by the same worldwide headwinds discussed in our latest Global M&A Industry Trends report. They include uncertainty resulting from ongoing waves of COVID-19, unemployment and the resulting weaker demand for products and services, global trade tensions and regulatory pressures.
Against this transitional background, we anticipate that key industry sector leaders in the Middle East will continue to explore consolidation strategies that create shareholder value and strengthen their market positions. They will need to select targets carefully, with many potential deals on hold because of valuation and financing issues, and heightened uncertainty about business models. Buyers are looking harder at contingent considerations, with particular attention being paid to issues such as termination rights in sale and purchase agreements (SPA) and completion mechanics.
“We are living in a new normal where businesses are having to rethink their strategies and navigate the uncertainty. It is important that they remain agile and re-evaluate their strategy since deals can no longer be put on hold. The Covid-19 pandemic will continue to force businesses across many sectors to restructure and transform their operations in the years to come. However, whilst it remains essential for deal makers to factor in the current, uncertain environment, companies and investors should also view M&A as an opportunity to achieve their strategic objectives and it may be the best or fastest way to fill in gaps, for example, in technologies or resources.”
Middle East Regional Deals Markets Leader at PwC Middle East
Worldwide, volumes for completed deals fell by 9% in 2020 compared with 2019, as the pandemic slowed or halted transactions, particularly during the first half of 2020. Despite this global decline, M&A activity in the Middle East increased marginally by 6% in 2020, with 235 deals completed in the region, compared with 221 in 2019.
More than half (117) of these deals were valued at less than $100m, based on the 136 deals with disclosed values, with six deals worth more than $1bn. The largest was the sale by Abu Dhabi National Oil Company (ADNOC) of a 49% stake in its natural gas pipeline for $10.1bn to an investor group led by Global Infrastructure Partners (GIP). This sale was followed closely by three other deals: Indonesia’s PT Indofood’s $3bn acquisition of Pinehill Co, a manufacturer of instant noodles in the Middle East and Africa; the delisting of port operator DP World from NASDAQ’s Dubai exchange, which raised $2.7bn; and ADNOC’s sale of 49% of its real-estate portfolio to a consortium led by Apollo Global Management for $5.5bn, with $2.7bn paid upfront in 2020.
The UAE remained the most important focus of M&A activity, with 79 completed deals in 2020, six more than the previous year.
However, a number of these transactions were smaller-scale deals valued at less than $100m. Strikingly, the UAE registered 21 venture capital (VC) deals, confirming its status as the main focus for the recent influx of VC funding into the region.
Egypt registered 93 deals in 2020, compared with 58 in 2019, with most of the disclosed values at less than $100m. Real estate (especially property management) and construction were the most important M&A sectors, accounting for 19 deals, largely driven by opportunistic buyers seeking returns on investments in equities after share prices slumped during the first wave of COVID-19, which coincided with falling oil prices.
By contrast, Saudi Arabia experienced a sharp fall in activity, with 25 deals completed in 2020, compared with 45 the previous year. This decline was partly due to a slowdown in the energy sector, following Saudi Aramco’s acquisition in 2019 of a 70% stake in Saudi Basic Industries Corp (SABIC) for $69.1bn and Aramco’s $631m buy-out of Shell’s stake in its refinery operations. In 2020, the only significant reported energy deal was the acquisition by the Saudi government’s Public Investment Fund (PIF) of an additional interest in ACWA Power.
Governments will need to address the infrastructure funding gap and help stimulate economies with public-private partnerships (PPPs).
The role of sovereign investors:
Sovereign wealth funds (SWFs) and governments will be critical drivers of M&A activity.
Supply-chain disruptions and their impact on businesses have increased the focus on finding local solutions to reduce dependence on imports.
Digitalisation and new technologies:
Activity will remain strong, reinforced by the lockdown shift to remote working, with opportunities in sectors ranging from e-commerce to cyber security.
The consolidation and reorganisation trend for some public-sector entities will continue as a means to reduce costs and optimise operations.
Restructuring activity will increase once COVID-19 support measures end, affecting deal activity and valuations.
Deals Leader, PwC Middle East
Middle East Valuations Leader and Regional Deals Markets Leader, PwC Middle East
Tel: +971 52 731 5064
Partner M&A, Head of Corporate Finance, PwC Middle East
Tel: +971 (0) 50 298 3765
Transaction Services Partner, PwC Middle East
Tel: +971 566 829 961
Transaction Services Leader, PwC Middle East
Tel: +966 (11) 211 0400 (ext 1501)
Partner, PwC Middle East
Tel: +20 100 666 6240