Deal flow in the MENA region intensifies

Beirut (RPN) – Companies in the Middle East and North Africa have recently announced nine new merger and acquisition (M&A) plans that could be worth $11.4 billion. The largest new M&A transaction under debate is a sale of telecommunications assets by Egypt’s Orascom Telecom Holdings to South African MTN. Other new major M&A deal announcements involve companies in health care and steel making.

The new projects, announced between April 16 and April 30, have pushed the known portfolio of major business partnership deals – acquisitions, mergers, joint ventures, venture capital participations, strategic and financial investments – to more than 800 deals with aggregate value of $141.5 billion.

According to the RPN Dealflow Monitor, a new service by information refiner Regional Press Network, telecommunications transactions represent the largest slice in the pie at $32.3 billion, followed by deals in financial services, at $25.6 billion. Oil and gas investments rank third, with a value of $19.9 billion.

Combined, the three sectors account for 60% of deals reported by the monitor which tracks announced, ongoing, completed and cancelled deals and covers the period from January 2009 until today.

Consumer goods (not including food and beverages), miscellaneous services, and leisure were the least active sectors, accounting together for $180 million worth of known deals.

M&A flow
Of the total $141.5 billion valuation total of deals where valuation estimates or firm transaction values are available, 45% are M&A deals where one entity acquired a controlling interest in another entity or where two companies merged into a new one.

Transparency of the merger and investments activity in private sectors across MENA is still in its infancy and the data contain a number of blind spots – such as a two-of-three ratio where deal valuations have not been provided. For many other transactions, value estimates are preliminary and are yet to be confirmed.

The strength of the available data is supported by the fact that the vast majority of deals in the list have been completed.

Pending and rumored deals account for 22.5% and about 6%, respectively. Only three deals in the database carried the stamp “canceled”.

This ratio of canceled deals is low when noting that mergers and acquisitions are known to carry downside risks. From lessons in developed markets, M&A risks have been identified as empire building hubris, incompatibility of cultures, overestimation of synergies or cost savings and underassessment of new cost factors or changing market situations.

On the other hand, reluctance to divulge merger plans and investment and partnership projects in the Middle East and North Africa is a challenge not only for data collection in serving investment professionals but also for the region’s corporate and government decision makers.

Deal or no deal
Analysts and pundits have been saying of late that they expect 2010 to see an increase in investment deal making after 2009 had been under the weather due to the stormy economic conditions.

Areas where pundits say they expect concentration of deals include telecommunications, real estate, and financial services. However, predictions on bank consolidations have been proven wrong in the past and the current outlooks are often tainted by the need to bet on deal potentials rather than being able to assess realistic prospects with a high degree of confidence.

On the upside, M&A transactions reside next to initial public offerings and general company formations among the potent means in enhancing productivity in an economy. They are a key tool of corporate investment activity and a measure of a market’s maturity.

In fragmented markets, merger theory sees the potential of forging stronger, healthier businesses that can better withstand economic downturns as long as concentration of market power is kept in check by antitrust regulations.

Arab market economies are traditionally highly fragmented in some sectors and have tended to be state influenced or oligopolistic in others.

Growth of private sector consolidation in MENA through M&As can be expected to hold true even as the largest deal cancelation was very recent when the $1.7 billion fire sale of Dubai construction leader Arabtec to Abu Dhabi’s Aabar Investments was called off in mid April.

The two companies said the cancelation was in mutual agreement but the suddenness and dearth of information involved in cancellation of their merger intentions was no less disturbing than the smoke screens that had been put up before the firms released their original bombshell transaction announcements on the UAE equity markets in January of this year.

M&A trends are also hard to assess on sector levels as decisions are propelled by a wide variety of considerations, from financial to strategic but also including political reasons, unpredictable motives, non-economic rationales, or having singular characteristics.

The largest transaction on record in the past 16 months was in fact concluded with a definite sales agreement in March when India’s Bharti Airtel acquired mobile communications network assets from Kuwait’s Zain Group in a $10.7 billion deal. This deal was atypical not only because of its size which accounted for 48% of all telecom deals recorded between Jan 2009 and end of March 2010.

It also was a case of extra-regional assets being sold to a foreign strategic acquirer by a MENA company which effectively relinquished its strategic interest in an overseas market. As such, consolidation in regional terms was not a factor in the Zain-Bharti transaction.

Inbound, outbound
Deals with extra-regional participants targeting regional assets, however, play a growing role, as do consolidation moves on regional level.

One in every four merger and acquisition deals of just over 200 deals tracked by RPN Dealflow between January 1 and April 15, 2010 involved a partner outside of the MENA region (inclusive of Turkey) but most of these deals related to assets located within MENA.

Compared with the same period a year ago, the three-and-a-half months in 2010 showed a moderate increase in the number of deals by about 3%.

But when analyzing the location of acquisition targets further, the number of deals involving target countries in the GCC, Levant, and North Africa’s Mediterranean rim increased y-o-y quite a bit more in 2010, by 25.5% — given that deals involving Turkish stakeholders, which almost entirely were domestic in  2009 and 2010, were fewer this year.

Analysts say that outbound M&A activities by cash-heavy Arab Sovereign Wealth Funds and private wealth aggregators will proceed with more scrutiny and inbound flows will witness to the increasing appetite of international players for slices of MENA economic activities.

Dynamics of M&A in one sector often get a stimulus from a major deal closing, as demonstrated when Zain’s telecommunications sale to Bharti was quickly followed by MTN and Orascom disclosing that they entered discussions for an MTN takeover of Orascom’s Algerian unit, Djezzy.

MENA-only deals entailed both mergers among majority state-owned corporations and private sector action. However, looking at talked-about consolidation of certain already market-dominant real estate or housing finance companies in some countries, it appears that consolidation of state-backed enterprises follows rationales that do not prioritize avoidance of monopolistic capacity concentrations. Some of the private sector mergers on the other hand will predictably be called off or fail, as M&A invariably include a share of flops.

On the whole, the growth of M&A can still be expected to be more multilateral and diverse than in the past and include increased deals with foreign investors as well as intra-regional and emerging markets partnerships where in the past much of regional M&A capital was directed toward high-value assets in developed economies and inbound international capital focused on oil exploration and refining joint ventures.

About the Author

Regional Press Network (RPN) is a MENA-based news agency and provider of original and analytical business and financial content about the region. RPN’s diverse portfolio of authoritative databases, along with proprietary solutions enable clients to quickly find, analyze, package and present mission-critical business information.

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