Financial sector activity heating up in Middle East, shows PwC M&A report

01 June 2018 Consultancy-me.com

Financial sector mergers and acquisitions were the most expensive deals in the Middle East last year, spearheaded by the massive $14.8 billion merger of First Gulf Bank with the National Bank of Abu Dhabi. Digitisation and government transformation programmes, however, are the trends opening up new investment opportunities in the region.

The transformation agendas of regional governments and planned diversification of economies away from oil is opening up interesting opportunities in nascent sectors connected to tech and digitisation, says PwC in a new report. Examining the mergers and acquisitions (M&A) landscape in the Middle East in the first edition of ‘TransactME,’ the Big Four firm notes that family businesses and conglomerates are looking to diversify their holdings from oil, real estate, and retail.

Technology – including fintech and e-commerce – remains a small sector, but with great potential for growth. More traditional sectors like healthcare and education, however, continue to be a popular target because of underlying demographics.Deals completed, by key industryThe long-term investment shift to new sectors was clear in 2017, and is likely to continue in the future, according to the PwC report. Last year, retail, real estate & construction, and energy & mining saw declines in the number of M&A deals completed. Key industries that saw growth in deal volume included e-commerce & tech products, manufacturing, and financial services.

There is currently strong interest in companies dealing in digitising business processes – from banking to telecom to retail. After Amazon’s 2017 acquisition of Souq.com – the largest e-retailer in the Arab world –  most retailers are considering their online strategy and distribution logistics. However, deals in the tech sector remain small, and the sparse number of tech firms in the region remains an impediment.

Meanwhile, the education and healthcare industries were steady in deal-making volume, remaining attractive to long-term investors, particularly in Saudi Arabia, with the market being largely untapped.Landmark Middle East deals completed in 2017Last year was big year for deals in the financial sector, by far the largest of which was the $14.8 billion merger of First Gulf Bank with National Bank of Abu Dhabi – creating the largest bank in the UAE. As well, Kingdom Holding Company, owned by Saudi Prince Alwaleed bin Talal, bought a $1.5 billion stake in Banque Saudi Fransi. Meanwhile, MENA-based investors bought a 20% stake of Amman-based Arab Bank for $1.1 billion.

Another large transaction for which the value was not disclosed (though was estimated to be $5 billion) was the merger of Saudi British Bank (SABB) and Alawwal Bank – creating Saudi Arabia’s third largest bank. PwC expect further consolidation in the financial sector in the coming years, given the current number of players.

The two biggest deals outside of the financial sector was Oman Telecommunications acquiring 12.1% of Mobile Telecommunications (giving them a total 21.9% stake) for $2.2 billion, and Russian energy company Rosneft’s purchase of a 30% stake of Egypt’s Zohr Gas Field for $1.5 billion.

There is future opportunity for M&A involving fintech firms dealing in the digitisation of banking processes like payments, compliance, and asset management. Waha Capital’s recent acquisition of a stake in Channel VAS – a micro finance lending company – is a sign of things to come.Deals completed by key geographyWith the Vision 2030 transformation programme, Saudi Arabia is seeking to diversify its economy and create a more investor-friendly climate. The country is instituting new bankruptcy regulations that make it easier for firms to restructure debt, as well as rules allowing foreigners to trade shares directly. Investment opportunities are opening up in hospitality & leisure as Saudi Arabia aims to become a religious tourism destination. The insurance sector is also likely to get a boost when women start driving in Saudi Arabia this year.

The UAE is the prime Middle East destination for investors and deal-making, with 89 deals closed in 2017 despite a difficult economic climate. Aside from the massive merger between First Gulf Bank and the National Bank of Abu Dhabi, Amazon bought Souq.com, and Engie of France invested $775 million in sustainable cooling supplier Tabreed. According to PwC, the government’s stated 2021 digitisation agenda is likely to create further M&A opportunities across financial services, transport, and retail, among others.

With Egypt’s currency issues subsiding, the country is seeing renewed interest. Though deal activity in 2017 was the lowest in five years, the country’s demographics and infrastructure and energy investments have spiked investor appeal. According to the report, deal growth is likely to occur in the medium term, rather than in 2018 – due to the investment depressing effect of elections this year.

The UAE saw deal volume increase to 89, as it did Saudi Arabia (44 deals). Egypt and others (including Bahrain, Jordan, Lebanon, and Kuwait) saw deal volume decline in 2017. Egypt and others have seen deal volume steadily decline since 2015, while the UAE has seen steady and slight growth in deal volume since 2013.

PwC expects deal flows in the region to improve in late 2018 and 2019, as restrictions on foreign ownership are eased and transformation agendas progress. The regulations surrounding M&A are also expected to be more supportive, improving the volume of deal activity in the Middle East.

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Uber bids on future with Careem, but outcome may depend on the past

01 April 2019 Consultancy-me.com

With ride-hailing giant Uber buying local success story Careem for a cool $3.1 billion during the past week, a timely report from PwC looks into creating value from M&A over the long-term. 

M&A is increasingly part of corporate activity, as companies seek to pick up market access, knowledge, new products or key talent. However, new analysis shows that value creation remains difficult to achieve, while many companies overstate their belief that a deal created value in the long term. New analysis from PwC shows that successful value creators have a long-term plan, are focused on value creation, and keep their eye on engagement with management and the retention of key staff.

M&A has for the past decade boomed, as private equity (PE) players and corporates have both sought to acquire companies; the former to boost, among others, their portfolio holdings in a period of high-speed growth and low-cost credit, and the latter to augment their innovativeness, expand product lines or access new markets. M&A deal value hit recent record levels in 2015, at $3.8 trillion, before falling marginally to $3.4 trillion last year.Value creation in acquisitions and divestmentsYet, acquiring companies remains a risky proposition, with outcomes not always positive for long-term growth. Current market turbulence is creating value uncertainties, while rapid technological change and global regulation environments contribute further ambiguity. Landing deals that prove to have long-term value has become ever-more tricky. To better understand the market, PwC recently released its ‘Creating value beyond the deal’ M&A report – with a specific focus on value creation post deal-making.

Among the firm’s findings; many companies are overly optimistic about the value created by a deal. While 61% of buyers believed that their last acquisition created value, the study found that 53% of respondents underperformed their industry peers on average based on total shareholder return (TSR) over the 24 months following completion of their last deal. When divesting, the study also found considerable levels of underperformance, with 57% underperforming their industry peers, on average, in terms of TSR for the same period.Initial M&A strategic focus and alternative prioritiesThe report contends that one of the issues faced by many companies is their failure to make value creation a key strategic focus from day one of the process. The survey found that 34% of acquirers made value creation a priority on deal closure, with 66% stating it should have been a priority from day one. In addition, the study found that strategic vision rather than opportunism is a cornerstone for long-term value creation – demonstrated by the broader strategy brought to deals by 86 percent of those who believed the last acquisition created significant value.

Yet, while strategic decision-making is a key part of value creation, PwC furthers that any such planning necessitates deeper consideration than a simple box-ticking exercise – requiring, rather,  strategic direction. For divestment, poor performers in terms of value creation were much more likely to say that there was no blueprint for action, at 87%, compared to those whom were successful in value creation, of which 99% said there was a strategic plan in place.Retention rates for key staff in successful acquisitionsLastly, various aspects of planning require key information, such as thorough due diligence. Yet, for successful value creation, there are less tangible and measurable areas of a business that also require attention. For instance, engagement with management – a focus on aligning cultures – is believed by 89% of respondents to drive more value. Furthermore, for acquisitions, considerable focus on key employees at the acquired company remains key to retaining value.

Here, 82% of companies that said significant value was destroyed lost more than 10% of key employees post-deal, while 50% of those citing significant value creation lost fewer than 5%. On the flip-side, no company which claimed significant value creation lost greater than 20% of its key retention targets – yet this occurred in 42 percent of cases of poor value creation. Indeed, it also happened for poor performers when just 11-20% of its desired employees departed.

“Deals that deliver value don’t happen by accident,” concludes seasoned M&A and divestiture specialist Bob Saada, current Deals Leader for PwC in the US. “Transactions should be an extension of your corporate strategy instead of a sudden opportunity. Companies that invest time in strategy, follow that course, and avoid chasing a shiny object just because it’s available will have a much better path to success.”