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

01 June 2018 Authored by 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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