Middle East M&A Activity Sluggish, but Optimism Persists
Regional merger and acquisition (M&A) activity has remained muted this year, as buyers and sellers adopt a cautious stance amid political and economic uncertainty. Yet finance professionals remain optimistic that deal flow could pick up soon.
According to EY, the first half of 2017 saw both deal numbers and values fall compared to the same period in 2016. The number of transactions dropped 23%, while total deal value fell 17% to $31.9 billion, down from $38.9 billion the previous year.
The largest deal of the period was Dubai Aerospace Enterprises’ $7.5 billion acquisition of Ireland’s Awas Aviation Capital. Overall, the top 10 deals accounted for over 76% of the total deal value in the first six months. Inbound M&A activity reached 38 deals totaling $7.3 billion.
Drivers of subdued activity
Advisers cite a combination of political and economic factors. In Saudi Arabia, frequent policy changes—ranging from expatriate taxes to regulatory shifts—have made it difficult for investors to determine valuations.
“Every other day there is a new policy… that makes it challenging to zero in on value,” says Anil Menon, MENA M&A and equity capital markets leader at EY.
Lower oil prices have also dampened sentiment, with crude averaging around $54 per barrel this year under a “lower-for-longer” scenario.
With domestic appetite limited, regional investors have increasingly focused on deals outside the Middle East. EY data shows outbound M&A accounted for 61 deals totaling $19.6 billion, highlighting the region’s role as a net exporter of capital.
“The Middle East is always a net exporter of capital, and in times of regional uncertainty, that becomes more pronounced,” Menon explains. “While sovereign wealth funds are not particularly active, we see a higher allocation of capital outside MENA.”
Sector trends
Despite the slowdown, some sectors have remained active. Oil and gas led by deal value at $11.5 billion, followed by aviation ($7.5 billion), power and utilities ($3 billion), and chemicals ($2.2 billion).
“Defensive sectors like healthcare and food & beverage (F&B) are seeing consistent activity,” Menon notes. “We’re also seeing deals in oilfield services as smaller players move to complete transactions before Abu Dhabi National Oil Company’s downstream assets come to market in Q3 2018.”
F&B deals in 2016 surged to $3.4 billion, up from just $402 million in 2015, driven by expansion through company-owned stores and franchising.
Banking M&A remains subdued, despite the $16 billion merger of Abu Dhabi’s NBAD and First Gulf Bank into First Abu Dhabi Bank in 2016. In the first half of 2017, banking deals accounted for $1.9 billion, constrained by structural challenges. Yet Ubhar Capital sees potential for growth, noting reports of five banking M&A deals underway, including a cross-border GCC merger between Kuwait Finance House and Ahli United Bank of Bahrain.
Country outlook
Among countries, the U.A.E. continues to lead in M&A activity. Saudi Arabia is expected to strengthen next year, supported by reforms like the announcement allowing women to drive—a move analysts anticipate will boost market confidence.
Overall sentiment for the next 12 months is cautiously optimistic. EY’s Capital Confidence Barometer shows that 47% of MENA executives expect deal activity to increase, while 41% have five or more deals in the pipeline and 44% anticipate more deals to follow.
“My gut feeling is that we should still land around 400 deals by year-end, which would be very strong given the macro shifts this year,” Menon says.
