Dubai: The GCC dominated deals in the third quarter, representing 92 per cent of total deal value and 77 per cent of total deal activity while the Middle East and North Africa region reported a slowdown in activity recording 74 deals amounting to $5 billion (Dh18.3 billion), compared to 98 deals amounting to $6 billion in the third quarter of 2015 according to EY’s third quarter 2016 M&A report.
According to the latest EY Capital Confidence Barometer (CCB) fewer deals are expected, even as pipelines swell. Unlike global respondents, who see a rebound in deal activity from six months ago, interest from Mena executives is on the wane, with 21 per cent expecting their company to pursue a merger or acquisition in the next year.
“Mena companies’ interest in pursuing M&As is lower compared to October last year, and is currently below the long-term average level. The key driver behind this is lower CEO confidence, given the macro-uncertainties in the Mena region. Market fundamentals that are affecting M&A performance such as low interest rate and low growth rate are still prevalent,” said Phil Gandier, Mena Transaction Advisory Services Leader, EY
Qatar and Egypt are particularly quiet on the M&A front, whereas the UAE is feeling most optimistic, with 37 per cent looking to make a deal.
Global trade flows
Mena executives cite geopolitical uncertainty and high volatility in currencies and commodities as the greatest economic risks to their M&A strategy, as well as the slowdown in global trade flows that all countries in the region are experiencing.
While deal fundamentals remain relatively stable at local levels, with more respondents feeling better about the number of acquisitions, they are less optimistic overall about the quality of acquisition opportunities and the likelihood of closing, largely as a result of macroeconomic issues.
Despite the low expectations Mena companies have reported strong with 67 per cent of Mena CCB respondents indicating that they have five or more deals in the pipeline versus 49 per cent of global respondents. For 40 per cent of Mena executives their pipeline numbers are expected to increase in the next 12 months.
“Deal activity in Mena in the third quarter of 2016 was muted although conditions that support M&A remain robust. We expect significant deal activity in the fourth quarterwith some large ongoing deals announcing completion,” said Anil Menon, Mena M&A and Equity Capital Markets Leader.
Objectives
Although 32 per cent of Mena executives suggest that new product or service innovation is the key strategic driver for pursuing acquisitions outside of their own sector, the objectives of each country differ slightly. In Saudi Arabia, for example, half of the executives surveyed say that access to new materials or technology were their number one priority. In the Egypt, every company is looking for deals that help them address changes in customer behaviour. For all countries, their second most important driver is acquiring talent to deal with the disruption new technologies and digitalisation bring.
“In the next 12 months, companies in the region will have interesting capital allocation decisions to make as liquidity remains tight and value pockets remain unclear. Given the commitment governments have made in the region to economic stabilisation and reform, and an expected rebound in oil prices, we expect to see economic confidence and deal intentions to improve in 2017,” said Gandier.
