After several sluggish years, mergers and acquisitions activity within the Middle East is showing signs of revival, giving hope to global banks which scaled back their regional operations because of a dearth of deal flow.
Traditionally, the Gulf has been a major source of outbound deals, with its cash-rich sovereign wealth funds and state entities snapping up stakes in Western companies ranging from banks to automakers and football clubs.
But M&A activity within the region - deals to acquire Middle Eastern companies - suffered after 2007 as the global financial crisis and then Dubai's corporate debt crisis of 2009-2010 caused investors to pull in their horns. From nearly $45 billion in 2007, Middle East M&A transactions sank to about $25 billion in 2008, according to Thomson Reuters data.
Now, however, bankers and industry experts say they are encouraged by an increased level of intra-regional business, as corporations seek to expand beyond their borders and governments back consolidation in some sectors. Middle East M&A rebounded to $20 billion in 2012, double the level in 2011.
First-quarter 2013 volumes saw a 10 percent drop from a year earlier, but bankers said the level of business negotiations underway suggested the rest of this year would be strong.
"What we are seeing is that activity levels are definitely better than last year and there is greater confidence in the overall economic system," said Paul Skelton, HSBC's regional head of global banking in the Middle East and North Africa.
"The cross-border deals are happening and it will continue given the cash levels with entities in places such as Qatar. There are more middle-market deals and discussions taking place which are intra-regional."
A few years ago, because of the uncertain economic outlook, there were big differences in the valuations that potential buyers and sellers assigned to companies, causing many of the negotiations that did occur to fail, bankers said.
This prompted many international banks, such as Switzerland's Credit Suisse and Japan's Nomura Holdings, to cut jobs in their investment banking teams for the region.
In the past year, however, Gulf economies have set the seal on their recovery from the global crisis; the private sector in Saudi Arabia has boomed, while Dubai's real estate market - a key barometer for confidence in the United Arab Emirates - has started to recover.
Meanwhile, despite the political and economic disclocation, the Arab Spring uprisings of 2011 were seen by many Gulf companies as creating long-term business opportunities, by opening North African economies to fresh competition.
So Gulf companies across the banking, telecommunications, retail and energy sectors are looking to expand regionally
The UAE's state-owned telecommunications firm Etisalat and Qatar's Ooredoo are competing to buy Vivendi's 53 percent stake in Morocco's Maroc Telecom, a deal potentially worth up to $8 billion if minority shareholders are also bought out.
Large banks such as Qatar National Bank and Dubai's Emirates NBD are studying the possibility of more acquisitions in the region after they bought assets in Egypt last year to diversify from their crowded home markets.
"M&A activity this time around is underpinned by strong industrial logic as regional companies are today far more sophisticated and financially strong, and are coming out of a consolidation phase in home markets," said Omar Iqtidar, Citigroup's Dubai-based investment banking head for the Middle East.
Differences over valuations are narrowing as companies' earnings growth improves and tangible cash flows make expectations more concrete, bankers said.
"We are working on a deal currently where the asset failed to sell a number of years ago due to vendor's valuation expectations," said Declan Hayes, managing director for transaction services at consultancy Deloitte in the UAE.
"A combination of multiple realignment and some growth in operating earnings makes the deal possible now."
Hayes said several of Deloitte's clients, including private equity firms and corporates, were seeking acquisition opportunities to position for growth in Saudi Arabia, the largest Gulf Arab economy.
The lack of major M&A for several years has left inefficiencies and room for consolidation in some industries. In some cases, that is now being addressed by mergers.
In Saudi Arabia, Sahara Petrochemical and Saudi International Petrochemical Co (Sipchem) said this month they were in talks on a potential merger.
In some countries, governments are backing the consolidation. Dubai and Abu Dhabi agreed to merge their aluminium smelting companies this month to create a national champion with an enterprise value of $15bn; the combined company will be the world's fifth largest aluminium firm. Morgan Stanley advised Abu Dhabi in the deal.
That merger has raised speculation that the Abu Dhabi and Dubai governments might move forward in merging the country's multiple stock exchanges, a deal which stalled three years ago because of political differences.
Earlier this year Abu Dhabi agreed to combine its two biggest real estate firms, Aldar Properties and Sorouh Real Estate, in a state-backed deal. The deal involved advisory roles for several banks such as Goldman Sachs, Credit Suisse and Morgan Stanley.
Mergers among Bahraini lenders have been encouraged by the country's central bank, especially among smaller Islamic banks hit hard by a local real estate crisis and political unrest in the tiny island nation.
"Government-level discussions are happening and you have seen some positive announcements on consolidation in some key sectors. There is an understanding that it needs to happen," HSBC's Skelton said of the Gulf M&A outlook.
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