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Thu 24 Dec 2015 02:49 PM

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Middle East misses out on M&A boom as sellers hold out on prices

Global boom in mergers and acquisitions has largely bypassed the Middle East where regional deals are stalling

Middle East misses out on M&A boom as sellers hold out on prices

A global boom in mergers and acquisitions has largely bypassed the Middle East where regional deals are stalling as sellers refuse to budge on valuations despite a slumping oil price.

While a flurry of big deals pushed global M&A volume in 2015 to a record $4.6 trillion, transactions between parties in the Middle East totalled just $12.68 billion in the year to Dec. 7, according to Thomson Reuters data.

That would make it the slowest year in value terms since 2011, while the actual number of deals is on course to be the lowest since 2007.

The decline follows a buoyant period when surging economic growth - driven by government largesse and a young and increasingly affluent population - propelled the region's private equity market and pushed up valuations, especially in consumer-focused, healthcare and education businesses.

The valuations being sought by sellers, their expectations inflated by that frenzy, have yet to come back down to earth, despite a regional growth outlook clouded by oil falling to an 11-year-low.

"I don't think expectations of sellers have modulated at all in response to oil prices," said Richard Dallas, managing director of Abu Dhabi-based Gulf Capital, noting that "just like in any real estate market, the first phase of an adjustment is a period of illiquidity."

One industry participant contrasted the gap in valuations between private sellers and public markets, with most Gulf stock exchanges tumbling around 15 percent this year.

One reason potential sellers have been reluctant to compromise is because many businesses are owned by families who often have sentimental attachments to their assets.

In other cases, sellers promised high valuations a year ago by advisers pitching for roles are now unwilling to yield to changed economic conditions.

"It's the wrong discussion to try and optimise pricing up front and then either end up with the wrong partner or with no transaction," said Mustafa Abdel-Wadood, partner of emerging market-focused firm Abraaj Group.

The result is that deals take longer to close, as buyers and sellers haggle for longer to reach a mutually-agreeable price, or transactions simply fall through.

The sale of Dunia Finance is one such example, with sources indicating that initial interest shown in the consumer finance firm in August had petered out as the sellers' price expectations deterred potential buyers.

Nobody was immediately available to comment on the state of the sale process from Dunia, or current Abu Dhabi-based owners Mubadala and Waha Capital. Singapore's Temasek Holding, whose unit is the third stakeholder in Dunia, declined to comment.

Similarly, KKR and Dubai-based Fajr Capital's joint bid for a 25 percent stake in Azadea Group ran into difficulties because of a disagreement over valuations between the buyers and the family group which owns the Middle Eastern retailer.

While the Middle East has started to benefit from engagement by international private equity firms, who target larger deals, such transactions remain rare. Most deals are below the $200 million level and between local parties

It is not all doom and gloom, with population growth continuing to make defensive sectors like food and beverages and healthcare attractive.

Another potential bright spot is that the uncertain economic environment has prompted more companies to begin talks with advisers about raising cash through asset sales.

"We are getting a lot of enquiries from family groups as many are having to look at tough strategic decisions and are looking at ... possible M&A transactions, divestments," said Raymond Hurley, financial services deals specialist at professional services firm PwC.

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