Grant Thornton UAE CEO, Hisham Farouk, and our M&A and Transaction Advisory Partner, Salmaan Khawaja, sat with HSBC to discuss the current mergers & acquisition themes of the region post to the COVID-19 outbreak and the disturbance caused in the overall economy as a result.
Here are some of the key discussed points:
Foreign Capital in The MENA Region:
The regulatory and business reforms that the MENA region is experiencing will further open the markets for foreign capital. So far and even prior to the outbreak, the region was slightly struggling to boost liquidity in the capital markets as well as the private equity space, and the national growth strategies had not yet achieved their desired growth. This means that there is a significant sectoral consolidation already on its way.
In this context and in the current crisis, MENA-based family businesses are turning their backs to outsourced investments and are choosing the investment management route instead, transforming into significant players when the consolidation activity starts to revive post crisis.
Venture Capitalists and Their Role to Recover Global and Local Economies:
The role of venture capitalists is more important now than ever to help fill in the funding gap as innovative and disruptive businesses are essential for the region’s overall growth as well as the economy’s recovery.
Any decision made by the VC’s must be examined through the lens of social responsibility. If investors are not helping with safeguarding communities or are not focused on strategies that can help recover economies, now is the right time for them to change their monetary outlook and take into account new ways that their investment and expertise can help flatten the curve.
Global Market Trends & Grant Thornton’s International Business Report:
Grant Thornton’s International Business Report (IBR) that was published early this year, is a survey of key business decision-makers from 30 economies globally.
From an M&A perspective, the key findings were that 45% of business leaders cited access to strategic markets as a key factor for undertaking M&A, and that 25% of global leaders conducted domestic deals in 2019. One of the reasons discussed on this topic was that there were more protectionist measures taken globally whereby governments were playing a key part to prevent transactions from completing on the basis of national security concerns. This was particularly a theme noted between the United States and China, with it being less applicable to the MENA region.
The MENA Region’s Sector Favouritism
From a sector perspective and based on deal activities, we have seen relatively higher levels of interest in the healthcare, logistics, financial services, and technology sectors:
- Healthcare: Historically, we have seen interest in polyclinics, laboratories and pharmacies in the healthcare space with an increased demand shifting towards specialized clinics.
- Logistics: In the logistics space, there is an increased level of interest in asset-light logistics businesses with a technology play.
- Financial Services: Post to a number of large banks consolidating, we now may see that the smaller banks will be the ones starting to merge in the next wave of consolidation.
- Technology: The technology space in the region is experiencing increasing M&A and investment driven by growth capital and flagships/unicorns.
The Outbreak’s Impact on Forms of Consideration in M&A Deals
Since the recession back in 2008, the EV/EBITDA multiples have been increasing steadily at a global scale. Overall, the same can be said about the MENA region as well, although different parts of the region have understandably varying characteristics unique to each country.
It was also discussed that between the yeas of 2014 to 2018, globally and on average, 20% of the transactions involved share consideration offers only. However, in 2019, over 60% of deals were paper offers with buyers offering their shares as consideration, reflecting the fact that buyers were taking a conservative approach towards their balance sheets and conserving their cash. It is safe to predict that in the post crisis environment, debt may become a cheaper option and one might start seeing leveraged deals again.
SARS Vs. COVID-19, and Transaction Multiples:
So far, evidence shows that the COVID-19 outbreak is likely to play a significant role in determining the impact on deal valuation metrics. It was noted that in previous pandemics, e.g. the SARS outbreak back in 2003, deal multiples more than halved in the aftermath. Now, if the COVID-19 pandemic will not be contained within a reasonable timeframe of 2 to 3 months, then a similar, if not worse, effect will definitely be on rise.
All in all, the region started off this year with having big strategic growth plans but is now required to revisit them all to prepare for resilience and to best survive the current crisis.