- Bridging the gap in private M&A transactions - from a MENA perspective
The increased appetite for mergers and acquisitions (M&A) is prevalent at both a regional and global level. This upward trend presents much opportunity; however there can be trials and tribulations before the success when noting the MENA (Middle East and North Africa) current market place.
For instance, the second most challenging part of being a regional M&A Advisor is being able to secure offers on the firm’s entire pipeline and not being able to close deals quickly due to the bid-offer gap being too large to bridge. Obviously, the first and foremost challenge is having no pipeline at all, or worse, one of poor quality. Thankfully the market in the MENA region has changed in the past 6-18 months with each sector, one by one, showing signs of vitality with deals closing.
According to Mergermarket data, while M&A deal flow in the MENA region in Q1 2014 (USD 2bn) was down 31% from USD 2.9bn in Q1 2013. Activity in Q1 2014 managed to double the Q4 2013 value of USD 1bn. The top five transactions alone made up 85.3% of the total M&A value in the region during Q1 2014.
Valuation trends in the M&A market
Sectors such as food and beverage, healthcare, hospitality, education and oil and gas are leading the way with valuations potentially running away with themselves. Investors are still shying away from cyclical investments such as contracting companies and real estate developers. Whilst today, debt-raising on asset backed deals can be closed with relative ease, equity fundraising is still challenging in this environment, and it is likely to take another 6-18 months before this trend changes. Green shoots in the regional IPO market appears to be following the same timeframe and pattern.
In the current market, buyers’ value expectations are still very conservative, and whilst buyers do appreciate distressed sellers have left the market, they still consider a conservative bid should be enough to convert a deal. In contrast, sellers who have weathered the storm over the past 5 years have now moved into better cash positions, they may have also seen promising revenue and profit growth over the past two years, and now they are considering that it may not be the right time to sell. This is exacerbated by the media frenzy of recent good news, which really does not affect the sellers’ business valuation today or any time soon; however it affects their confidence, sentiments and outlook. Some sellers have difficulty letting go of a business where their invested capital is significantly more than their current market valuation.
For direct investments into private businesses, the transition from a buyers’ market to a sellers’ market and vice versa is cyclical. This transition could occur in the midpoint of a change from recessionary times, where there could be a buyers’ market or no market at all, and boom times, where sellers have the upper hand. In the MENA region, 2014 could well be this midpoint as today’s market appears to be neither a buyers nor sellers. It appears to be slowly heading back towards more positive economic times in the region; therefore the sellers could soon regain the full upper hand in deal negotiations and terms.
Bid offer differentials in the sale of private businesses in the MENA region can be significant to bridge as M&A advisors. Typically bids range between 50% and 85% of the sellers offer price.
Some ways to bridge the gap
Simply convincing a buyer to increase their offer and a seller to decrease their exit expectations in this transitionary market is ‘easier said than done’. Nevertheless, there are different structures that can be used to bridge the gap and facilitate a deal.
• Deal terms could potentially soften the bridging process for both buyer and seller. For instance, to help the seller reduce their price expectations; advisors could assist by negotiating better earn out terms (such as a sliding scale or a reduced percentage), or requesting the buyer to deposit a certain portion of the deal consideration into escrow (which will then be paid if the conditions are met without risk to the seller).
• Exchange rates can play a key role for sellers looking to repatriate their sales proceeds to their home country.. Discussing the future outlook of their relevant currency can sometimes give the seller perspective; if the foreign exchange rate is expected to appreciate considerably in the months ahead, then the bid-offer differential no longer remains material.
• To enable the buyer to raise their offer; an advisor could convince the seller to offer some interest bearing, vendor financing on a certain portion of the offer to be repaid post deal in instalments over 2 to 4 years period; or one could encourage the seller to retain a minority share; or even allow the seller to take a non-core asset with them to alleviate the cash flow effect on the buyer.
As the MENA M&A market transitions to be more active and towards a sellers’ market, there are renewed expectations of increased deal flow and increased business valuations in the coming years; an agreed upon theme between regional M&A Advisors.