Executives expect stable oil price outlook, portfolio optimization and private equity to power M&A activity in 2018
Our 2018 M&A survey, Global Capital Confidence Barometer, shows that 79% of MENA boards are focusing on portfolio transformation to reshape their portfolio for the future.
In this edition of the Capital Confidence Barometer (CCB), MENA companies continue to look at strategic, transformational M&A that provides them with enduring long term competitive advantage.
While 98% of executives say they see the MENA economy as improving or stable, short-term optimism about M&A is more tempered. In the Kingdom of Saudi Arabia (KSA), few believe the economy is declining, while a majority (61%) perceive things to be stable. This is reflective of an economy in transition. As KSA continues to pursue its diversification agenda, respondents understand that some policy decisions, such as removal of subsidies, VAT, and other taxes, may affect economic growth over the short term, but that over the long term the government's vision will result in greater and more sustainable economic prosperity.
Short-term hesitation in M&A activity will give way to renewed enthusiasm later in the year
Although confidence in the economy remains strong (after reaching record levels, as cited in the previous edition of the CCB), MENA companies are taking a pause as rising inflation, market volatility, and high deal valuations have companies looking to preserve capital rather than deploy it in the short term unless they are presented with strategic transformational opportunities. Companies in Saudi Arabia and Egypt, in particular, are looking to take more of a wait-and-see approach.In the United Arab Emirates (UAE), dealmaking intentions remain above the CCB average. UAE companies dominated inbound and outbound M&A activity by volume in 2017. We expect the UAE to continue driving MENA deals in 2018.
As sector lines blur with convergence, MENA businesses are reviewing the impact of technology and using bolt-on M&A to strengthen their business models. Although deal volume has been modest in the first quarter of 2018, deal values have reached their highest levels since 2001, with US$9.3b invested in the region; insurance, medical and education sectors have seen the highest allocation of acquisition capital.
Overall, almost three-quarters (73%) of MENA respondents expect the local M&A market to improve in the coming 12 months, up from 63% six months before. Healthy, robust deal books across the region support the optimistic view of M&A activity. Respondents expect the primary drivers of this activity to be private equity players who are not net sellers, sector consolidation plays or business portfolio optimization by regional family businesses to remain competitive. On the whole, more stable geopolitics and favorable macro-economic situations have MENA executives anticipating more deal completions in the next 12 months than in the past, suggesting that any hesitation in the short term will give way to renewed enthusiasm later in the year.
Portfolio transformation becomes a boardroom priority as MENA companies prepare for the future
In an effort to become more agile and responsive to market volatility, and to better prepare their organizations for the future, 79% of MENA boards are focusing on portfolio transformation over the next six months. MENA executives see portfolio transformation and M&A as a means to further strengthen their companies to achieve long term competitive advantage.
Although a majority of MENA executives acknowledge that they conduct portfolio reviews annually, an increasing number are undertaking reviews on a more frequent basis. More than a quarter say that they are reviewing their portfolios more often than three years ago, largely because of threats to their business from digitally-enabled competitors and startups, as well as the impact of digital technology on their business models. Saudi Arabia has been most active in stepping up its portfolio reviews in recent years.
Cross-border dealmaking dominates the agenda over the next 12 months
As MENA executives look ahead, they expect cross-border dealmaking to be an important theme over the next 12 months as companies look to reallocate capital outside the region in pursuit of strategic opportunities. Most MENA executives believe that MENA will continue to be a net exporter of capital in FY18.
EY MENA Transaction Advisory Services Leader
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