The announcement earlier this year that the Saudi Stock Exchange (Tadawul) would be opening up to foreign investors from 2015 ensured the bourse its fair share of international headlines.

But foreign corporates have already been busy investing in the kingdom in recent years, cutting a series of merger and acquisition (M&A) deals as they seek to tap into the region’s largest market. Saudi Arabia’s appeal to corporates is not hard to see; it allows the opportunity to access regional supply chains and represents a sizeable consumer market in its own right.

According to figures from Zephyr, a database of M&A deals globally, Saudi Arabia was the target for $444m-worth of M&A deals in the third quarter of 2014, the second-highest in the region (although only a fraction of the $4bn-worth of deals involving the UAE that quarter). Overall, Saudi Arabia will struggle to match the estimated $2.5bn-worth of M&A deals seen in the kingdom in 2013.

Strong pull

Even so, the kingdom has shown it exerts a strong pull on foreign strategic buyers. UK consultancy EY’s latest Capital Confidence Index shows Saudi Arabia performs strongly in both inbound and outbound M&A deals. Although there is greater interest in capital market transactions – particularly in light of the Tadawul opening announced in the summer of 2014 – there is also a healthy growth trend in small and mid-sized deals, where 80 per cent are valued at $100m or less.

The biggest cross-border deal this year was the Netherlands’ Royal Philips’ $235m investment in Saudi-based General Lighting Company (GLC). Philips acquired a 51 per cent holding in GLC on a cash-free, debt-free basis, creating a joint venture designed to strengthen the company’s regional footprint and create growth opportunities in
sustainable technologies to support the Saudi government’s objective to reduce energy consumption.

US private equity giant Carlyle Group sold a 30 per cent stake in GLC to the Dutch firm, highlighting the significant role that private equity investments have had in the Saudi market in recent years. The Carlyle Group is still a sizeable player there with its investment in the local franchise of Domino’s Pizza.

Domestic merger

The biggest deals over the past year also reveal the growing muscle of Saudi buyers, with the largest ticket items all involving in-country transactions. This year saw the biggest ever private sector corporate merger, a $1.3bn deal between National Shipping Company of Saudi Arabia (Bahri) and the Saudi Aramco-owned crude oil tanker company Vela International Marine Limited (Vela). The deal created the world’s fourth-largest oil shipping fleet, with 31 vessels, adding the 14 tankers from Vela’s fleet to the 17 already owned by Bahri.

The merger has granted the group an estimated 5 per cent share of the world’s shipping market, becoming the exclusive provider of oil shipping services for Aramco.

With their large balance sheets and deep knowledge of the market, Saudi corporate entities are well-placed to engineer further strategic acquisitions in 2015. However, not all of these deals are so easy to pull off. A large proposed local petrochemicals share swap merger that was expected to take place in 2014 had to be postponed in June, as Saudi International Petrochemical Company (Sipchem) and Sahara Petrochemicals put on ice a deal that would have created a chemicals company with about $5.8bn in market capitalisation. The merger would have handed Sipchem access to Sahara Petrochemicals’ ethylene feedstock, giving it a stronger position in the olefins supply chain.

The decision to mothball the tie-up was attributed to the current regulatory framework. A deal might be workable in the future, the two parties said, if they could agree on a different post-merger operational structure to benefit their shareholders.

Food and beverage

Sector-wise, downstream and oil-related deals such as the Bahri-Vela tie-up will attract the biggest deal sizes, but advisers point out that it is the consumer-related areas such as food and beverage (F&B) that are attracting much of the buying interest, especially from overseas.

In February, UK beverage cans producer Rexam bought a 51 per cent stake in Saudi Arabia’s United Arab Can Manufacturing, a supplier to Coca Cola, for $122m as part of its strategy to expand in emerging markets. Rexam sees the kingdom as a good platform for supplying the wider region, with attractive prospects for the beverage can industry in the Middle East, the firm’s CEO Graham Chipchase said in a statement.

Only three months previous to that deal, another UK F&B player, United Biscuits, acquired all the assets of Rana Confectionery Products. That acquisition was undertaken jointly with United Biscuits’ local partner, Ali Zaid al-Quraishi & Brothers Company. United Biscuits will manage the production facility. The acquisition of a Saudi-based manufacturer of branded sweet snacks is designed to boost the UK company’s ability to serve consumers and customers in the Middle East.

Growth potential

As one deal adviser tells MEED, many clients are looking at Saudi Arabia because of its manufacturing and distribution infrastructure, or for acquiring strong brands. United Biscuits’ decision to buy Rana Confectionery Products confirms this.

The larger Saudi players are also realising the significant growth potential of these sectors.

In June, Olayan Financing Company acquired a 51 per cent stake in Gulf Union Foods Company (GUFC), a leading beverage maker in the kingdom that specialises in fruit juices. Local investment bank Jadwa Investment sold its 30 per cent stake in GUFC to the Saudi family-owned conglomerate. With 12 production lines and 1,200 employees, the firm is among the largest players in terms of market share in the GCC F&B sector.

The appetite for acquisitions has seen the largest Saudi F&B companies look beyond the kingdom’s borders for inorganic growth opportunities. Jeddah-based food producer Savola Group is eyeing a potential acquisition of Kuwait Food Company, known as Americana, which is valued at $4.3bn and most of whose shares are currently held by Kuwait’s family-owned Kharafi Group.

In September, Savola hired the US’ JPMorgan Chase & Co to advise on a potential bid for Americana, although Brazilian food maker BRF is also understood to be interested in competing to take a majority holding in the Kuwaiti company. It remains to be seen if Savola will be successful in buying Americana, but if it is, it will create a sizeable Gulf F&B empire.

Inorganic expansion

Maintaining the pace of deals seen in 2013-14 may be more difficult in the gloomier economic climate expected in 2015. One private equity adviser tells MEED that M&A activity has died down in recent months, with fewer new financial investors coming into the market. This is not just a reflection of the lower oil price climate stalling enthusiasm for deals; in the late 2000s, there were several private equity funds that struggled to turn around investments in Saudi entities. Many are wary of repeating the same mistakes.

However, there is a growing sense that Saudi groups such as Olayan and Savola are becoming more strategic in their growth ambitions, which means more inorganic expansions will be on the agenda.

“Acquisition has become a part of the development menu, where historically it was more about building new ventures through greenfield projects,” says the private equity adviser. “Now, the mentality has shifted and they are looking to make acquisitions to supplement their existing portfolios of operations, especially in situations when they can leverage existing platforms in a value-added way.”

The kingdom’s manufacturing and distribution capabilities present a valuable bolt-on for both large domestic players. With lower oil prices offering up the prospect of lower asset prices, there may yet be more M&A deals coming to the fore in the next year.