Mergers and acquisitions to remain slow in 2012

21 December 2011

Regional protests hit foreign investment and mergers

Two significant acquisitions by major international companies investing in the Middle East have raised the prospect of a recovery in deal flow, but bankers and advisers in the region have said activity is likely to remain slow in 2012.

In the first few weeks of December, the US’ Coca-Cola announced it would spend $980m buying up about half of Saudi Arabia’s Aujan Group, which sells soft drinks, and US private equity firm Carlyle closed a deal to buy 42 per cent of Alamar Foods, which operates fastfood outlets in the region.

Mergers and acquisitions (M&A) activity in the Middle East has been declining fast during 2012 as widespread anti-government protests hit sentiment. In November, just $35m of deals were announced, the lowest level of the last 12 months and just six months previously the figure was $4.7bn.

But it is a slowing global economy and problems in the banking sector that are likely to keep deal flow constrained over 2012. “It is very hard to get financing on attractive terms and the acquisitions that have occurred involve companies with cash on their balance sheet, or where the strategic logic is so compelling that raising finance becomes easier,” says Tom Emmet, head of corporate finance and equity capital markets at the Royal Bank of Scotland.

There could be some increased incentive for businesses to look at selling as banks become less willing to allow informal debt repayment extensions than they have been over the past few years. “Banks are starting to become a lot tougher with borrowers after a long time hoping that if they gave some leeway conditions would improve,” says one M&A specialist at an international bank in Dubai. If banks do start becoming tougher with borrowers, it could force more debt restructuring and asset sales.

Emmet, is leading the RBS team working on the Aujan transaction, says that although markets, such Iraq and Egypt offer a lot of potential, “the near-term focus of most banks will continue to be Qatar, the UAE and Saudi Arabia for deal origination, but there will continue to be only a handful of larger deals”.

Uprisings in places such as Egypt, Syria, Bahrain and Libya have also knocked foreign direct investment (FDI) into the region. According to the Multilateral Investment Guarantee Agency (Miga), part of the World Bank, FDI flows into the region will drop in 2011-12, before recovering in 2013. FDI into the region has been falling since 2008.

With the oil price still at more than $100 a barrel, most governments in the region remain in a strong financial position, meaning the direction of acquisition activity is likely to continue being predominately out of the region, rather than into it. “My observation is too much money is going out of the region rather than coming into it when comparing flows of M&A deals,” adds Emmet.

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