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MENA M&As survive on mid-size deals and SWFs

MENA M&As survive on mid-size deals and SWFs

Modest recovery is expected in mergers and acquisitions across MENA next year, with most driven by mid-size restructuring. Not a bad start for 2012, but not great either.

September 26, 2011 12:25 by



Increased appetite from sovereign funds and restructuring-driven asset sales will help drive a modest recovery in mergers and acquisitions (M&A) in the Middle East and North Africa (MENA), the head of HSBC’s regional advisory business said.

While global markets are teetering under the impact of a sovereign debt crisis in the euro zone and a slowdown in the US economy, a sharp fall in asset values may present an opportunity for these cash-rich funds with a mandate to invest their state’s hydrocarbon revenues, Omar Mehanna told Reuters.

“Yes, the global picture is pretty bleak, but for sovereigns that are cash rich, they will certainly assess opportunities and this could prove to be an opportune time to deploy some of that capital,” Mehanna said in an interview.

M&A in the MENA region hit a rough patch in the wake of the financial crisis as an era of leverage-led buyouts waned and several high-profile investments suffered heavy losses.

Year-to-date, deal volumes in the region have totalled around $40 billion but may see a gradual improvement next year, Mehanna said. Thomson Reuters data show M&A fee income for investment banks stood at $280.8 million in the first half of 2011, down nearly 30 percent from the same period last year.

Sovereign funds such as the Qatar Investment Authority (QIA) and Abu Dhabi Investment Authority (ADIA) — main allocators of state capital in the region — were relatively quiet in the first half of the year.

The global crisis on the other hand has also put increased pressure on regional corporates to restructure their operations, which Mehanna thinks will eventually result in more disposals.

Companies in the region have limited access to other financing options as equity markets remain virtually shut and banks become increasingly cautious with their lending.

“You will hear about more corporates forming creditor steering committees, hiring advisors and launching restructuring processes,” Mehanna said.

“Businesses where the fundamentals are robust but the capital structure needs revision, is where I would expect to see more restructuring-related M&A activity.”

MORE REALISTIC

HSBC has been involved in several deals in the last year.

It was an adviser to Citi Infrastructure in its $1.5 billion purchase of DP World’s Australian port operations, it advised Lamprell Plc in its $336 million purchase of a stake in Maritime Industrial Services and also advised on the $2 billion restructuring of Saudi Arabia’s Al-Ittefaq Steel.

A major impediment for completing deals in the region has been a stark contrast in perceived valuation between the buyer and seller. That trend is slowly changing as more sellers get realistic on valuations, Mehanna said.

“What we are witnessing is sellers becoming more realistic regarding their price expectations. One catalyst behind this has been the recent political unrest as well as the global economic backdrop,” he said.

Mehanna said he expects further consolidation in financial services in Gulf states such as Bahrain and Qatar.

Earlier this year, Qatar’s regulator asked conventional banks to close their Islamic banking operations. In August, International Bank of Qatar (IBQ) sold its Islamic banking retail operations to Qatar’s Barwa Bank.

In Bahrain, Bahrain Islamic Bank and smaller rival Al Salam Bank said they were in talks on a merger which would create a $4.5 billion entity.

Strong fundamentals in sectors like oil and gas should foster both inbound and outbound M&A, the executive said, noting HSBC has “a high-quality deal pipeline” without giving…

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