July 14, 2020

Local Spotlight: Deal Drivers in the Middle East

By Suzy Bibko, Content Marketing Manager, EMEA

The Middle East has not suffered quite as badly from the current pandemic as other regions, but neither has it been spared. And the oil crash hasn’t helped markets there either. While the outlook seems fairly positive, the region is not yet at average levels for dealmaking. Can restructurings help drive a faster recovery? If so, which types? What role, if any, will the tech sector and technology play? Elaine Green of Mergermarket asked experts Pietro Castronovo, Anil Menon, Alexandra Balafa, and John Komninakidis for their views during our recent webinar.

Now: Optimism for H2
M&A deals are currently down around 50% in the region to date, but optimism is in the air as we start the second half of the year.  

“Dealmakers are struggling with confidence, as well as deal metrics, valuations, and the like,” explains Komninakidis. “While there are many M&A transactions in the Middle East right now, most of them are only in the pre-diligence phase. So, we anticipate H2 to be very active in the Middly East. Historically, or statistically, the second half of the year is always the most active part of the year. And most of the activity will likely be related to fundraising, debt restructuring, or distressed asset sales.”

“As with the last crisis, after the first shock, M&A transactions will pick up again,” agrees Castronovo. “In the Middle East we are already seeing certain drivers for consolidation. The financial sector is seeing a lot of activity, as well as the healthcare, education, energy, and technology sectors. And I see a continuation of megadeals, which will drive value, but not the overall number of transactions.”

Next: Restructuring as a way forward
For restructurings, like most of EMEA, divestitures and carve-outs are expected to dominate. “By definition, that’s what you do first in restructuring: divest non-core assets. And that’s what’s happening,” says Castronovo.

Balafa reveals: “We will see more consolidation across sectors, and sales of non-core business held by merchant families. And we will also see, and have been seeing, bolt-on acquisitions and transformative deals from well-capitalized businesses at favorable valuations.”

“There is a need for capital in these situations,” says Menon. “And one of the sources of capital is portfolio optimization. Really looking at non-core businesses and divesting those.”

But is this just a short-term solution to get companies over the hump, so to speak? Or will restructurings continue into next year? “Short term, those companies that have cash shortages due to lockdown and restriction of operations may see more equity financing and more M&A consolidation,” explains Balafa. “For the medium to long term, those businesses that have a slow recovery of revenues will be resorting to increased leverage and will require negations with creditors to avoid actual defaults. So, we expect to see more restructurings for quite awhile.”

“Moreover,” says Castronovo, “I think everyone is realizing restructuring is not a bad word and it’s a way to have a faster comeback and have the ability to succeed.”

Beyond: Investing in technology
With restructurings losing their tarnish and beginning to shine a bit, are there any other ‘stars’ from the crisis? Technology could be one – in terms of getting deals done and the focus of the deals and investments. After all, it’s amazing how fast everyone has adapted to and adopted the technologies that allow them to work from anywhere at any time. Rapid digitization has become almost a fact of life for most every person and company. And many companies are looking to how they can make that part of their strategy – internally or as an investment – if it is not already. 

“Digitalization was really pushed for everybody because now there is a different way of working,” says Castronovo. “So, the companies that are able to provide superior technology and a better digital experience may be much more attractive for any investor.”

“Moreover, governments will continue to bet on their long-term strategies, which include accelerating digital transformation in commerce, supply chain reinvention, and supporting labor forces,” explains Balafa.

“At Datasite, we not only invest heavily in our platform, but also in people,” stresses Komninakidis. “The due diligence process is expected to get shorter and shorter, to three months or less by 2025 as our new report reveals, and therefore it’s important to have the right technology and people on your side. I hope companies in the Middle East continue their efforts to become more digitally ready both for commercial and M&A purposes. And Datasite is here to help them succeed.”

Deal Drivers: Middle East

Hear experts from the Middle East discuss the current and future state of M&A there, including the challenges, recovery, sector outlooks, and lessons learnt from the current crisis.

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The New State of M&A

Covering the M&A lifecycle, due diligence, asset marketing and restructuring, our report reveals that the M&A process is being transformed by technology as never before. Find out what else 2,235 global practitioners think.

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