The quest for competitiveness is driving record-breaking levels of activity.

Despite a drop in the number of transactions, megadeals drove M&A value to a new high

The first half of 2016 was a record semester for mergers and acquisitions (M&A) in the Middle East and North Africa (MENA) since 2013 with $30.5 billion in deals—almost three times the first half of the year (see figure 1). Megadeals drove this exceptional activity with four transactions above $1 billion, stacking up to $24.2 billion. The largest transaction was in financial services. First Gulf Bank and National Bank of Abu Dhabi agreed on a merger worth $14.8 billion—creating the United Arab Emirates’ largest bank with assets of around $178 billion. The remaining megadeals were in shipping and interest acquisitions in companies engaged in oil and gasconcessions in Egypt and the United Arab Emirates. However, the number of transactions dropped 53 percent compared with the first half of 2016 to reach the lowest level in the past four years with 76 transactions announced.

Corporations lead transactions in key regional sectors to improve competitiveness

As the largest MENA financial investors seek opportunities mainly outside the region, corporate buyers have increased their share in the MENA M&A market. In the second half of 2016, corporations represented 82 percent of the MENA deals compared with 64 to 75 percent in previous periods (see figure 2). International corporations were particularly active during this period with a record investment of $11 billion. The second largest transaction in the first half of 2016 is one example of corporations resorting to M&A to enhance competitiveness: Hapag-Lloyd and United Arab Shipping Company announced a $5.4 billion merger to counter an industrywide downturn caused by a faltering global economy and overcapacity of vessels. The combined company is expected to generate significant cost savings and optimize networks and infrastructure.

International M&A sustains momentum with financial investors leading the market

MENA investors maintained a healthy appetite for international M&A with 55 deals announced in the second half of 2016—24 percent less than in the first half of the year (see figure 3 on the following page). However, in terms of value, the second half of the year recorded $17.8 billion—52 percent more than in the first half. Financial investors, mainly Gulf Cooperation Council sovereign wealth funds, have been instrumental in driving international M&A from a value perspective as they searched for enhanced and diversified financial returns. The main investors in the number of transactions were Qatar Investment Authority and Abu Dhabi Investment Authority, which made a combined total of six investments across the energy, real estate, and transportation sectors.

MENA investors are continuing active investment portfolio rebalancing but with selective divestments

Investors are using active portfolio management to maximize the value of their investments, albeit at a somewhat slower pace compared with the previous four periods. Divestments abroad dropped 38 percent in the second half of 2016 compared with the first half of the year, reaching 10 transactions (see figure 4).
Divestment value dropped 63 percent to $1 billion in transactions, still within the historical value range of $0.6 to $4.4 billion per year. The largest share of divestments occurred in the Americas, with 40 percent of the total for the second half of 2016 mainly driven by two deals in Canada. First, Dubai World Corporation sold a 45 percent stake in DP World for $650 million to Caisse de Depot et Placement du Quebec, a Canadian institutional investor. Second, Kingdom Holding Company disposed of the Four Seasons Hotel in Toronto for $172 million to a private investor.

2017 MENA and International M&A Outlook

We anticipate the MENA and international M&A market to remain dynamic as market players carry out initiatives to enhance competitiveness, including through M&A transactions. We expect investors to focus on transactions that have scale and impact to achieve synergies with the core business.

Four factors are expected to drive the market in the next 12 months:

• The downward pressure on oil prices is expected to continue, sustaining the need for Gulf Cooperation Council governments to optimize their fiscal budgets. In the current low-growth market, acquisitions provide opportunities to improve bottom lines or give access to new markets or customers.
• Refocusing on core activities is a major trend in the region to maximize the value of company resources, increasing the supply of assets up for divestment and feeding the M&A market. For instance, several oil and gas companies are seeking opportunities to divest assets far from their core businesses or not
needed to support their long-term strategies.
• The transition to a knowledge-based economy envisioned by MENA countries is expected to incentivize transactions that secure access to new technologies, innovation, and skills. Joint ventures are attractive partnership opportunities as they serve a dual purpose in this transition: transferring know-how and
reducing capital requirements for new projects.
• The opportunity to acquire assets with attractive valuation enabling access to the region’s long-term growth potential is compelling for international corporate investors. We witnessed this trend in the second half of 2016 with corporations enhancing their participation in the overall MENA M&A market. The high availability of dry powder for financial investors can also lead to opportunistic investments by such investors in the
region, where global financial investors have historically been cautious.