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M&A slowdown fails to dent long-term optimism for dealmaking in Gulf region

The long-term prospects for mergers and acquisitions in the Gulf region remain strong, according to local deal advisers and investors, even after a dip in activity in the second quarter.

There were 62 deals in the Gulf Cooperation Council, or GCC, region announced in the period, the joint lowest quarterly total since the third quarter of 2020 and down from 82 deals in the first three months of 2022, S&P Global Market Intelligence data shows. The 144 deals in the first half compares with 165 in the same period of 2021.

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Similar to other regions, Middle East M&A activity has slowed since the start of Russia-Ukraine conflict, said Chris Lester, a partner at Latham & Watkins law firm in Dubai, United Arab Emirates.

"There was more caution about dealmaking and deployment of capital generally," Lester said.

Yet, another consequence of the conflict — sky-high oil prices — has resulted in several key Gulf sovereign entities having access to large pools of cash, said Lester, which could help fuel a recovery in activity in the second half.

"Provided none of the major economies go into recession then I'm optimistic about how the back end of 2022 will play out in terms of M&A," Lester said.

Focus on financials

In terms of sector, 33 of the 144 deals announced in the first half were in the consumer sector, with 22 in technology, media and telecoms, 20 in financial services, 17 in industrial, and 10 in energy and utilities.

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Financial services is one area to watch, said a senior consultant involved in M&A work in the Middle East and North Africa. The combination of a fragmented industry and strong appetite from foreign investors to penetrate a new emerging market makes it primed for more deals.

"We expect to see further mergers too — especially in the insurance industry, which has considerable excess capacity," said the consultant, who asked to remain anonymous.

Venture capital activity has remained stronger than in other regions, according to Lester, while energy and infrastructure "will always be a key theme for M&A in the Middle East."

The biggest deal in the Gulf was Dubai-based ports operator DP World Ltd.'s $5 billion sale of a minority stake in three of its domestic assets. Public Investment Fund of Saudi Arabia acquired a 16.9% stake in Kingdom Holding Co. for $1.51 billion in another notable deal.

Kingdom Holding is majority owned by Prince Alwaleed Bin Talal and has stakes in Citigroup Inc., Uber Technologies Inc. and Chinese e-commerce giant JD.com Inc. Abu Dhabi's Q Holding PSC bought real estate developer and asset manager Reem Investments PJSC for $1.62 billion in May.

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Almost 80% of GCC transactions took place in the UAE and Saudi Arabia. As well as being the largest non-oil economies in the region, these countries have more favorable regulatory frameworks and are more encouraging of M&A compared to neighboring markets, said Akber Khan, senior director of asset management at Al Rayan Investment in Doha, Qatar.

"These two countries should always lead the region for deal numbers," Khan said.

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Fees under pressure

The fees banks can reap from M&A, and advisory services more broadly, have come under pressure in recent years. "The boutiques and local banks have been building out their teams over the years, expanding their expertise and pricing their services lower than the international banks," said the consultant. "There is some overlap in terms of services, target clients and markets, so competition is intensifying."

In the first six months of 2022, JP Morgan earned about $49.6 million advising on M&A deals in the Middle East, Africa and Central Asia, according to Refinitiv data cited by the Financial Times. The Goldman Sachs Group Inc. earned $37.4 million, Citigroup $29.6 million, Barclays PLC $32.9 million, Morgan Stanley $13.1 million and Bank of America Corp. $27.5 million.

Whether M&A for Gulf-based target companies increases over the remainder of 2022 will in part depend on the global economy, inflation and interest rates, said Lester. But even so, the economic fundamentals are in place for sustained in years to come, Khan said.

"M&A deal volumes are lumpy, so vary greatly on a monthly or quarterly basis, but that's something bankers and lawyers fret about, not the people actually running the businesses in question," Khan said.

"Focusing on M&A activity over short time frames is not as important as considering the potential for economic and social reforms to sustain elevated economic growth, and therefore corporate activity, over the next three to five years."