Low level of confidence among C-suite executives due to macro uncertainties in the region has prompted the Middle East and North African (Mena) corporates to hit the pause button on mergers and acquisitions (M&A) during the third quarter (Q3) of 2016, according to Ernst & Young (EY), a global consultant
The Mena witnessed 74 M&A deals amounting to $5bn during Q3, 2016 compared to 98 transactions valued at $6bn in the year-ago period, EY said in a report.
The GCC (Gulf Cooperation Council) dominated deals in Q3, representing 92% of the total deal value and 77% of deal activity, it said.
Deal activity in Q3 2016 eased across all transactions year-on-year; inbound deal fell 42%, outbound by 24% and domestic by 10%.
The UAE was the most attractive destination for M&A in region with value at $17.1mn from 14 deals. It witnessed the largest deal with the acquisition of Media.net Advertising by Investor Group from China for $900mn.
Media and entertainment, real estate and airlines were the top three target sectors by deal value in Q3 2016.
“Mena companies’ interest in pursuing M&A is lower compared to October last year, and is currently below the long-term average level. The key driver behind this is lower CEO confidence, given the macro-uncertainties in the Mena region. Market fundamentals that are affecting M&A performance such as low interest rate and low growth rate are still prevalent,” Phil Gandier, Mena Transaction Advisory Services Leader, EY, said.
Unlike global respondents, who see a rebound in deal activity from six months ago, interest from Mena executives is on the wane, with 21% expecting their company to pursue M&A in the next year, according to the latest EY Capital Confidence Barometer (CCB).
Qatar and Egypt are particularly quiet on the M&A front, whereas the UAE is feeling most optimistic, with 37% looking to make a deal.
Mena executives cite geopolitical uncertainty and high volatility in currencies and commodities as the greatest economic risks to their M&A strategy, as well as the slowdown in global trade flows that all countries in the region are experiencing, EY said. “While deal fundamentals remain relatively stable at local levels, with more respondents feeling better about the number of acquisitions, they are less optimistic overall about the quality of acquisition opportunities and the likelihood of closing, largely as a result of macroeconomic issues,” it said.
However, 67% of Mena CCB respondents indicate that they have five or more deals in the pipeline against 49% of global respondents. For 40% of Mena executives, their pipeline numbers are expected to increase in the next 12 months.
“Deal activity in Mena in Q3 2016 was muted although conditions that support M&A remain robust. We expect significant deal activity in Q4 2016 with some large ongoing deals announcing completion,” said Anil Menon, Mena M&A and equity capital markets leader.
Gandier said in the next 12 months, companies in the region will have interesting capital allocation decisions to make as liquidity remains tight and value pockets remain unclear.
“Given the commitment governments have made in the region to economic stabilisation and reform, and an expected rebound in oil prices, we expect to see economic confidence and deal intentions to improve in 2017,” he added.