This Article was originally published in The National
GCC Investment Bankers (IB) should be the most stressed lot! Too much work and too little rewards. The fee based investment banking business has four key components going for it i.e., syndicated loans, equity capital markets, debt capital markets and Mergers and Acquisitions (M&A). While in other markets we can witness activity across the four components, in GCC the IB advisors solely depend on syndicated loans for their survival. (On average 50% of total IB fees) Equity capital market is dull thanks to poor performing capital markets and related dull IPO environment. Debt capital market looks promising given the slew of activity expected from sovereigns and corporates. However, the sticky point seems to be M&A, which can be erratic and suffer from some idiosyncrasies.
The fallout of Global Financial Crisis and the recent oil price crash has dented the stamina of corporates leading to weaker balance sheets for many companies. The operating environment has turned difficult with stagnating earnings and increased cost of capital. After hitting peak of $70 billion in 2014, our research expects corporate earnings to touch $62 billion for 2016. This should be a dream environment for M&A advisors as difficult environment forces corporates to restructure, improve efficiency and productivity, hive off non-core assets and concentrate on strategic business. In other words, corporates need the help of M&A advisors to do all this.
However, the value of announced M&A transactions reached $18.7 billion during the first half of 2016, a decline of 29 percent compared to the first half of 2015 and the slowest first six months for deal making in the region since 2014 according to Reuters. What can explain this conundrum?
GCC market is dominated more by private companies than public companies. Scouting opportunities in the private market is onerously difficult due to lack of transparency and family control. This prevents deal flow even though there may be genuine need for M&A. Even assuming healthy deal flows (cases where companies express interest to hive off non-strategic units), the actual consummation of transaction can be low (poor deal closures) as poor information can prevent meaningful negotiations and conclusion of transaction. Take the case of Emaar Properties buying a stake in Americana (Kuwait Food), a deal that was in the making for years with multiple parties. There are several such examples like Etisalat ending talks with Zain, Kuwait or EFG-Hermes agreement to create the largest Arab investment bank with Qatar’s QInvest collapsing in 2013 after the deal didn’t get Egypt’s regulatory approval.
GCC M&A environment is also characterized by dominance of “mega deals”. Take the recent acquisition of Emaar Properties chairman Mohamed Alabbar’s buying of 9.9% stake in Aramex or his recent acquisition of a USD 2.36bn stake in Kuwait Food Company (Americana) along with a group of investors or the recent merger of National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB) which is expected to create a mega bank with total assets of around USD 171 billion (only bettered by Qatar National Bank whose assets stand at USD 190bn) or the celebrated Emirates Bank and National Bank of Dubai merger to form Emirates NBD in 2007. Domination of such mega deals can “crowd out” other transactions and can also create league tables (rankings of Investment bankers) that can look very different and distorted from one period to another (making it difficult for comparison).
How will things be going forward?
Given the low oil price environment, corporate stress levels are bound to increase going forward. Need to restructure, enhance productivity and efficiency and hiving off unnecessary non-strategic assets will be pursued vigorously by private and public players. This should certainly be good news for IB’s. Also, companies are unusually sitting on very high levels of cash as measured by data available for publicly listed companies. At the end of 2015, total cash levels reached nearly $250 billion with financials (read banking) accounting for $155 billion. Hence, banking related M&A transactions will continue to see action followed by energy and telecom. “Mega deals” may continue to dominate the scene but given the oil price impact across the board, representation from mid-level segments and SME’s can also increase. This will help to improve the ratio of “pipeline to closure” which should be good news for IB’s. Political climate will also play a role in Mena ex GCC countries. Volatile political situation, large scale currency fluctuations and lack of lending and underwriting experience in those regions could increase the risk that could outweigh any potential gains and hence this may shift the focus back to GCC.