When news broke late last month that the total value of mergers and acquisitions (M&A) in the Middle East and North Africa had doubled in the first quarter of 2013, many saw it as a sign that the region’s markets were maturing. Based on data released by consultancy Ernst & Young, (EY), M&A activity in the region reached $14.6 billion, up from $7.3 billion in the same quarter a year ago. Nice numbers on the surface, but when compared to global M&A trends and even more so when put in the regional context, MENA mergers once again look feeble.
Still small fish
On the global scale, M&A values in the Middle East in the first quarter of 2013 were (as usual) outclassed by deals in the United States and elsewhere, which totaled $479 billion according to Ernst & Young. The announced buyout of Dell, the American Airlines/US Airways merger, and the takeover of H.J. Heinz by Warren Buffett and friends were collectively assessed at $63 billion, boosting M&A activity in the US to $219 billion in the first six weeks of the year.
And last week the long-awaited completion of the world’s biggest mining merger, the creation of Glencore-Xstrata, caused a price spike of 4.5 percent on the new combined stock’s first day of trade. The finalization of the deal was made possible in April by getting the blessings of China, the new don of global commodities, and the UK courts, guardian of the formalities of listing the new Glencore-Xstrata.
In a different bracket of M&A processes, the first quarter witnessed the closure of the $55 billion acquisition of Russian oil producer TNK-BP by Rosneft — also Russian — that created the new world leader in oil production by output.
In this context of major deals, the Middle East's share of global M&A has yet to grow beyond the lower single digits and Q1 2013 reinforces the view that the region is still a very minor sideshow of the global circus.
Furthermore, in the Middle East the regional tally is distorted by two outsized transactions – the Aldar-Sorouh real estate merger in Abu Dhabi that was approved by shareholders in March and the ongoing acquisition bid for Egypt’s Orascom Telecom Holding (OTH). The fact that these two deals accounted for more than two thirds of total deal values in the first quarter casts doubt on hopes for a new trend in the region.
The $2 billion Aldar and Sorouh deal in Abu Dhabi was the largest domestic M&A transaction in the region in the first quarter. Given their shareholding structures and alignment of the two companies with the emirate’s state-driven development strategies, non-market factors cannot be neglected as the deal’s driving forces. Therefore the lack of market forces at play suggests the deal is perhaps unlikely to trigger others or lead to a greater consolidation of the real estate sector in the UAE and the wider region.
Even more important is the latest transformation in regional telecoms ownership represented by the quarter’s biggest transaction by far, the bid for full acquisition of OTH by a Cypriot unit of Alfa Group – a Russian investment group. Ernst & Young’s valuation of this acquisition ($6.4 billion) accounts for the entire increase in regional M&A in Q1 2013 vis-à-vis the same quarter in 2012.
The big share of this one transaction again suggests that this is not a new dawn for regional markets. Telecoms mergers have in the past caused upward spiking of regional M&A statistics as operators were an exceptionally attractive set of takeover targets, where other sectors in the MENA were not so. Previous telecoms acquisitions thus made waves in the region but did not mark sea changes.
Another interesting facet of the offer to buy out the minority shareholders in OTH — which was viewed by a Reuters analyst as undervaluing the stock — is that this acquisition of a Middle Eastern asset is indirectly correlated to the large Rosneft takeover of TNK-BP. Russian billionaire Mikhail Fridman, who cashed in $7 billion in divesting from TNK-BP, has reportedly allocated $1.8 billion of that new liquidity to taking full ownership of OTH — of which he already controls a majority stake.
In that sense, the currently largest merger in the MENA and most significant inbound investment into the region by a wide margin appears to be an outflow of global M&A streams and may indicate that some assets in the Arab world are looking attractive because they may be undervalued.
There are many reasons why M&A matters, not least because it is generally viewed as a sign of economic vibrancy, but also because companies see opportunities to expand geographically, consolidate and streamline co-operational synergies with industry peers, or buy market share in quest for greater dominance. With regard to the region as a whole, the baseline figures may be positive but closer analysis suggests there are few signs that Middle Eastern markets are about to boom.