GCC M&A expects 20% increase in volume this year: Report

With main bulk of activity of mergers and acquisition (M&A) is expected to be seen in Saudi Arabia, Gulf-based M&A specialists are forecasting an increase in GCC deal flow volume of around 20 per cent in 2011 over 2010, according to the 2011 Middle East M&A Barometer.

The survey polled 30 investment bankers from international, regional and local investment banks for their views on M&A growth, country and sector focus. The survey also uncovers the drivers and barriers that bankers believe will influence M&A activity in 2011.

The main bulk of activity is expected in Saudi Arabia’s mid-market sector, as regional economies take their cue from strong international oil prices and increased business optimism. Bankers also hope to see some much needed consolidation in the GCC banking sector underway in 2011 as buyer-seller valuation mismatches start to decline.

Nicholas Lunt Managing Director M Communications

“Our previous M&A Barometer survey conducted during the spring of 2010 revealed a widespread sense of optimism among bankers who believed that 2010 was going to be the year when this sector of the economy finally bounced back. It would seem that this was a little premature,” said Nicholas Lunt, Managing Director at M:Communications. “Whilst there is a sense of hope looking forward into 2011, with 70 percent of our participants saying that M&A budgets will grow in 2011, the mood is much more measured this year.”

“Although there are still a number of big ticket deals in the pipeline, it is activity in the mid market led by family businesses that is expected to rise rapidly and act as a driver,” said Youssef Saada, Head of Financial Research at Zawya. “Especially in Saudi Arabia, bankers are expecting to see a lot of activity in the mid market, boosted by the $155 billion annual budget recently announced by the government, and which will be aimed at improving infrastructure projects across the Kingdom. Having said that with the recent political development that rose in North Africa and might be spreading, these deals might remain in the pipeline till 2012 when the region is likely to have regained its political stability.”

The 2011 Barometer illustrates that there have been some clear changes in bankers’ opinions since the 2010 survey was conducted a year ago. Among these is the significant increase in expectations that Qatar will drive M&A volumes – mentioned now as a primary driver by 30 per cent of bankers compared with 12 per cent in 2010. Other changes see Egypt emerging as an important driver for Middle East M&A activity in 2011, although in light of the ongoing events there it must be doubtful whether this will now be the case. Sector-wise, financial services have emerged as a clear sector leader for 2011 activity. In 2010, predictions were spread evenly across healthcare, energy, telecoms and financial services.

Other developments such as Qatar’s winning World Cup bid is also expected to generate activity as companies across the region seek to take advantage of the massive developments due to take place there.

Middle East-based bankers see regional sovereign wealth funds becoming even more aggressive in acquiring high profile stakes oversees in 2011. However, intra-regional M&A is expected to outpace outbound international investments as Middle East companies increase their focus on market extension in the mid-market. Increased divestments are seen as a key driver for the M&A sector, possibly signaling a bottoming out of the market.

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