GCC region M&A blazes trail as global deals decline

The GCC’s economies remain somewhat insulated from soaring inflation and high interest rates and have shown signs of resilience amid mounting global economic slowdown concerns. The region has benefitted from a rally in oil prices and economic diversification as governments press ahead with their national visions.

These developments have made countries such as the UAE, Saudi Arabia and Oman very attractive locations for foreign direct investments (FDI), alongside private equity investments and sovereign wealth funds.

“In a global context of a liquidity squeeze and rising interest rates, the GCC is one of the few economic zones globally that are still enjoying healthy economic growth – for instance, Saudi Arabia posted the highest GDP growth last year among the G20, driving up investor confidence,” remarks Aurelien Vincent, partner at Strategy& Middle East.

“Beyond this cyclical reason, however, we see a couple of more structural and longer-term forces propelling the investor confidence in the region.”

With more than $3.7tn in projected total assets under management (AUM), according to Global SWF, GCC sovereign wealth funds are using their wealth to diversify regional economies.

“Sovereign wealth funds such as Abu Dhabi Investment Authority (ADIA) and Mubadala from the UAE and Saudi Arabia’s Public Investment Fund (PIF) continue to lead the deal activity in the region to support their countries’ economic strategies,” global consultancy firm EY said in August.

These state investors continue to lead deal activity at home and abroad and have broadened their investments in various sectors including healthcare, technology and hedge funds. Yet the vast pools of GCC capital remain untapped.

Without the constraints that face other global firms, the region’s wealth funds are expected to keep spending despite the global growth concerns. Investment bankers and dealmakers in the GCC expressed optimism that the gradual recovery of the regional economies will restore CEOs’ dealmaking confidence, with the UAE and Saudi Arabia remaining top investment destinations due to the structural reforms that continue to attract investments.

Though mergers and acquisitions (M&A) volumes in the GCC declined, the region is in dramatic contrast with the US, Europe and China, where deals have succumbed to higher interest rates and recession fears.

George Traub, the managing partner at Lumina Capital Advisers, cautions that key challenges remain, including perceived in-region risks, availability of financing, and access to acquisition and joint venture targets of a sufficient scale.

However, he notes that this is offset by the potential higher growth and risk/return profile, making the region high on the agenda of international boards as one of the key markets of expansion.

Global M&A activity in the first nine months of 2023 plunged by 29 per cent year-on-year to $2.1tn, according to capital markets data provider ION Analytics, driven by high interest rates, poor economic outlooks, and a tougher antitrust environment.

A golden age

The GCC countries’ deep-pocketed sovereign funds are deploying billions of dollars to expand their global reach and deepen their foray into global markets through diversified sectoral buys.

The wealth funds have largely benefited from external surpluses generated by the latest oil revenue windfall, which has armed them with the capital to make strategic buys in advanced economies, mostly in the US and Europe, including the UK.

“The pipeline across the buyer universe strategics, sovereign funds and financial sponsors remain strong, but with an enhanced focus on integration synergies and value creation,” said Faisal Shaikh, managing director and regional head of Corporate Finance at Alvarez and Marsal.

“Inorganic growth via acquisitions is very much in vogue with strategic buyers as a means of fast-tracking market share growth, extracting synergies, and accessing talent.”

The region’s state investors, from Riyadh to Doha, are bankrolling some of the world’s biggest acquisitions and investments – and show no signs of pulling back.

S&P Global Market Intelligence said investments in large advanced economies and prominent emerging markets will likely continue in the medium term while noting that GCC sovereign funds will recycle part of the petrodollar inflows in peer Middle East and North African (MENA) economies.

PIF has made several investments in the gaming industry over the year, by acquiring stakes in Japan’s Nintendo to become its largest foreign shareholder with an 8.6 per cent stake, Chinese e-sports company VSPO, and US-based Scopely in a $4.9bn takeover deal.

In June, the Saudi Arabian wealth fund committed to inject capital into the newly agreed-to golf company aiming to unify the game of golf and merging the PGA Tour and DP World Tour and PIF-owned LIV Golf. PIF will initially be the exclusive investor in the new company. Electric carmaker Lucid Group, which is majority-owned by PIF, said in June that the fund agreed to inject a further $1.8bn in a private placement.

“Our analysis showed that during the first half of the year, the UAE, Saudi Arabia, and Egypt were at the centre of deal activity in the Middle East,” reveals Romil Radia, deals markets leader, PwC Middle East.

“Robust expansions of non-oil sectors in the Middle East have effectively offset the impact of decreased oil revenues, showcasing moderate growth in the second half of 2023 and ensuring a resilient GCC economy,” adds Radia.

Across the border in the UAE, Abu Dhabi is one of the world’s most prominent cities when it comes to sovereign wealth management.

ADIA has been making headlines in 2023. It acquired a stake in India’s Adani Enterprises $2.5bn secondary share offering. The fund agreed to invest $597m in Indian group Reliance Industries’ retail arm, Reliance Retail Venture, in October.

The fund partnered with Swedish fund EQT in the second quarter of the year to jointly acquire UK’s Dechra Pharmaceuticals in a deal valued at $5.6bn (EUR4.5bn).

The Abu Dhabi-based fund holds a 26 per cent shareholding in the veterinary pharmaceuticals firm while the Swedish fund owns the remaining 74 per cent stake. ADIA also joined a consortium of investors in July to buy a portfolio of 27 Japanese hotels from Daiwa House Industry for $900m amid a continued recovery of the global tourism sector.

Similarly, Mubadala is making huge bets on computer software, hardware and biopharmaceuticals. The sovereign fund agreed to buy a majority stake in US-based Fortress Investment Group, a credit and asset investor in May.

In April, Mubadala became an anchor investor in a $630m listing of India-based Cube Highways Trust, an infrastructure investment trust, along with a Canadian pension investment manager.

Furthermore, ADQ has emerged as one of the region’s most active dealmakers, making strategic acquisitions to build companies that are leaders in their industries locally or regionally.

The fund, the smallest of Abu Dhabi’s three main sovereign wealth funds, partnered with Canada’s Bank of Montreal (BMO) in June to jointly acquire minority equity stakes in Sagard – a global multi-strategy alternative asset management firm with $14.5bn assets under management.

ADQ also signed two memoranda of understanding to finance up to $8.5bn of Turkey earthquake relief bonds and $3bn in credit facilities to support Turkish exports in July. GCC wealth funds have been recently increasing their investments in professional sports across the world.

Qatar Investment Authority struck a deal in July to buy a stake in Monumental Sports & Entertainment – the parent company of the NBA’s Washington Wizards, NHL’s Washington Capitals and WNBA’s Washington Mystics. The Qatari fund also invested $1bn in billionaire Mukesh Ambani’s Reliance Retail in August.

Elsewhere in the region, Bahrain’s Mumtalakat purchased a further stake in carmaker McLaren from PIF and Ares Management in June for $510m (GBP400m).

New rising stars

Oil-rich GCC countries are also channeling more international deals through state-backed entities, as part of their broader economic diversification.

Together with billions of dollars of sovereign investments, state-run companies in the UAE and Saudi Arabia – the majority of which are also backed by sovereign funds – have been involved in at least $50bn in deals this year across sectors from telecommunications to renewables and gaming, according to Bloomberg.

Anil Menon, EY MENA head of M&A and equity capital markets leader says the primary drivers for regional M&A are continuing activity by government-related entities and sovereign funds, technology reshaping business models and portfolio optimisation by large regional merchant corporates.

“As long as high oil prices and government spending plans continue, the GCC continues to be a major focus of internationals.”

Earlier this year, Saudi Aramco raised its multi-billion-dollar investment in China by finalising and upgrading a planned joint venture, Huajin Aramco Petrochemical Company, in northeast China and acquiring a 10 per cent stake in petrochemical group Rongsheng Petrochemical for $3.6bn (SAR784bn).

ION Analytics projected that the internationalisation of the Chinese yuan currency will likely spur M&A deals in China ranging from oil and petrochemical sectors to technology.

In October, Aramco said it is in talks to buy a 10 per cent stake in Shandong Yulong Petrochemical Company – a deal that will further boost the state oil giant’s investments in the world’s second-biggest economy.

The company also forayed into the global LNG market through a minority stake in EIG Partners’ MidOcean Energy for $500m and entered the South American market by acquiring a 100 per cent equity stake in Esmax Distribusción (Esmax).

Saudi Arabia’s state mining giant, Maaden and PIF jointly invested $2.6bn for a 10 per cent shareholding in Brazilian miner Vale’s multibillion-dollar nickel and copper operations in June. The deal gives Saudi Arabia an interest in mines from Indonesia to Canada.

AviLease, an aircraft leasing company owned by PIF, also bought Standard Chartered’s aviation finance business for $3.6bn in August. The Saudi Arabian jet lessor acquired a portfolio of 100 narrowbody aircraft and became a servicer for another 22 jets.

In Abu Dhabi, Pure Health – majority owned by ADQ – bought one of the UK’s largest independent hospital operators in August for $1.2bn (Dhs4.41bn). The transaction marked the healthcare firm’s foray into the UK and is part of its global expansion programme, which includes acquisitions in the US.

PureHealth also completed its more than Dhs1.8bn equity investment in US healthcare provider Ardent Health Services in May.

On the technology front, Abu Dhabi’s G42 is driving large-scale digital transformation initiatives in the UAE, Middle East region and beyond. The artificial intelligence firm acquired a $100m plus stake in Tiktok parent company ByteDance, valuing the firm at $220bn.

Bespoke joint venture arrangements are an increasingly common sight across MENA and are expected to become even more popular moving forward. G42 is no stranger to the trend, as the firm is teaming up with international partners including Microsoft and Dell Technologies to get deals done.

“The GCC represents a rare bright spot for internationals in certain sectors that are seeking growth markets with ambitious infrastructure spending, population growth goals, and an influx of skills and talent – against a backdrop of geopolitical issues and weak growth in Europe and Asia,” says Traub.

Furthermore, AD Ports Group completed its $722m (Dhs2.65bn) acquisition of Spain-based logistics services provider Noatum in July, as the Abu Dhabi-listed logistics giant looks to expand globally. Noatum’s acquisition is among a string of deals that the company executed this year in a bid to become a more diversified, integrated logistics company.

The ports operator signed a 50-year concession agreement with Karachi Port Trust in June to operate and develop the Karachi Gateway Terminal, berths 6 to 9 at Karachi Port.

The shipping and logistics group also signed a 30-year concession agreement worth $200m in March to develop, manage and operate the Egyptian multi-purpose terminal in the Red Sea port of Safaga.

The shift in the dealmaking landscape highlights how GCC countries are seeking to fulfil their growing international ambitions while creating top global companies amid limited expansion opportunities at home.

Drivers of fast-paced growth  

The M&A market in the first six months of the year was consistent with the trends observed during the same period a year ago. Global constancy firm EY said the MENA region registered a total of 318 M&A deals valued at $43.8bn in the six months to June 30.

The GCC region accounted for the majority of deals with 254, valued at $42.5bn. Compared with H1 2022, deal volume during this period was down by 14 per cent, while deal value saw a slight increase of 0.4 per cent.

“A major theme in the region is companies and wealth funds seeking to create end-to-end platforms that serve customers across the value chain, whether in the healthcare, logistics, retail and consumer, or TMT space,” says Shaikh.

“We see the consolidation being followed by several sovereign funds in the region to enhance both the performance of their investments as well as improve the service offerings to their populations.”

“The need for transformational change is greater than ever, as businesses are under increased pressure to demonstrate growth and innovation, along with shareholder returns.

In the current environment, value creation will need to consider enterprise-wide transformation that may include changes in operating models, digital transformation and partnerships,” notes Radia.

While deals continued notwithstanding the dampened economic outlook, high-interest rate, recession fears, inflationary environment and geopolitical tensions, deal-makers seemed to be adopting a cautious approach given the uncertain market conditions.

Earlier in February, Saudi Arabia’s wealth fund bought stakes worth as much as $1.3bn in four local construction companies, including Nesma & Partners Contracting Company and AlBawani Holding Company, as part of the kingdom’s efforts to scale up capacity in the sector and improve supply chains.

PIF also agreed to acquire a 30 per cent stake in Tamimi Markets Company, one of Saudi Arabia’s biggest grocery chains and is set to create a steel behemoth following the acquisition of the metals unit of chemicals maker Saudi Basic Industries Corporation (Sabic) for $3.3bn in September.

In the UAE, Aldar Properties’ property and facilities management subsidiary, Aldar Estates, acquired FAB Properties, bringing its residential units under management to 157,000 together with facilities management contracts valued at an estimated Dhs2.5bn.

In October, Abu Dhabi’s Agtech firm Silal acquired a majority stake in the UAE’s food and beverage distributor, SAFCO Group, a deal that is expected to bolster the company’s market presence and expand its footprint in the food service and distribution industry.

“The GCC M&A market will continue to be active notwithstanding the dampened global economic outlook –evidenced in the M&A deal books for all regional actors,” adds Menon.

Meanwhile, Canada’s Brookfield Asset Management agreed to acquire Dubai’s Network International Holdings in June in a deal that is valued at around $2.8bn, as the investment firm seeks to bolster its presence in the GCC region’s payments sector.

Brookfield sees a strategic and industrial logic in pursuing a potential merger of Network and Magnati, a combination that is expected to potentially create a key platform in the attractive Middle East payments sector.

The UAE dominated the lists of target countries as well as bidder countries by value last year, followed by Saudi Arabia and Kuwait. Egypt and Oman also made it among the top five bidder countries, while Bahrain and Qatar made an appearance among the top five target countries by value.

For the time being, the GCC region continues to have much to offer corporates and financial investors in pursuit of M&A and is increasingly opening its doors to foreign direct investment and growing more diverse in the number and types of deal opportunities that are available.

Read: UAE’s Bayanat and Yahsat agree potential Dhs15bn merger