MENA M&A Deals Down, But Companies Positive About Volume Growth – Report

Acquisitions are expected to make up a smaller portion of revenue growth value for the current fiscal year, but companies are upbeat about M&A volume growth, according to EY.

MENA acquisition values decreased by 36 per cent year-on-year in Q1 2014 but companies in the region reported a larger deal pipeline than global counterparts, according to a new report.

In its MENA Capital Confidence Barometre, Ernst & Young (EY) found that the total value of acquisitions in the region had dropped from $11.2 billion in Q1 2013 to $7.1 billion in Q1 2014.

The number of deals also dropped from 109 during Q1 last year to 90 this year.

“Due to boardroom agendas having an increased focus on cost optimisation and operational efficiency, MENA executives report that acquisitions are expected to make up a smaller portion of revenue growth value for the current fiscal year,” said Anil Menon, MENA M&A Leader, EY.

“MENA companies are, however, still overwhelmingly upbeat about the outlook for M&A volume growth over the next year, with 75 per cent expecting to see an improvement in M&A volume growth.”

Companies in MENA reported a larger deal pipeline than their global counterparts, with 38 per cent reporting five or more deals for the next year, compared to 15 per cent of global respondents.

Companies in the automotive, life sciences and mining and metals industries reported the highest appetite to acquire, with those in the oil and gas and power and utilities industries having less of an appetite.

Cash was found to be the preferred for of M&A financing for MENA companies with 69 per cent saying it would be their primary source, compared to 36 per cent globally.

Over half of MENA respondents (53 per cent) said they are confident in credit availability at the local level, equivalent to a year earlier and down from 59 per cent six months ago.

However, only 6 per cent of executives reported a decline in credit confidence, compared to 10 per cent six months ago and 12 per cent a year ago.

“MENA continues to demonstrate its prominence as a key liquid market where deal financing does not hold companies back when it comes to deal execution,” said Phil Gandier, MENA Head of Transaction Advisory Services EY.

EY found that corporate confidence in the global and local economies was at a two year high, with 61 per cent of respondents in the region saying the global economy is improving up from 32 per cent six months ago.

Nearly three quarters (74 per cent) of respondents also saw improvement in local economies, with only 3 per cent saying the economy was declining, down from 15 per cent six months ago and 14 per cent a year ago.

MENA executives were significantly more upbeat about local market conditions than they were in October, with 78 per cent positive about corporate earnings, a rise of more than 20 per cent. Three fifths (60 per cent) were found to be optimistic about equity valuations, the highest number in the past year.

“As a blend of frontier and emerging markets, MENA countries possess a number of unique advantages. Cash levels in MENA businesses continue to remain high, this coupled with a diminishing valuation gap between buyers and sellers could lead to more deal closures over the coming months. Additionally, many MENA companies have promising deal pipelines which could be a catalyst for more transaction activities,” said Gandier.