What will drive the next round of dealmaking in Middle East?

M&A has proven more resilient than in the overall global market
M&A has proven more resilient than in the overall global market
M&A activity in the Middle East has proven resilient, but what more can be done to help drive near-term dealmaking? BCG Partner Samuele Bellani explains

The last year has proven quite the dealmaking desert.

As the world faces persistent core inflation, rising interest rates, and greater geopolitical tensions than those over the past two decades, deal volumes have continued to slide.

For the Middle East, however, M&A has proven more resilient than in the overall global market, according to BCG's Global M&A report, now in its 20th edition.

The region’s sovereign wealth funds and state-owned entities have been especially active, while economic diversification and enhancement of digital competencies is helping to drive near-term dealmaking.

Mega-deals fuelled record levels of Middle Eastern M&A activity in 2019, and the dealmaking momentum continued into the first half of 2020.

Since then, the market has experienced lower, albeit average, levels of activity, according to Samuele Bellani, Managing Director and Partner at BCG, based in Dubai.

Bellani says deal values in the first half of 2023 were similar to those in the first half of 2022, compared with a 45% decline globally. In contrast, deal volume in the first half of 2023 declined by 22%, versus a 15% decline globally.

“The region's M&A activity in the second quarter of 2023 was much stronger than in the first quarter, propelled primarily by larger deals.”

Big deals in key sectors

Despite the prevailing market headwinds, Middle Eastern energy, chemicals, and technology sectors have remained relatively active in 2023. This is especially true with regards larger deals.

Bellani points to Middle East oil and gas players, like Abu Dhabi’s ADNOC and Saudi’s Aramco, which are leveraging M&A to expand globally and move further into downstream businesses.

There was ADNOC’s announced acquisition of a 30% stake in the Absheron Gas Field in Azerbaijan from the State Oil Company of the Azerbaijan Republic and TotalEnergies, extending the oil giant’s global reach.

While for Aramco, the acquisition of a 10% interest in China-based Rongsheng Petrochemical Co. for $3.4 billion, and acquisition of Chile’s Esmax Distribusción marks a greater shift into downstream businesses, like oil refining and retail.

Similar trends are taking place in the chemicals industry, according to Bellani. “Aramco acquired Valvoline Inc’s US-based global lubricant products business for $2.7 billion, and ADNOC is reportedly in discussions with the German chemicals company Covestro to explore a potential acquisition valued at more than $10 billion,” he says.

While in technology, Brookfield Business Partners, a private equity firm, has acquired UAE-based Network International in a deal valued at $2.7 billion – as it looks to expand its payments business in the MEA region.

Bellani points out that while private equity and VC firms have experienced a significant decline in global deal activity since the beginning of 2022, Middle Eastern sovereign wealth funds, along with the companies they support, bucked this trend.

“Armed with substantial capital and liquidity, they are investing across various regions, sectors, and themes. These firms have adopted varied, long-term strategies to diversify in directions other than simply those involving natural resources and to support the growth of their national economies.”

Deal-making outlook and drivers 2024

Owing to current geopolitical uncertainties, the outlook for the M&A market in 2024 globally is certainly hard to predict. That said, the fundamental drivers of M&A activity remain intact – and according to BCG, dealmakers have returned to the negotiation table, which bodes well for a pickup in 2024.

“We’re relatively optimistic about the outlook for 2024, as deal activity shows promising signs of recovery,” says Jens Kengelbach, BCG’s global head of M&A.

In the near-term, major support for dealmaking will come from the abundance of available capital held by sovereign wealth funds, private equity and VC investors – as well as some large companies. 

“Challenges for dealmakers remain — in particular, a higher cost of capital, which will push companies to consider large or transformational deals with an even higher level of scrutiny. This could mean pursuing acquisitions, divestitures, and sometimes a combination of the two in order to bolster growth and reshape businesses.”

Globally, ESG and digitisation will continue to promote dealmaking across most sectors in the medium and longer terms. 

In the Middle East region, in particular, efforts to diversify economically and to enhance digital competencies will drive near-term dealmaking, according to Bellani.

Economic Diversification. Companies and governments must invest to diversify the region's economy away from its longstanding dependence on oil and natural gas production.

Digital Competencies. The pressing need to enhance digital and technological competencies, especially in view of the looming disruptions posed by generative AI, will motivate acquisitions to secure necessary capabilities.

“From the perspective of sellers, strategic portfolio reviews will lead to corporate divestitures and initial public offerings (IPOs), as investors and companies seek to monetise some of their investments and redirect the funds toward other growth opportunities,” he says. “IPOs also serve the strategic purpose of developing local capital markets.”

ADNOC leveraging M&A to expand globally and move further into downstream businesses

Bellani points out that while private equity and VC firms have experienced a significant decline in global deal activity since the beginning of 2022, Middle Eastern sovereign wealth funds, along with the companies they support, bucked this trend.

“Armed with substantial capital and liquidity, they are investing across various regions, sectors, and themes. These firms have adopted varied, long-term strategies to diversify in directions other than simply those involving natural resources and to support the growth of their national economies.”

Deal-making outlook and drivers 2024

Owing to current geopolitical uncertainties, the outlook for the M&A market in 2024 globally is certainly hard to predict. That said, the fundamental drivers of M&A activity remain intact – and according to BCG, dealmakers have returned to the negotiation table, which bodes well for a pickup in 2024.

“We’re relatively optimistic about the outlook for 2024, as deal activity shows promising signs of recovery,” says Jens Kengelbach, BCG’s global head of M&A.

In the near-term, major support for dealmaking will come from the abundance of available capital held by sovereign wealth funds, private equity and VC investors – as well as some large companies. 

“Challenges for dealmakers remain — in particular, a higher cost of capital, which will push companies to consider large or transformational deals with an even higher level of scrutiny. This could mean pursuing acquisitions, divestitures, and sometimes a combination of the two in order to bolster growth and reshape businesses.”

Globally, ESG and digitisation will continue to promote dealmaking across most sectors in the medium and longer terms. 

ESG-related dealmaking continues to grow globally

In the Middle East region, in particular, efforts to diversify economically and to enhance digital competencies will drive near-term dealmaking, according to Bellani.

Economic Diversification. Companies and governments must invest to diversify the region's economy away from its longstanding dependence on oil and natural gas production.

Digital Competencies. The pressing need to enhance digital and technological competencies, especially in view of the looming disruptions posed by generative AI, will motivate acquisitions to secure necessary capabilities.

“From the perspective of sellers, strategic portfolio reviews will lead to corporate divestitures and initial public offerings (IPOs), as investors and companies seek to monetise some of their investments and redirect the funds toward other growth opportunities,” he says. “IPOs also serve the strategic purpose of developing local capital markets.”

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