Region primed for a return of major M&A deals

Riding a wave of recent mergers and acquisitions activity in global markets, the Middle East, Asia and Africa are expected to follow suit as companies target consolidation and seek to broaden their business footprint.

Current economic conditions have lowered entry barriers and cash-rich companies now possess the opportunity to grow through acquisitions.

Increasing talk of M&As and announcements of multi-billion dollar deals have made investors take notice and have caused market rallies and helped stocks.

Major deals, talks and take-overs to make headlines in recent weeks include the possible acquisition of Kuwaiti telecom operator Zain by an Indian-Malaysian consortium, global bids by Kraft Foods for Cadbury, and Deutsche Telekom's joint venture talks with France Telecom for their respective British mobile operations, T-Mobile and Orange.

As the deals return, growing corporate dialogue will restore confidence in the economy and more deals are expected, said Dr Mubashir Sheikh, Chairman and CEO of investment bank MAS ClearSight, in Dubai.

"Merger and acquisition waves become an active reality of life under two economic conditions: One, where the growth in the economies are heated and companies are flush with liquidity. Second, when the growth in the economies is threatened by recession and companies are starving for liquidity.

"Today growth is being challenged by liquidity and recessionary forces are at play.

"European and American economies are struggling a lot more than the Middle Eastern and Asian economies. We are indeed in a wave of M&A activities where we expect to see companies and businesses engage in vertical and or horizontal M&A activities," said Sheikh.

In this region, the biggest M&A deal to be announced this summer – excluding a proposed merger of Emaar Properties and three of Dubai Holding's developers – is the possible acquisition of a 46 per cent stake in telecom giant Zain by Vayasi Telegence, which comprises India's Bharat Sanchar Nigam (BSNL), Mahanagar Telephone Nigam and Malaysian investor Syed Mokhtar Al Bukhary.

Valued at $13.7 billion (Dh51.4bn) the deal is a rare example of foreign buyers investing in this region. However, BSNL said it was still considering joining the Vayasi-led consortium.

"We are still looking at it," said BSNL Chairman Kuldeep Goyal. "They [Vavasi] are a small company. But if they have an exclusive tie-up with Kharafi, then that point is going in their favour," Goyal said. The Kharafi Group holds an estimated 20 per cent stake in Zain.

Inviting small investors to take part in the Kharafi's consortium to sell shares is a positive move, but ambiguity is still surrounding the deal and potential buyers, Credit Suisse analyst Richard Barker said.

"The drawback is it is not clear to me that there is actually a funded buyer. There is some significant doubt about the involvement of BSNL," he said. "Without BSNL, it's not clear that the buying consortium has something in place to complete the deal. That's the biggest issue."

In Saudi, dairy firm Almarai has been diversifying its revenues through acquisitions and has earmarked SR6bn (Dh5.8bn) for investments to expand outside the Gulf.

This week, Almarai's $253.2 million cash and stock bid for Hail Agricultural Development (Hadco) got regulatory approval, leaving the merger's fate up to shareholders. A conclusive end to the bid would give the Saudi stock exchange, the Arab World's largest, its first takeover involving listed companies.

Outside corporate M&A activity, a merger between Dubai's top stock exchanges, Dubai Financial Market and Nasdaq Dubai, is a possibility, Emirates Business learnt this week.

"Under a consolidated approach, because Borse Dubai owns both DFM and Nasdaq Dubai, the merger can be looked into," said Abdulla Al Awar, CEO, Dubai International Financial Centre Authority. "There isn't, to the best of my knowledge, any official talks. But one thing is for sure, when we develop strategies we will be in close contact with Borse Dubai, Nasdaq Dubai and our regulators, Dubai Financial Services Authority, to make sure that the proposition of the UAE is a good one," he said.

"Consolidation is to be expected in the financial sector locally and regionally," said ClearSight's Sheikh. "The local market for consolidation will be driven by enhancing the quality of balance sheets in terms of reserve requirements."

Activity will be rife in sectors hit hardest with firms now available at low valuations for potential acquirers.

"The phenomenon we call 'fire sale acquisitions' will be more in play. In the Middle East, real estate and infrastructure-related businesses have been affected in a significant manner and hence will invite potential acquirers in the region who are cash rich. It will also attract foreign acquirers who see a clear value addition in their business by acquiring the distressed regional firms," said Sheikh.

Sell side deals for M&A in the region are expected to remain low as most businesses are not listed and tightly held ownership structures give uninvited acquirers limited to zero access to such companies.

On the buying side, a large number of deals are expected to go through in the next two years as the region still holds greater liquidity. The drive is to look for fire sales valuations and regional companies with growth ambitions are poised to strategically look for assets in the West.

Markets can thank Kraft Foods for its surprise £10bn (Dh60.3bn) bid for Cadbury which took the FTSE 100 past the 5,000 level – its highest in nearly a year – and encouraged other majors to reveal their M&A plans.

Kraft launched its cash-and-share bid for Cadbury on September 7 which was initially worth 745 pence a Cadbury share, or £10.2bn, but the fall in Kraft shares and a weaker dollar has cut this to 709 pence, or around £9.7bn.

Cadbury immediately rejected the bid as undervaluing the group, and Cadbury Chairman Roger Carr said it was an "unappealing prospect" being absorbed into Kraft's "low-growth conglomerate business".

Even billionaire investor Warren Buffett, whose Berkshire Hathaway is Kraft's largest shareholder, echoed the sentiment saying: "Kraft has a lot to do to justify the price offered for Cadbury."

Cadbury's CEO Todd Stitzer is now preparing to defend the company against the bid from US food giant Kraft and is looking to effectively enforce a 'Vision for Action' plan by 2011, after which he was confident of growth.

In the three months to August, global M&A rose 29 per cent compared to the preceding three months. In the second quarter, M&A was up 15.2 per cent compared to the first quarter.

The action is "a sign that corporations are seeing value in the market and usually there is a spillover rainbow effect from increasing M&A activity", said Fred Dickson, Market Strategist at DA Davidson in Oregon, the US. "We went so long without much, that investors will start thinking there will be more."

The S&P 500 hit its highest level since October 2008 on Wednesday after a spate of M&A announcements, led by Adobe Systems, the maker of Photoshop and Acrobat software, which announced it would buy software maker Omniture for $1.8bn.

Other major mergers announced include Japanese high-tech makers NEC, Hitachi and Casio's decision to merge their mobile phone businesses in a bid to improve profitability. American Airlines is expected to team up with British Airways and Qantas Airways to expand their alliance with cash-strapped Japan Airlines. (With agency inputs)

 

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