GCC Investment Bankers (IB) should be
the most stressed lot! Too much work and too little rewards. The fee based
investment banking business has four key components going for it i.e.,
syndicated loans, equity capital markets, debt capital markets and Mergers and
Acquisitions (M&A). While in other markets we can witness activity across
the four components, in GCC the IB advisors solely depend on syndicated loans
for their survival. (On average 50% of total IB fees) Equity capital market is
dull thanks to poor performing capital markets and related dull IPO
environment. Debt capital market looks promising given the slew of activity
expected from sovereigns and corporates. However, the sticky point seems to be
M&A, which can be erratic and suffer from some idiosyncrasies.
The fallout of Global Financial
Crisis and the recent oil price crash has dented the stamina of corporates
leading to weaker balance sheets for many companies. The operating environment
has turned difficult with stagnating earnings and increased cost of capital. After
hitting peak of $70 billion in 2014, our research expects corporate earnings to
touch $62 billion for 2016. This should be a dream environment for M&A
advisors as difficult environment forces corporates to restructure, improve
efficiency and productivity, hive off non-core assets and concentrate on
strategic business. In other words, corporates need the help of M&A
advisors to do all this.
However, the value of announced
M&A transactions reached $18.7 billion during the first half of 2016, a
decline of 29 percent compared to the first half of 2015 and the slowest first
six months for deal making in the region since 2014 according to Reuters. What
can explain this conundrum?
GCC market is dominated more by
private companies than public companies. Scouting opportunities in the private
market is onerously difficult due to lack of transparency and family control.
This prevents deal flow even though there may be genuine need for M&A. Even
assuming healthy deal flows (cases where companies express interest to hive off
non-strategic units), the actual consummation of transaction can be low (poor
deal closures) as poor information can prevent meaningful negotiations and
conclusion of transaction. Take the case of Emaar Properties buying a stake in
Americana (Kuwait Food), a deal that was in the making for years with multiple
parties. There are several such examples like Etisalat ending talks with Zain,
Kuwait or EFG-Hermes agreement to create the largest Arab investment bank with
Qatar’s QInvest collapsing in 2013 after the deal didn’t get Egypt’s regulatory
approval.
GCC M&A environment is also characterised
by dominance of “mega deals”. Take the recent acquisition of Emaar Properties
chairman Mohamed Alabbar’s buying of 9.9% stake in Aramex or his recent
acquisition of a USD 2.36bn stake in Kuwait Food Company (Americana) along with
a group of investors or the recent merger of National Bank of Abu Dhabi (NBAD)
and First Gulf Bank (FGB) which is
expected to create a mega bank with total assets of around USD 171 billion
(only bettered by Qatar National Bank whose assets stand at USD 190bn) or the
celebrated Emirates Bank and National Bank of Dubai merger to form Emirates NBD
in 2007. Domination of such mega deals can “crowd out” other transactions and
can also create league tables (rankings of Investment bankers) that can look
very different and distorted from one period to another (making it difficult
for comparison).
How will things be going forward?
Given the low oil price environment,
corporate stress levels are bound to increase going forward. Need to
restructure, enhance productivity and efficiency and hiving off unnecessary
non-strategic assets will be pursued vigorously by private and public players. This
should certainly be good news for IB’s. Also, companies are unusually sitting
on very high levels of cash as measured by data available for publicly listed
companies. At the end of 2015, total cash levels reached nearly $250 billion
with financials (read banking) accounting for $155 billion. Hence, banking related
M&A transactions will continue to see action followed by energy and
telecom. “Mega deals” may continue to dominate the scene but given the oil
price impact across the board, representation from mid-level segments and SME’s
can also increase. This will help to improve the ratio of “pipeline to closure”
which should be good news for IB’s. Political climate will also play a role in
Mena ex GCC countries. Volatile political situation, large scale currency
fluctuations and lack of lending and underwriting experience in those regions
could increase the risk that could outweigh any potential gains and hence this
may shift the focus back to GCC.
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