Saudi Arabia’s economic diversification to drive more M&A activity: interview

The outlook for mergers & acquisitions (M&A) in Saudi Arabia remains positive, driven primarily by the Kingdom’s economic diversification away from crude oil, Campbell Steedman, Managing Partner - Middle East, Winston & Strawn LLP, a global law firm, told Argaam in an exclusive.

Steedman spoke with Argaam on the sideline of Saudi Arabia M&A and Capital Markets Forum in Dubai today.

He said while the industrial sector remains at the top of the active sectors list in the Kingdom in terms of deal value, the financial services sector is likely to be another attractive sector for M&A going forward.

Here's the full interview with Campbell Steedman, Managing Partner, Middle East, Winston & Strawn LLP:

Q: Over the last year, M&A trends in Saudi Arabia and the Middle East have been quite robust. What are the factors pushing companies to go for acquisition/merger?

A: While, as a general perception, the appetite for PE transactions in the region remains dampened, and lower oil prices may weigh over economic growth across the region. The reality is that governments in the region are in need to diversify away from a reliance on the oil sector in order to drive economic growth, which is actually pouring some of the larger M&A activity in the region.

In this regard, the acquisition by Aramco of PIF’s interest in SABIC, and ADNOC’s engagement in a number of M&A mandates have significantly impacted regional M&A activity and have contributed to the robust levels of deal activity in the region. 

In addition, continued consolidation in the financial services sector has also contributed to levels of deal activity – in particular, when assessed by reference to deal value rather than number of transactions. 

Having said that, the number of transactions has also risen in the region – particularly by reference to intra-GCC transactions, where global trade issues and international political and economic tensions are driving a more domestically focused transaction trend. 

The other key driver in regional M&A is the increasing diversification of family businesses.

Q: Which are the most sought-after sectors in the Kingdom for M&A and who is winning – the acquirer or the acquired?

A: In terms of deal value, the industrial sector remains at the top of the active sectors list, with the acquisition of PIF’s interest in SABIC by Aramco dominating the market. 

Going forward, the financial services sector is forecast to be attractive, with both banking and insurance likely to see deal activity as consolidation in the sector continues.

In common with the wider GCC region, the F&B sector remains active, while PE and strategic investors retain a keen interest in the healthcare sector – in which interest is likely to grow as the Kingdom implements privatization in the sector.

As for who is winning, this will always vary on a transaction by transaction basis.

However, for the region to be successful, it is critical that both sides benefit from the M&A process – particularly as the over-riding model in the region is based around partial acquisitions, where parties need to work together post-acquisition for the transaction to be successful.

Q: What issues are companies currently facing in connection with synergies and post-merger integrations in Saudi Arabia and the wider Middle East?

A: Control is the key issue faced by business in the M&A process in the region. While legal control may flow transaction documentation (e.g. through acquiring a majority stake), effective post-acquisition control remains a challenge – particularly in family businesses, where there continues to be a reticence over ceding control to an outside investor. 

With an increased focus on attracting foreign direct investment to the region, there may also be increased challenges around cultural integration of target businesses, while the privatization process in the Kingdom may also throw up challenges for integration where investor and government objectives may not be completely aligned (e.g. in relation to private sector employment post acquisition).

Q: Is an attractive asset valuation a prime condition for acquisition in the Kingdom?

A: Asset valuation is always an issue in any M&A transaction. In the GCC, the mismatch of expectation between seller and buyer has been critical in restricting M&A activity.

However, recent transactions seem to indicate that the business synergies flowing from merger activity, together with greater alignment on valuation, is leading to greater transaction volume in the Kingdom.

Q: If so, isn’t increasing competition for M&A driving up valuations, therefore making the ROI on those investments harder and harder to obtain, not only in Saudi Arabia but across the Middle East?

A: While valuation expectations are becoming more realistic, there still remains a limited pool of investors in the region. As such, we are not seeing a substantive increase in competition for transactions, where business synergies also remain a highly relevant transaction driver.

Over time, I would expect to see increased competition (particularly as foreign direct investment levels), and this may impact ROI going forward.

Q: What is the outlook of M&A in Saudi Arabia going forward – will momentum continue?

I expect momentum to continue for a number of reasons:

- The need to diversify from oil dependency is a long-term driver for the economy and is likely to drive M&A activity in the future. In addition, as the economy diversifies, this in itself will lead to further transactional activity as further investment and merger activity continues in the non-oil sectors;

- The government in KSA is committed to growing foreign direct investments, which should stimulate further M&A activity from foreign investors; and

- The privatization program being undertaken by the Saudi government is expected to provide investment opportunities to both international and local investors – all of which will be reflected in increased M&A activity.

Write to Sunil Kumar Singh at sunil.kumar@argaamplus.com