Bargain buys and law reforms tipped to drive deal-making

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• M&A activity set to remain buoyant, says law firm’s 2023 forecast
• Energy, infrastructure, healthcare and tech expected to dominate
• Value of deals with any Mena involvement hit $85.2bn in 2022

When Oman Qatar Insurance and Vision Insurance signed a merger pact in December, it rounded off a busy year of M&A activity in the Middle East.

The proposal, which is still subject to approval from regulators and shareholders, was one of hundreds of deals struck across the region. 

Global law firm Norton Rose Fulbright predicts that mergers and acquisitions activity will remain buoyant in the Gulf this year, driven by the energy, infrastructure, healthcare and technology sectors.

Norton partner Zubair Mir and counsel Shazi Askarpour said in a research report that M&A activity in 2022 was fuelled by sovereign wealth fund and government-related entity investments – “with neither showing any signs of slowing down”. 

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“Deal activity in the energy and infrastructure sector is expected to continue with green and renewable investments leading the way, alongside investments in large infrastructure projects to support the development of smart cities and giga-projects,” they added.

“While investors will proceed with caution, given the prediction of a global economic slowdown, we expect cash-rich sovereigns and [government-related entities] to take advantage of depressed valuations and possible distressed assets over the next 18 months.”

Norton Rose Fulbright also predicted that technology-related M&A would remain active throughout 2023. 

The region has launched several initiatives to support tech startups and is home to a number that are receiving increasing interest from foreign investors, according to Mir and Askarpour. This will drive deals in the tech sector.

“The region’s increasing openness to foreign investment and recent legislative reforms, particularly in the key growth markets of the UAE and Saudi Arabia, will be another factor contributing to a buoyant M&A market,” they said. 

The tax question

However, the Norton report said questions remained over how the Gulf’s evolving tax landscape will affect deals. Several states have introduced VAT and the UAE is set to introduce corporate tax this year. 

“The impact of tax legislation on deal-making and valuations is yet to be seen and will most likely only impact the market in the latter half of the year, or possibly not until early 2024,” said Mir and Askarpour.

Global political instability and the recessions forecast for some economies may cause businesses to revisit their strategies, which could stall investments in the early stages. 

However Norton added that it expects depressed valuations to play a major role in sparking M&A activity in late 2023.

“Despite the evolving geopolitical landscape, holistically, we expect M&A activity in the Middle East to remain positive, with the region’s foreign investment liberation and economic reforms playing a key role in attracting investors,” the report said.

The predictions come as Refinitiv’s investment banking analysis for 2022, published on Tuesday, showed that the value of M&A transactions with any Mena involvement reached $85.2 billion last year.

While this represented a 31 percent fall in value compared to 2021, the number of deal announcements rose by 6 percent to the highest full-year total since 1980.

Refinitiv added that the UAE was the most targeted nation in the region, followed by Saudi Arabia and Egypt.

Anil Menon, head of Mena M&A and equity capital markets leader at EY, said: “The increasing M&A activity is not just emanating from traditional markets such as the UAE and Saudi Arabia, but also from other countries across the Mena region, namely Egypt, Morocco, Oman and Qatar.

“Higher crude oil prices, combined with favourable regional government initiatives in attracting investments to the region, and Mena investors looking for futuristic investment opportunities in foreign markets, will be the major drivers of such activity in the region going forward.”

Watch the third in a series of short, engaging films about #TheRedSea that we created in partnership with Warner Bros. Discovery (@wbd). In this episode, we discuss how we're meeting the challenge of balancing the lighting needs of our guests with those of our wildlife. pic.twitter.com/kRNhvXNif9

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Last month corporate finance adviser Lumina, which tracks private company M&A transaction multiples across a range of sectors in the GCC, showed an overall increase from 6.2 to 6.6, as sectors such as manufacturing, oil and gas services and industrials showed strong levels of activity. 

Transaction multiples are a type of metric used to value a company. In an M&A deal, the valuation of a company is reached by various methods, including discounted cash flow and multiples.

Lumina pointed to significant plans for infrastructure spending in the region, saying consolidation in the construction and contracting sectors was “gathering pace”. 

In October, two of Saudi Arabia’s leading giga-project developers merged. The Red Sea Project and Amaala combined to form Red Sea Global, which is now the master developer for both tourism projects.