Smaller strategic deals to lead sustainable MENA M&A growth: EY

• Q3 MENA M&A deal activity up by 17% while deal value dips 47%
• More than half of the MENA respondentsexpect their company to pursue an acquisition overthe next 12 months, according to the latest EY Capital Confidence Barometer
• Consumption-led sectors such as real estate, construction, consumer products and diversified industrials dominate deal activity

Dubai, 24 November 2014:According to EY’s MENA Q3 2014 M&A Update, deal activity increased by 17% in Q3 2014, where 109 deals were announced compared with 93 deals in Q3 2013,. Announced deal value in MENA decreased by 47% from US$17.5b in Q3 2013 to US$9.3b in Q3 2014, indicating a preference for smaller strategic deals.

EY’s latest MENA Capital Confidence Barometer (CCB) highlighted that the increaseddeal volume is expectedto continue as more than half of the MENA respondentsexpect their company to pursue an acquisition overthe next 12 months.

Phil Gandier, MENA Head of Transaction Advisory Services, EY says: “MENA executives continue to be upbeat about localmarket conditions. Outlook for corporate earningsis strong, with 81% of CCB respondents confident about betterfinancial performance for local businesses. The biggestjump was seen in the outlook for credit availability, whichrose from 53% to 70% over the last six months. Regionalbanks are expected to report higher earnings supportedby lower provisions and strong loan growth. Rapid expansion is anticipated next year, in line withhealthy economic activity driven by robust governmentspending and non-oil private sector growth.”

Domestic and outbound deal value falls in Q3 2014
Domestic and outbound deal value decreased by 70% and 59% respectively, while inbound deal value rose by 16% in Q3 2014 compared to the same quarter last year. However, domestic deal activity saw an increase of 59%, while inbound and outbound deal activity dropped compared to Q3 2013.

“Contrary to global trends, bolt-on acquisitions may not make up the larger portion of revenue growthin the MENA region. Although this year has seen an increase in confidence and deal-making, executivesare more cautious in their approach. The decrease in both domestic and outbound deal values in Q3 2014 indicates that MENA executives are prioritizing organic growth, even as bolt-onacquisitions remain in their plans. Businesses are not planning acquisitions at the expenseof organic growth, but they expect to do deals that are aligned to their strategy,” comments Phil.

High activity in consumption-led sectors
Consumer products, asset management and real estate were the leading sectors in terms of domestic deals in Q3 2014. International investors looked to the oil and gas, diversified industrial products and consumer products sectors for investment opportunities within MENA. For outbound deals, oil and gas, diversified industrial products, real estate and provider care sectors dominated Q3 deal activity.

“Deal activity has increased in consumption-led sectors such as real estate and construction, consumer products and diversified industrials. Looking ahead, mid-market deals in consumption led sectors will continue to dominate the M&A landscape in the GCC in the future,” said Anil Menon, MENA M&A Leader, EY.

Investment into new markets
According to the survey, 85% of MENA businesses will focus on expanding theircore offering into new markets and are also increasinglyconfident about addressing the challenges to deal-makingsince last year.

“The top three drivers impacting M&A strategy overthe next 12 months in the MENA region includemoving into new geographical markets, reducingcosts and improving margins, and access to newtechnology and intellectual property. MENA businessesare looking to achieve growth within core businessesand are beginning to look at a range of transactiondrivers, but businesses continue to take less risky optionswhen acquiring assets,” says Anil.

Expectations of changes in deal pipeline are highlypositive, with 79% of MENA respondents expectingit to grow, up from 39% in April 2014.

“Executive optimism remains high due to the expectation of strong corporate earnings,easy credit availability and market stability. In addition, the strength of deal pipelines and risingcapitalmarket activity continue to provide a positive outlook for liquidity in the markets.MENA businesses will focus on expanding their core offering into newmarkets, thus adopting a less risk-averse approach to expansion. Organic growth throughcomplementary acquisitions is likely to be the theme for the region’s growth story over the coming year,” concludes Phil.

The CCB is a regular survey of senior executives from large companies around the world, conducted by the Economist Intelligence Unit (EIU). It gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their capital agendas.