Riyadh – Mubasher: The merger and acquisition (M&A) activity is an important aspect of investment in Saudi Arabia, particularly with the launch of the National Transformation Program and Saudi Vision 2030.
Like the case with other sectors, the M&A activity was negatively impacted by the coronavirus pandemic. In an interview with Mubasher, Managing Partner at ARKAD Advisors, Mustapha G. Boussaid, observes the most notable developments and future of the M&A activity in Saudi during the new normal.
Over the second half (H2) of the first quarter (Q1) of 2020, the Saudi M&A space was one of the highly active sectors across the Middle East and North Africa (MENA) region and South Asia.
Boussaid expected the local M&A market size in Saudi Arabia to reach $1.2 billion during 2021, excluding initial public offerings (IPOs) and milestone deals such as Saudi Aramco’s recent acquisition of a 70% stake in the Saudi Basic Industries Corporation (SABIC) for SAR 259.1 billion ($69.1 billion).
Moreover, he predicted the Vision 2030 will create abundant opportunities, a situation that will elevate the kingdom’s position to become one of the most active markets in terms of the M&A space, which represents almost two-thirds of yearly deal flows.
In addition, the In-Kingdom Total Value Add (IKTVA) programme, which aims to boost the Saudi energy sector competitiveness, was created by Saudi Aramco and is now supported by various bodies like Dussur and Nusaned. This encourages all international firms yearning to invest and work in the Saudi market to conclude cooperation agreements and strategic alliances and enter into M&A deals with Saudi corporates.
Furthermore, he remarked that the limited bank liquidity is a source of concern and it negatively affects consumer spending and deals’ conclusion. Recently, the Saudi Arabian Monetary Authority (SAMA) injected SAR 50 billion into the banking sector. Though this is an encouraging step, Boussaid recognised the need to pump cash in the M&A sector, purchase, and leverage operations as well.
The consumer sectors lead the M&A transactions in the kingdom, and this is mainstream in the middle market. Local deals and direct foreign investments mainly target healthcare, education, and electronic commerce (e-commerce) spaces, with the latter acquiring the lion’s share of M&A operations over the past five or six years.
On the COVID-19 crisis, Boussaid said the pandemic and tumbling oil prices negatively impacted the M&A operations in the kingdom. Some deals that were in an active negotiation stage were suspended due to negative sentiments and the economic impact on the target company, not to mention the sudden virtual freeze of all banking liquidity available to finance acquisition operations.
He continued, “Since its outbreak, the COVID-19 pandemic has hit hard various sectors, pushing offer providers to claim the 'important negative effect' provisions in their offer letters as a reason to cancel deals at the last minute.”
On a more positive note, reverse earnout reemerged as an approach to fix the current challenges. This mechanism allows the purchaser to receive part of the paid price in case the performance of the acquired business weakens or deteriorates. According to Boussaid, this represents a major transformation from the traditional pricing structure, earnout, which usually rewards vendors if the invested-in company made certain achievements in gains.
Towards 2021, investors will look at a clear vision, concerning the coronavirus and its effect on economy, travel and lockdowns, as well as related support systems, more than anything else. A recovery in the M&A activity is likely when things get back to normal and banking lending increases again.
On the effects of the kingdom’s legislations and laws on the M&A deals, Boussaid explained, “The quick improvements in the business practice environment and positive changes within the legal framework through organisational reforms will help attract more foreign capital to the kingdom and facilitate the conclusion of deals. These key developments include the foreign ownership laws for companies, ease of registration in the Saudi Arabian General Investment Authority (SAGIA), the recently-approved professional companies’ law, as well as the new franchise bylaws.”
ARKAD Advisors currently provides advice and consultation to purchasers and vendors in deals whose market value totals SAR 450 million. Additionally, it supports foreign investment companies that acquire Saudi counterparts during the negotiation, auditing, and financing stages.
(Contributed by: Mahmoud Salah El-Din - Translated by: Amal A. Wahaab)