Continued growth anticipated in Middle East mergers and acquisitions market

A recent Legal 500 event on the future of the Middle East’s M&A market heard from Rima Hadid, Emirates Investment Authority general counsel; Linda Mouaz, a former head of compliance at Nestle; Nadim Elias El Haj, the chief legal officer for Abu Dhabi National Hotels; and Zahid Kamal, a managing director at Fajr Capital Group.

The panel, which was moderated by Pinsent Masons M&A expert Mohammad Tbaishat, discussed topics including the resilience of the Middle East M&A market despite the Covid-19 pandemic and global financial downturns, increased interest in warranty and indemnity (W&I) insurance and how the Middle East is embracing technology to design and achieve more streamlined transactions.

Resilience in the Middle East

The Middle East and North Africa (MENA) region has shown signs of resilience amid a worldwide economic slowdown. The panel agreed that the region had benefited from recent global oil price rises, economic diversification and the easing of Covid-19 restrictions since the start of the pandemic. Those changes have made countries like the United Arab Emirates (UAE), Saudi Arabia and Egypt very attractive locations for foreign direct investments, alongside private equity investments and sovereign wealth funds.

The UAE, in particular, has a long heritage as a welcoming country for external investment, with both Dubai and Abu Dhabi functioning as important regional hubs for doing business. Panellists suggested that Saudi Arabia and Egypt, too, have huge potential. While foreign investment has traditionally been focused on a small number of industries in the region, rapid growth in the financial services and tech sectors – aided by government policy – is also now gaining the world’s attention.

The panel suggested that M&A transactions across the Middle East as a whole have not yet reached their peak, with continued growth expected over the next few years and beyond.

Sectors with the most potential for growth

Panellists identified technology, real estate and hospitality as sectors of the MENA economy that have big potential for future foreign direct investment. Fintech start-up firms can struggle to develop profitability in their initial stages, however, the levels of government and private sector support offered in tech hubs like Dubai and Abu Dhabi can make start-ups extremely attractive to investors.

Likewise, the expansion of tourism projects in the UAE beyond traditional hotspots like Dubai and Abu Dhabi is establishing the country as a global travel destination. Ras Al Khaimah, for example, has positioned itself as a new holiday destination, bolstering the attraction of its landscape and cultural offering with new hotels and resorts. New tourism projects in the emirate have attracted a number of acquisitions, with more likely to follow.

The hospitality sector in Saudi Arabia has proven itself to be very resilient during and after the pandemic and has the potential to become a much bigger market as the government there continues to diversify the country’s economy.

Increasing cooperation

The experts also noted an increase in cooperation between institutions, such as sovereign wealth funds, and private equity firms. Parties are often looking to form partnerships with others that have expertise and a strong track record of performance in the relevant field. International private equity firms, for example, often work with local private equity firms and seek advice on potential investments that they are looking at in the region. The arrangement is mutually beneficial, with local firms providing on-the-ground knowledge in exchange for the big international firm’s access to the global market.

Distressed deals

Panellists noted an increase in ‘distressed deals’ – which are characterised by very tight time frames and limited contractual support and protection for buyers. While distressed deals carry increased risk, they also present significant opportunities for private equity firms and other investors who can move quickly and have financing in place, along with their legal, tax and HR teams at the ready.

Risk allocation

The experts highlighted the current “sellers’ market” for M&A deals, with a recent shift of risk allocation towards buyers – particularly in the hospitality sector. Landmark deals in the UAE, for example, mean that buyers are trying to obtain hospitality assets that have impressive valuations. Because of this, buyers are being forced to adapt to sellers’ requirements regarding transaction timelines, warranties, indemnities – and even how payments will be processed closing an M&A deal.  

Increase in the use of W&I insurance

W&I insurance has become increasingly prevalent in recent years and is now key to a lot of M&A transactions. The panel suggested that investors are now much more comfortable employing W&I insurance, although its use still depends on the level of risk associated with an asset, the type of deal involved and the level of shareholding in the acquisition – as well as the stakeholders, their knowledge and their involvement in the business.

Use of artificial intelligence in transactions

The group agreed that artificial intelligence (AI) is increasingly being deployed in M&A transactions, and can offer significant benefits to firms that use it. AI can help to deal with huge volumes of due diligence associated with M&A deals, making law firms and advisors with AI capabilities attractive.

At the same time, however, the panel noted that the work conducted by AI needs to be examined by a human being for accuracy. The legal community, in particular, should consider what risks and opportunities the technology provides. It remains to be seen how AI will be utilised on M&A transactions going forward.

The importance of ESG

Environmental, social and governance (ESG) considerations have become very important in M&A transactions in the Middle East. The panel highlighted the fact that ESG impacts the value of businesses, and is crucial to assess correctly as part of the due diligence process. They said the issue was not just a matter for legal teams to consider, and that areas like supply chains – which carry a large proportion of a company’s ESG risk – need to be assessed to ensure that flaws are not missed. ESG due diligence and compliance is no longer a box-ticking exercise.

Opportunities in the energy sector

High oil prices mean that the development of renewable energy is now even more viable than in previous years. Sovereign wealth funds, in particular, are looking for investment opportunities in renewables projects. The panel noted that, from a tech perspective, the Middle East was already seeing an exciting increase in renewables investment.

Co-written by Nathalia Elhage of Pinsent Masons