In the past two years, M&A in the Middle East and North Africa region has consolidated into fewer, but larger, deals.
For example, Amazon’s 2017 acquisition of Souq.com, a Middle East-based e-commerce company, encouraged companies across a range of sectors in the region to focus on the digitisation of business processes, raising the prospect for deals in a number of sectors such as fintech, telecommunications, automotive and retail.
This trend is likely to persist throughout 2019; nonetheless there are various substantive reforms proposed by regional governments that look set to be key drivers for dealmaking. The loosening of foreign ownership rules in Saudi Arabia, government digitisation in the UAE and the IMF-supported economic restructuring in Egypt should generate unique opportunities for foreign investors.
There are, however, a number of considerations and potential challenges that dealmakers should consider when looking to invest in the region:
1. The appointment to executive or directorship positions of politically connected individuals and members of royal families.
This can impact the ability to influence decision-making and make investments vulnerable to regime change or political considerations. However, in the GCC in particular, royal families can comprise thousands of members and relationships are opaque, making it difficult to determine if an individual is really part of the inner core and wields significant political power.
2. Lack of transparency or up-to-date information on shareholding structures and finances, as well as on legal or regulatory proceedings.
Target companies may take advantage of the prevalence of low disclosure requirements across the MENA region to avoid providing the information you need to make an informed investment decision. For example, litigation is rarely reported on in the press, and hidden shareholders, particularly in subsidiary companies, may not be apparent.
3. Payment of bribes to win contracts, and low-level corruption in essential tasks.
These risks are particularly prevalent when the target company has regular interactions with public authorities. In addition to the concerns corruption and financial malfeasance can pose to the integrity of the business, the pursuit of key principals by authorities can also impact on business continuity.
4. Governance and managerial concerns around family- and government-owned companies.
These target companies are often characterised by a reluctance to cede management control, or where the deal involves the acquisition of a small minority stake, the investor can find themselves unable to exert sufficient influence in an investee or portfolio company.
5. Reliance on a government policy or subsidy.
Particularly in jurisdictions where government involvement in the commercial environment is characteristically high, target companies may be reliant on a particular policy or sector subsidy for their existing business model. In investments where the target company is vulnerable to political, policy or regulatory changes, we conduct enquiries with contacts close to decision making to determine the nature and risk of these potential changes.