As Saudi Arabia seeks to boost privatization and attract foreign investment under ambitious economic reforms, several industry sectors could see higher activity in terms of mergers and acquisitions (M&A), analysts told Argaam.
While deal activity in 2018 and 2019 is not expected to be as high as 2013-15 levels, the outlook remains positive as companies adapt to “the new normal” in terms of growth potential in the current economic environment, said Imad Matar, Partner – Deals at PwC Middle East.
The issuance of M&A rules by the Capital Market Authority earlier this year has facilitated the process for listed companies, as a result of which many potential deals are expected to materialize over the next few months.
“In addition, various family businesses are looking to divest non-core activities, which is also driving the growth in deals flow. Generally shareholders are looking to focus on their business’s core strengths as opposed to being exposed across multiple sectors and activities,” he noted.
As levels of activity increase across the board in Saudi Arabia, seller expectations are also being more realistic amid a more subdued economic backdrop. This, in turn, should increase the success rate of potential M&As, said Islam Al Bayaa, head of advisory at KPMG Al Fozan & Partners.
Argaam takes a look at six sectors that offer promising opportunities for M&A activity in Saudi Arabia.
1) Banking
The Saudi banking sector has seen some major deals over the past year. Tadawul-listed Kingdom Holding Company announced the purchase of a 16.2 percent stake in Banque Saudi Fransi for $1.5 billion late in 2017. In May this year, Saudi British Bank (SABB) and Alawwal Bank revealed they would merge to create the Kingdom’s third-biggest lender in a $5 billion deal.
The next few years are likely to see further consolidation opportunities in the various financial services subsectors, but perhaps not of the same magnitude of deals as there is less urgency for it, PwC’s Matar said.
Andrew Nichol, partner at Lumina Capital Advisers, agreed that the banking sector could see further consolidation.
“You're going to have a few large major players that are looking to capitalize on the infrastructure developments from the privatization on the Vision 2030. There are huge social projects coming up, and they would all require financing so the banking sector is attractive,” he told Argaam.
2) Insurance
The insurance sector also offers several opportunities for consolidation, given that several listed companies are not financially viable and are often in breach of minimum capital requirements, said KPMG’s Al Bayaa.
Regulators in particular need to be proactive about driving M&A in the insurance sector, as shareholders may not always have the power to force action. “In some cases, the shareholders have given up but in some cases, the shareholding is diluted so there's no one person driving the strategy or the direction of the company.”
3) Fintech
Elsewhere in the financial services industry, there is scope for investment in the fintech sector from banks or private equity firms, analysts said. A recent notable transaction in the region’s fintech space was the acquisition of fintech firm Saudi Geidea by Abu Dhabi-based Gulf Capital for SAR 1 billion.
In fintech, there could be opportunities for private equity investment and M&A, particularly in the digitization of banking processes such as payments processing, in technology-enabled regulation and compliance functions, and in asset management, Matar said.
Al Bayaa noted that there is also a trend globally with banks acquiring fintech players, which is usually a lot quicker and faster than developing the technology themselves.
“It's only a matter of time when this happens locally as well. It could be very interesting from a strategic perspective for some of these banks to leapfrog other banks that are more technologically advanced with these acquisitions,” he said. However, the right commitment and skillset is needed to integrate such acquisitions and make them work, he pointed out.
4) Food and beverages
Food and beverages is another industry with a promising outlook for deal volumes. A major transaction in the sector in Saudi Arabia this year was Tadawul-listed Savola Group’s acquisition of UAE’s Al Kabeer Group for SAR 565.5 million.
“There's been a lot of successful chains of restaurants or outlets that have grown to a size and then they're looking to expand more, or they're looking to franchise,” Al Bayaa noted. Accordingly, such companies are looking to either divest completely or go for a round of capital-raising for future expansion.
5) Education
Meanwhile, PwC noted that it is seeing M&A activity in the education sector. Factors driving this are recent regulatory changes, such as restrictions on tuition fee increases, as well as the impact of expats’ departure, particularly on international-curriculum schools.
“This is creating very attractive opportunities for bigger more established schools to expand through acquiring struggling smaller entities,” Matar said.
6) Healthcare
As Saudi Arabia pursues wide-ranging economic reforms, a key area of focus for privatization is healthcare. The Kingdom’s National Transformation Plan aims to increase private healthcare expenditure from 25 percent to 35 percent of total healthcare expenditure, in addition to boosting the number of licensed medical facilities and internationally accredited hospitals.
Accordingly, many international players are eyeing opportunities in Saudi healthcare, like the UAE’s NMC Healthcare, which inked a pact in June to form a new national healthcare joint venture with Saudi Arabia’s Hassana Investment Company. NMC has also announced acquisitions of multi-specialty hospitals in the Kingdom and plans to build new centers.
Other foreign companies are also looking to get more involved in Saudi healthcare, Al Bayaa said.
“The government is looking more to get the private sector involved in healthcare, in the operational and driving efficiency of healthcare. So some of these international players are dipping their toe in the Saudi market by making small acquisitions of hospitals, of clinics, chains of clinics, [dental practices], or even laboratories.”
Write to Jerusha Sequeira at jerusha.s@argaamnews.com
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