2023 Middle East M&A Outlook: Brace for Surprising Developments

Gulf SWFs and PE firms have substantial financial resources to support significant M&A activity.

The Middle East’s M&A sector experienced a deceleration in 2022, with both corporate and financial investors adopting a cautious stance due to surging interest rates and growing economic unease. Although M&A transactions sustained their robustness during the initial months of 2022, they lost momentum as the macroeconomic situation progressively worsened throughout the year.

The year 2022 has presented several economic and financial challenges that have made dealmaking a complex task on a global scale. Among the main obstacles has been the constricting credit environment, with banks limiting their funding for leveraged buyouts due to increasing interest rates and an overall aversion to risk. As a result, the issuance of leveraged loans to support private equity (PE) acquisitions have mostly come to a halt in Europe and the Middle East.

Despite the global challenges, the Middle East has experienced a modest decrease in the number of deals, from 366 in the first nine months of 2021 to 343 in the same period in 2022. The UAE, Saudi Arabia, and Israel were the most sought-after countries by buyers, with companies headquartered in these locations representing 20.7%, 9%, and 54.2% of the total deals in the region, respectively.

Amid the increasingly challenging economic climate, most M&A transactions in the Middle East were focused on recession-proof sectors, such as non-discretionary consumer goods and healthcare, while technology, media, and entertainment remained popular. Additionally, infrastructure deals proved to be a highlight in the region’s M&A activity.

Looking ahead to 2023, we anticipate a new dealmaking environment characterized by the same challenges that affected the market in the latter part of 2022. As a result, we expect the M&A sector to remain sluggish, particularly in the first half of the year. Despite this, the performance outlook, potential public-to-private opportunities, distressed situations, and lower valuations could present new avenues for dealmaking and unlock previously pent-up deals.

Nevertheless, in this increasingly complex environment, the timelines for completing deals are likely to be longer, and the risk of executing transactions successfully is higher.

Here are some potential trends that could shape the M&A market in the coming months:

• Undeployed Reserves
• Small-scale acquisitions
• Mergers and acquisitions in distressed companies
• Divestitures
• Environmental, Social, and Governance

Undeployed Reserves:

In the short-term, powerful corporate buyers may hold an edge, but the M&A market will still depend on sovereign wealth funds (SWFs) and financial sponsors, who have ample dry powder available for investment. As economic conditions shift, these funds will likely become more selective and focus on opportunities that enhance their existing portfolios or offer cash-generating potential. Despite a slowing fundraising pace, we anticipate that SWFs and financial sponsors will remain key players in the M&A market.

Small-scale acquisitions:

While financing options remain limited and large-scale opportunities are scarce, private equity firms and sovereign wealth funds may shift their focus towards smaller-scale bolt-on acquisitions. These types of acquisitions can add value to portfolios of SWFs and PEs, particularly when traditional growth channels are no longer viable, and exit routes become limited. During times of uncertainty, investing in familiar businesses and platforms may also prove to be a more sensible strategy for SWFs and PEs.

Mergers and acquisitions in distressed companies:

It is worth noting that, contrary to expectations, we did not observe a substantial increase in mergers and acquisitions involving financially troubled companies thus far in 2022. However, we anticipate this may change in 2023 as worsening economic conditions begin to pressure company balance sheets. This could lead to asset sales and operational restructuring, ultimately creating potential opportunities for mergers and acquisitions in distressed companies.

Divestitures:

We anticipate increased divestiture opportunities as economic conditions become more uncertain, causing larger companies and conglomerates to re-evaluate their strategies and shed non-essential assets. Moreover, activism investment remains a potent catalyst, with many investors able to establish positions at reduced prices during a downturn in the stock market. For SWFs and PEs, divesting non-core business units from their portfolio companies, while more intricate, may yield superior returns.

Environmental, Social, and Governance:

ESG factors are becoming an increasingly important consideration for both corporate and financial buyers in their M&A activities. This trend is expected to continue and gain momentum in 2023. Investors closely scrutinise targets’ ESG practices, including their impact on the environment, diversity and inclusion policies, and supply chain management. These factors are now essential components of investment decision-making and can have a significant impact on deal outcomes. They can also influence the availability and cost of financing, giving sponsors an advantage in securing debt funding.

In 2023, M&A buyers are expected to shift towards more resilient sectors in the face of economic headwinds, including non-discretionary consumer, healthcare, infrastructure, and specific sub-sectors within technology, media, and entertainment. These sectors are better positioned to withstand economic uncertainties due to strong demand, recurring revenue models, and the ability to mitigate rising operating costs arising from inflation. Moreover, the ongoing trend of digitalization across businesses will provide impetus to technology-related sectors. Infrastructure assets will also be a key focus, given their asset-heavy nature and ability to generate stable cash flows, thus providing downside protection.