I have recently interviewed a series of chief financial officers (CFO) of different multibillion dollar companies in the KSA. We discussed both their vision for the future in terms of the local economy, and the opportunities that are available in the international market as a result of the global financial crises. Of course I suggested the acquisition strategy, which assumes that the international manufacturers are liquidity starved, and that seizing the opportunity in this type of a market is mutually beneficial to both international manufacturers and Saudi companies.
The list of potential acquisition targets ranges from world-renowned brand names to generic manufacturers. The news is full of stories about companies that are struggling to maintain their normal working capital requirements, or they are announcing job cuts and production cuts. Whether its an issue of rising raw materials and commodity costs, or weak market demand for the goods that they produce in either case the manufacturers are looking for strategic partners. There have been a string of acquisitions announced recently like TATA buying Jaguar and a number of other auto manufacturers, the sheikh of Qatar buying Harrods, or Fiat buying pieces of both GM and Chrysler. Mergers and acquisition specialists have obviously been working around the clock on closing these types of deals.
The trend of acquiring the manufacturers fits ideally with the over all vision the Custodian of the Two Holy Mosques in terms of Industrializing the KSA. The timing is perfect for the acquisition strategy, so let’s discuss the various sources of finance. Either in the form of joint ventures or outright ownership, Saudi companies can attain the financing for these projects.
Sources of finance:
The fact of the matter is both Saudi banks and Saudi companies have issued and continue to issue bonds on the London Stock Exchange. They are issuing European Medium Term Notes (EMTN), which are 5 year bonds. From our research at The KIN Consortium the investment bankers of choice are both HSBC and Calyon, as they open the portal of liquidity to the KSA economy. Of course these facilities are only open to the most renowned and respectable companies in the region. The general obligation bonds can be used for a variety of purposes, including the acquisition strategy.
The acquiring Saudi conglomerates can then spin off their respective companies in the form of IPO’s on the Tadawul Stock Market. They also have access to both conventional and Islamic finance with every major bank and investment bankers based in Riyadh. There is also funds available from the government in the form of the Public Investment Fund (PIF). The various government agencies have been sponsoring huge refinery projects and they are rumored to be sponsoring some of the economic cities in exchange for an equity stake.
Yet another source of finance that we are discussing is all the Saudi funds outside of the Kingdom in London, Paris, New York, and Zurich to list a few. The fact is that a huge number of foreign investments have suffered dramatically in the recent global financial crises. The sophisticated Saudi investors have come to realize that investments abroad are a great deal more speculative than investments in the KSA. While I cannot reveal any names due to our confidentiality policies, we at The KIN Consortium have received an extra ordinary number of calls and emails regarding losses in Swiss Bank Accounts. The cases vary from unscrupulous Swiss bankers who do not actively monitor there clients portfolio all the way over to Swiss bankers that do not return the clients calls. The losses are so extreme in some cases to the degree, that even I can’t salvage the situation. Unsophisticated investors should not invest in products that they do not understand. The Capital Market Authority (CMA) has specific laws that discuss client suitability. It’s a shame that the Swiss banks do not fall under the jurisdiction of Saudi Law. It seems that the stereotypically elitist Swiss banks do not offer the type of security and safety that they did in the past. The ultra-rich Saudi investors should consider our acquisition strategy in terms of buying foreign manufacturers and bringing them here to the Kingdom. In fact they can loan the money to Saudi businesses through the aforementioned EMTN or sukuk on the London Stock Exchange.
Advantages of manufacturing in the KSA:
The advantages of manufacturing in the Kingdom have been discussed in depth by the media and SAGIA. Some of the issues that have been highlighted are about vitalizing the Saudi labor market with industrialization. They have also discussed the fact that the Kingdom is ideally located between Asia and Europe, which makes it cheaper than transporting the products from Asia. Finally the government of Saudi Arabia is literally building the infrastructure for the manufacturing plants with a number of industrial marine ports, the railway, new roads, and an energy rich environment. One might say that in light of the global financial crises, the KSA is truly the land of opportunity.
— Khalid I. Natto, [email protected], is chairman & CEO of The KIN Consortium.