This month saw a further step forward in the regional banking market when France Telecom acquired 94 percent of Egyptian mobile phone company Mobinil in a tender offer.
With this deal, the French group has taken control of a significant sector player in a volatile but important emerging market.
This deal isn’t just significant because of its size – although at 19 billion Egyptian pounds it is one of the largest ever cross-border M&A transactions in Egypt — but also because it shows that a market-changing deal can be achieved despite a challenging macro environment.
While this is only one deal, and doesn’t indicate a ‘return to normal’ — I think it is a very good example of the way we should expect the regional market to continue to develop.
If we look at the market only few years ago, much of it was private and many deals were executed on a company to company basis within their respective domestic markets.
Typically, family-owned companies were making “unilateral” decisions to acquire a competitor or expand through acquisition.
The common theme was that these deals were typically small and done on an ad hoc basis — moreover, the approach and structuring seen in international centers of M&A just wasn’t there.
So what changed? First, the market started to show an appetite for larger intra — regional and cross-border deals.
Typically, these were companies looking for faster expansion than available in the private peer to peer or domestic market.
Banks were engaged by companies to help them look for specific opportunities, in specific sectors — complementing their overall regional investment strategy. Such opportunities where not necessarily immediately apparent to the company. And, while these opportunities where often regional in focus, they weren’t necessarily small scale.
When we advised, last year, on the rights issue – the raising of capital through the issuance of new shares — for Mannai Corporation and the resulting purchase of 35 percent of Axiom, this was an international standard deal, but done ‘intra’ regionally.
Second, the market has started to show a real willingness to open up to international investors — improving standards and adopting higher levels of corporate governance.
While historically many regional entities have had lower levels of corporate governance than those in the West, this is definitely changing and that’s a positive step for the region.
Of course, this is an ongoing process and not one that will be achieved over night.
The UAE and Qatar are still not officially classed as ‘Emerging Markets’ according to the MSCI Emerging Markets Index.
Future inclusion is not a foregone conclusion — but when ultimately they are successful, this will then lead to more international investment money coming into the region.
At present, these markets are classified as “frontier” and very little institutional money follows the MSCI Frontier indices.
Third, this region has the funds, and the willingness to look at international investment opportunities. Regional investors have shown an appetite for international opportunities that compliment their portfolios, and it’s my view that this will grow.
Last year, we advised Lamprell — a UK-listed UAE-based corporation — on the purchase of Maritime Industrial Services (MIS), an Oslo listed entity. Not only did this demonstrate HSBC’s cross border capability, it was also an excellent example of “Emerging into Developed Market” deal flow from the region, where a strong local company acquired in the ‘developed’ market.
The next question surely has to be where we see the regional banking market going.
Will the future of the local market be driven by ‘intra’ region, ‘into’ region, or ‘out of’ region deals?
My view is that there’s no one answer to this and it is likely to be a combination of the above.
However, the regional investment banking market has been massively impacted by the events of the Arab spring and the fall out from the euro zone. As we’ve often stated, the M&A market is primarily driven by market sentiment — and then by the identification of deal opportunities.
To deal with market sentiment first: this will return, but it will take time.
What we’ll need is for some deals to come to the market, in size and with success.
This happened with the France Telecom deal, but this remains only one deal and clearly international investors will want to see more. Our pipeline of deals remains strong, but the fragile nature of the market means that timing of execution remains of paramount importance.
Our clients rely on us for informed, expert advice and we will have to be sure that the ‘window’ is open for a deal to be a success before we launch.
Second — and most obviously — deal opportunities remain important.
Regional investors have grown in both sophistication and size. Therefore, a deal has to be ‘right’ for them — rather than just a good opportunity. It has to fit with their strategy, portfolio and aspirations.
Clients want their banks to work harder for them, and identify opportunities that they can’t necessarily identify themselves — so, those that exist in other countries, regions and sectors.
So, where do I see the market going? We remain positive on the MENA region and its growth prospects.
It has a number of strong fundamentals — such as increasing hydrocarbon wealth and young populations.
These fundamentals haven’t been altered by the Arab Spring.
But what is changing is the level of sophistication of our clients.
I think we are seeing the emergence of real international players from the region, who have the skills, the funds and the appetite to go where the deals are.
— Paul Skelton is head of global banking, MENA, at HSBC, Dubai.
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