In a landscape characterized by dynamic market shifts and innovative advancements, Lumina Capital Advisers’ 2023 Cross-Border M&A Survey offers insights into the buoyant Mergers and Acquisitions (M&A) market in the Middle East. Reflecting on a year marked by strategic collaborations and transformative deals between the GCC region and the UK, the analysis sheds light on prevailing trends, discerning market players, and the multifaceted impacts of M&A activities across various industries. According to the report, 2023 is predicted to end with another robust year for M&A transactions in the Middle East in light of a resilient regional-led cross-border environment and intense activity in traditional industries such as infrastructure services, digital transformation, healthcare & education.

Key report findings:

1. Transaction inbound interest in both UAE and Saudi Arabia

The market is witnessing a significant influx of inbound interest, with approximately 40% of investors seeking an inbound transaction into the Middle East in the next 18 months and 19% looking at outbound activity. This robust influx is a testament to the allure of the regional market, which continues to thrive. In fact, around 70% of investors are transacting cross-border within the GCC, showcasing the region’s resilience against the backdrop of a global slowdown. Interestingly, the interest is equally substantial for both the UAE and KSA, marking them as the region’s most sought-after M&A markets. Many investors are eyeing the UAE as a regional base, focusing on specific sectors in KSA or using it as a regional platform to “buy and build” out into the wider region. This strategic positioning highlights the interconnectedness and complementary strengths of these two pivotal markets in fostering the growth and development of regional economies.

Andrew Nichol, Partner at Lumina Capital Advisers, remarked, “We’ve observed a remarkable 112% surge in inbound interest since our last survey in 2019, underscoring the enduring strength and appeal of the UAE and Saudi Arabia as prime destinations for regional business interests. Nonetheless, it’s imperative to acknowledge that, despite the pronounced interest in these regions, the landscape for capital raising continues to be extremely challenging.”

2. Key sector themes driven by Sovereign Investment Partnership and Vision 2030

Centered around the Sovereign Investment Partnership (SIPs) and Vision 2030, several key sector themes are emerging, demonstrating the goals and far-reaching impact of these initiatives. A focal point is the infrastructure services in KSA, where a $900 billion spending plan is set to facilitate the development of megacities, incorporating advancements in sustainability, technology, and automation. The emphasis on digital transformation is evident, with the integration of data centers, cybersecurity, and AI proving critical to developing advanced infrastructure and smart services.

Moreover, the healthcare and education sectors are experiencing significant attention due to population growth goals, the ongoing development of healthcare systems and infrastructure, the import of expertise, operational excellence, and the fostering of international partnerships. Additionally, consumer sectors are flourishing, underscored by regional social and economic reforms, with a notable focus on entertainment, sports & gaming, F&B, and retail. This thriving landscape showcases the strategic alignment and synergy between diverse sectors, driving comprehensive development and progress in line with the SIPs and Vision 2030.

3. UAE champions acquisition strategies while KSA seeks JVs and partnerships

In the dynamic landscape of mergers and acquisitions, various transactions are shaping the market, contributing to the emergence of regional champions and fostering joint ventures. Notably, acquisitions are gaining significant force, with the UAE driving the formation of regional champions at a federal level. This is fuelling a surge in acquisitions, particularly in infrastructure, construction, and contracting markets, signifying a strategic alignment with the nation’s development objectives. Simultaneously, the trend towards joint venturing and partnering is gaining momentum, driven by the scale and complexity of evolving projects. This approach creates centers of excellence and specific requirements in KSA, reflecting the intricate collaboration between diverse sectors and regions.

“We are witnessing a distinct trend of internationals seeking regional access through joint ventures, partnerships, and capabilities, with a pronounced focus on KSA. Simultaneously, the UAE plays a crucial role in sculpting the regional landscape, actively forming regional champions through consolidation acquisition strategies executed at a federal level,” Nichol noted.

4. Mid-market deal sizes dominate the market

Within the GCC, a distinct pattern is emerging in deal sizes and funding, with a notable emphasis on the mid-market and a persistent preference for equity. A vast majority of the deals are concentrated in the lower mid-market, falling below USD 250 million, demonstrating a targeted approach to investment within this range. Equity remains a predominant choice, with 76% of investors identifying it as the preferred funding method for acquisitions, accompanied by a significant component of deferred or earnout arrangements. This underscores the value placed on versatile and phased financial structures in acquisition strategies.

Debt is also a notable player, with 44% of investors utilizing it as a significant source of transaction funding. However, this is set against a backdrop where larger deal sizes are predominantly the domain of Sovereign Wealth Funds (SWFs) and quasi-government entities, which have greater access to borrowings. Additionally, the landscape is witnessing a rise in the utilization of hybrid and structured financing, with private credit funds becoming more competitive and flexible, especially given the higher cost of senior debt borrowing.

“Deal sizes are increasing significantly compared to our previous survey, moving from less than USD 100 million to below USD 250 million. There is a marked increase in the use of debt, primarily driven by the access of Sovereign Wealth Funds and quasi-government entities. However, it’s imperative to note that the availability of such financing remains limited for private transactions,” said Nichol.

Challenges & delays in closing a deal

Valuation Alignment: Particularly in cross-border deal situations, there are differing perceptions of in-region risk versus out-of-region inbound risk, which can lead to difficulties in achieving valuation alignment between the parties involved. This is often rooted in the diverse economic landscapes and market dynamics between the regions.

Internal & Stakeholder Approvals: The region often exhibits a top-down approach and, at times, unstructured decision-making, results in delays and uncertainties, which is not uncommon, leading to deal risks at key transaction stages.

Deal Timings and Delays in Closing: In the region, deal timings typically range from 12-18 months, contrasting the 6-9 months timeframe observed in the UK/Europe, which could be attributed to the complex regulatory environment and approval processes.

Limited Acquisition Targets: There is a limitation in the size and scale of regional targets that could serve as a substantial platform for regional access. This constraint is influenced by the characteristics of the regional market and its business landscape, resulting in a limited pool of acquisition targets with the necessary scale and capabilities for significant regional expansion.

George Traub, Managing Partner of Lumina Capital Advisers, concluded, “The symbiotic relationship between the GCC and the UK has long been a cornerstone for flourishing cross-border businesses. Now, with formal bilateral commitments being fulfilled through transactions in the M&A and JV space, we are seeing tangible results and record levels of market activity.”

Read the full report here.