Post Covid Considerations in GCC M&A
The Covid-19 crisis has had a significant impact on GCC economy and noticeable changes in M&A are being observed. Well-capitalized strategic players are strongly positioned to use Covid-19 crisis as a catalyst to consolidate their industry position and use M&A as an instrument to find attractive investment opportunities in the medium term.
GCC region is expected to witness following key M&A trends
#1 Trend – Growth equity by PE funds for working capital
The economic conditions are most likely going to remain challenging for the immediate future which requires major emphasis to be paid on the problems of liquidity and the need for optimizing the working capital. Under this scenario, a PE would be another smart option or route to M&A as the PE firms have extensive investments and portfolio management expertise. A quick equity injection through the strategy of PE will address solvency as well as the capital structure concerns allowing growth and expansion operations to the businesses.
Sectors such as Sustainable Technologies, Telemedicine, E-Commerce and EdTech seem to be high on radar of PE investors.
#2 Trend – Increase in JV and partnership transactions
Covid-19 pandemic has created significant changes in the business deals and environment. It has changed the way the international investors will do business in the GCC region due to the uncertainty in the market and recent high-profile scandals. Despite this, the international investors are still keen to invest in businesses that will be able to cope-up in the current scenario. Hence, many companies will now be seen to follow a Joint Venture model, which is a safer alternative, than a more strategic and proactive approach of M&A.
Post Covid-19 the GCC region has seen technology innovation and the Gulf economies are looking to leverage international expertise through partnership deals to help them realize their goals of innovation within the smart city value chain.
#3 Trend – Innovative structuring for buyer/ investor protection
In the GCC region the warranties are most probably going to be in the favor and pretty well dictated by the buyers given the risk associated post Covid-19 scenario with any potential transactions thus deals are likely to be structured in ways that protects the buyers such as warranty holdback, insurance on key liabilities, subsidy or grant claims etc. The GCC region will see an opportunity for portfolio diversification of global conglomerates where there will be easing of restrictions for foreign investors, specifically in Saudi Arabia.
#4 Trend- Focus on defensive and resilient sectors like healthcare, consumers, etc.
The healthcare sector is seen to be resilient in the tough times of COVID-19 pandemic. It underlined the need to upgrade existing infrastructure as investments have been ramping up in this sector. It was even seen that the GCC governments encouraging more involvement of private players through public-private-partnership models. The healthcare sector seems to be promising from investment perspective where investors can acquire stakes in companies delivering home healthcare, long-term and post-acute care services.
Food and beverage sector also emerged being defensive shifting the focus of investors towards the backend part of businesses focusing more on food production and supply. This focus could drive more M&A activities in the consumer sectors as there is an increasing demand trend for online grocery shopping and is likely to be retained by the consumers in future as well.
#5 Trend- Rise of activities in innovative sectors
Online activities have thrived in the tough times of Covid-19 pandemic. The GCC always had a digital vision of healthcare known as Telemedicine, an e-Health strategy in order to improve the quality of care among patients. The healthcare saw more strengthening of the digitalization during the Covid scenario causing to drive lots of attraction from investors and leading to increased M&A activity going forward.
The EdTech industry gained significant prominence during the Covid-19 times seeing significant growth and creative way for delivering online education since schools across the globe have been forced to take their classrooms online as academic operations are temporarily suspended. This sector saw high growing demand which attracted a lot of PE and VC funding which accelerated the investments raising huge amounts. The pandemic has opened a new phase for the EdTech industry prompting many new ventures to raise funds to support expansion plans.
The new Digitalization transformation seems to have opened the doors not only for education and healthcare but also for other fast-growing sectors such as logistics, banking, financial services, etc. leading to possible M&A activity in future.
It is believed that 2021 seems cautiously optimistic for M&A deals in the GCC region and businesses should not venture into new areas but shall divert all of the focus on their core sectors. There will be seen an increase in the M&A activities once the dust settles as the M&A markets in the GCC region are to gain steam in 2021 being committed to opening their economies and exploring new areas of investments. M&A activities have proven to be the go-to market solutions for leveraging the capabilities of leading local companies.