Strategic Treasury

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Oil and Gas M&A in MENA: Something Different M&A activity has gained traction in MENA over the years, lead by oil and gas and with performance primarily driven by the favourable demographic profile of the region.

Oil and Gas M&A in MENA: Something Different

Oil and Gas M&A in MENA: Something Different

by Mona Alqassab, Regional Sector Head MENA – Natural Resources & Utilities,
Global Liquidity and Cash Management, HSBC


MENA M&A activity has gained traction over the years, with performance primarily driven by the favourable demographic profile of the region. Oil and gas is leading this regional M&A activity, with USD 3.6 billion recorded in 2015 alone [1]. However, there are some differences in the nature of the activity and the way in which post-M&A treasury integration is being handled.

The first quarter of the year in MENA saw overall M&A deals totalling USD6.99bn, well above the USD5.99bn and USD4.52bn seen in the corresponding quarters of 2015 and 2014 [2].The Government of Abu Dhabi alone has announced three consolidations over the past 3 months, two involving Oil & Gas companies. The latest has been Abu Dhabi National Oil Company (ADNOC) to integrate two of its offshore oil firms amid the drop in oil prices; Abu Dhabi Marine Operating Company (Adma-Opco) and Zakum Development Company (Zadco) will be merging to form a new entity, Prior to that, the merger of National Bank of Abu Dhabi (NBAD) with First Gulf Bank (FGB) was announced, as well as Mubadala with International Petroleum Investment Company (IPIC). Distressed asset sales constituted a significant part of the activity driven by a tightening of capital availability in many countries, where governments are getting priority access to available capital, thus leaving less for private enterprises. While this is in line with some other regions, an important difference is that the bulk of M&A activity is intra-regional, with some 80% of deals being within MENA [3]

Most active countries

Much of the M&A in MENA is concentrated in just a few countries, with UAE being the clear leader, as it has been for the past couple of years, while Kuwait is not far behind [4]. Despite its size, Saudi Arabia is less active in M&A, as the focus there is currently more on social and economic reforms and reducing reliance on oil in the wake of the Saudi Vision 2030 announced earlier this year. Other countries in MENA such as Oman and Bahrain are far less active, with Bahrain still dealing with uncertainty in the aftermath of its credit rating downgrade. Political instability and struggling economies makes North Africa an unattractive option for foreign investors, particularly in Egypt with the difficulty of securing USD funding and continuous devaluation of the Egyptian Pound. Many have already planned their exit strategy out of Africa, with those remaining deciding to invest in more politically stable countries such as Tanzania. 

Asia

While intra-regional activity may represent the bulk of current MENA M&A deals, there is a clear desire among National Oil Companies (NOCs) in the region to acquire assets in Asia that will enable them to tap into the potential demand growth there. As these national oil companies already have ample crude resources, their primary interest is in acquiring Asian refining and processing assets that can be used to satisfy demand in the region. Typically policy and regulation in many Asian countries does not allow majority control of this type of asset by foreign entities, so in practice any acquisition will only be partial, with an Asian government-owned entity holding a majority stake in most cases. 

Treasury integration in MENA

A common intention among those acquiring assets within MENA is to improve their technology when doing so. This particularly applies to areas such as oilfield services technology, but also in other areas such as treasury. 

In general, treasury technology in MENA lags behind global standards, but in some areas this is changing rapidly in a tight liquidity environment. While certain countries remain wedded to manual processes and spreadsheets or are still in the early stages of ERP integration, NOCs across the Gulf Cooperation Council (GCC) countries are moving quickly to close the gap, with RFPs for activities such as SWIFTNet implementations and liquidity management becoming increasingly commonplace. Among these more forward looking organisations, there is a degree of competition to catch up with global best practices.

However, despite this thirst for best treasury practice and technology, when it comes to the treasury integration of acquired assets, the general approach among acquirers in MENA is more cautious. This applies both to intra-regional M&A and to NOCs acquiring assets in Asia. A major concern here is reputational risk. Especially among government entities, punctual payment of vendors and employee salaries is an extremely high priority. Therefore transitioning banks and/or treasury technology and processes is often perceived as highly risky in this context. As a result, it is not uncommon for an acquisition's treasury to continue with its existing banks, technology, personnel and processes for some considerable time after it is acquired. While this incurs duplicate costs for the acquirer and may be sub-optimal in terms of efficiency, this is often seen as preferable to the reputational damage of possible late payments, at least for the first 12 - 24 months post acquisition.

 

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