24/11/2014

With investor appetite ripe for local investment, the UAE Mergers and Acquisitions (M&A) market is rising. Dubai winning Expo 2020, along with various reforms and positive economic news, has reignited investor confidence in Dubai and the UAE. As of October 2014, the UAE leads the league tables in both number and value of deals in the Gulf.

According to the IMF, despite expectations of lower oil prices, economic growth should remain robust in the UAE, at an average of 4.5 per cent in each of 2014 and 2015 (6 per cent for non-oil sectors).

This positive growth story bodes well for both domestic and international investors seeking higher returns than in more mature Western economies. Such positive trends in the UAE economy are fuelling a surge in fresh capital seeking investment opportunities. Despite regional civil unrest, M&A activity in the UAE has remained healthy and is projected to grow further. Inbound M&A has witnessed a steady rise over the last three years, while outbound M&A (unlike pre 2008 trends) has been relatively flat as more investors look for opportunities within the region. Domestic transactions tend to be smaller in size, but are often more strategic. From a sector perspective, Real Estate, Oil & Gas, and Financial Services are the major investment sectors in the UAE, accounting for almost two thirds of all deals over the past five years. More recently, the Telecoms sector has also come into focus, with companies like Etisalat becoming very active in external growth.

Rise of the local banks

Sustainable economic viability, coupled with positive regional growth expectations, means that banks will have to play a major role in the next phase of the region’s economic cycle.

After the 2008 global recession, many of the international banks - exposed to major litigation and constrained by regulatory compliance requirements in Europe and the United States - are increasingly strained to compete with local banks and many of them are now scaling back their exposure to the region.

Another issue facing international banks (particularly those who service the region from head offices in Europe or the United States) is that many are losing key employees to tax-light jurisdictions, such as Dubai and Abu Dhabi. This has allowed local banks to hire top talent from the established global financial centers, thus increasing their market share.

Local knowledge and relationships are key to the growth in market share for local banks. Typically, many international banks target the largest sovereign wealth funds and institutions, but often ignore or under-estimate the needs of smaller, yet very important private companies. In response to these market trends, local banks have been adjusting their services accordingly, building capabilities and capacity.

Many regional banks, previously predominantly limited to relationship banking in the HNW and SME lending space, now have sufficient scale to provide a full spectrum of banking services to local clients, including M&A advisory and acquisition finance. Given the strength and depth of relationships which they maintain with key local clients, the local banks are fast becoming the partner of choice for major transactions in M&A, IPOs or debt capital markets. Commercial Bank of Dubai (CBD) is a good example, recently establishing a corporate advisory division to advise long standing clients on strategy and investments.

Dubai’s strength as an M&A hub

Dubai’s story over the past 15 years falls into two periods: pre- and post- the 2008 global recession. Prior to 2008, the Dubai economy grew exponentially with high leverage concentrations and considerable focus in the real estate sector, financial markets and outward “trophy” investments. Many investors viewed Dubai’s market as a short-term diversification into non-oil related sectors, with many such investors actively looking to “flip” real estate assets to secure a quick return. While the global recession affected Dubai’s growth for a few years, lessons learnt brought about a number of positive changes. Post-recession, the Dubai model of long term investment and sector diversification has been vindicated, with notable accelerated development in the tourism sector. Investors are now seeking investments beyond just real estate: sectors such as Food & Beverage, Consumer Goods, and Technology are now attracting substantial investment. Dubai’s continued positive growth cannot, however, be viewed in isolation: the Emirate as a hub of activity relies heavily on investment from the GCC and MENA region. In particular, with recent civil unrest in the region, politically stable Dubai and UAE continue to benefit from inward capital injection from the region.

Dubai is a growing hub for both conventional and Islamic banking. Many bankers and investors alike now view Dubai as the obvious alternative to London when covering the MENA region and the wider region, including India and Pakistan, Africa and the CIS countries.

There are major advantages to operating in Dubai: from a very low corporate tax regime for foreign financial institutions, to the ever-growing strength and network of Emirates airline, and free-zones which facilitates foreign investment. This is particularly true of the Dubai International Financial Centre (DIFC), whose laws and regulations are closely aligned with well-established mature jurisdictions.

Overall, Dubai is growing and maturing from being a frontier market into the next phase of market sophistication. Local banks are responding in kind, stepping up rapidly their overall services.

The writer is General Manager — Corporate, Commercial & Investment Banking

Alain Renaud - Gulf News