Kuwait Financial Centre on MENA Mergers & Acquisitions

This is the special report prepared by Kuwait Financial Centre on MENA Mergers & Acquisitions September 2008. The maximum volume of M&A transactions originated in Bahrain and the UAE, mainly due to cross-border acquisitions within the region and internationally.

The MENA (Middle East, North Africa) region witnessed announcement of 24 deals worth US$3.2 bn during September 2008 as depicted in the chart that follows.

The M&A activity by value picked up during the month of September 2008, primarily driven by the following key deals:

The largest transaction by value involved International Petroleum Investment Company (IPIC) wholly owned by the Government of the Emirate of Abu Dhabi-Abu Dhabi Investment Authority (ADIA); acquiring majority stake in Aabar Investments, UAE holding company for US$1.8 bn.

In relation to this transaction, Aabar shareholders agreed to issue a US$1.8 bn (Dh6.6bn) convertible bond to the Abu Dhabi Energy Investment Fund; paying 3-month Libor, plus premium of 1.95% a year. The bond will be converted into new shares amounting to a majority of the Aabar’s stock at a price of Dh3.00 a share (stock price-Dh3.75 on Sep 01, 2008); offering new opportunities to invest its cash reserves; offering a 19% premium to the shareholder equity per share (Dh2.52 based on financial results as at June 30,2008). Upon full conversion of the Bond, IPIC will hold 2.2 bn new ordinary shares in Aabar, representing approximately 71% of the then issued share capital of Aabar.

The bond amounts to a capital infusion of Dh8.9 bn for Aabar, adding to its existing cash reserve of Dh2.3 bn, for acquisitions. The transaction fits as a strong strategic rationale, for Aabar, being controlled by a Government-owned company 3 years after being launched by the Mubadala Development Company.

Health Care REIT Inc., US based equity REIT acquired 90.00% interest of an affiliate of Arcapita Bank in a venture owning 29 senior housing properties managed by Sunrise Senior Living Inc. for US$643.5 mn. The financing of the transaction will be with US$365.4 mn in cash, plus a 90.00% interest in US$309mn of existing debt held by the venture.

The third largest transaction by value involved strategic investment by Swicorp in Jordan Aviation, an aircraft leasing and operating firm for US$254.5 mn. Jordan Aviation’s expansion plan involves the purchase of 16 new aircraft from Boeing and Airbus at an estimated cost of US$200 mn.

Maximum volume of M&A transactions originated in Bahrain and the UAE, which were primarily cross-border acquisitions within the region and internationally.

Target Industry Sectors:

During September 2008, the highest volume of transactions was in the Real Estate/Construction, followed by the Industrial/Manufacturing, Investment Services, Oil & Gas (O&G) and Infrastructure/Power & Utilities sectors; with the Industrial/Manufacturing contributing the highest transaction value of US$1.9 bn.

Large volume of deals in the Real Estate/Construction sector, primarily originated in the UAE:
The private equity arm of EFG-Hermes (Egypt) acquired a US$65 mn stake in the UAE based Gulf Housing Solutions.

Dubai Investment Group, financial services company of Dubai Holding, acquired a 20.00% stake in Mazaya Saudi for Commercial Investment Co. LLC for US$136.1 mn (AED500 mn); to tap opportunities in the Saudi real estate sector.

Kuwait based First Dubai Real Estate Development Co. (fully owned subsidiary of Al Mazaya Holding) finalized plans to take over majority control of 77.0% in Dubai based First Waterfront Co., for which has raised its capital to US$353.1 mn (KD94 mn).

Power Track a UAE based Free Zone licensed equipment and project management enterprise that currently operates a limestone removal project Company has been acquired by US based Intelspec International, Inc. (Intelspec), with focus on international project management, in specialized projects in the range of US$1-10 mn; in the Middle East, Asia and Oceania. The acquisition will occur pursuant to an agreement between Intelspec, Marena Industries Ltd. (Marena, Power Track’s parent company), and the shareholders of Marena.

Intelspec will issue 14mn shares to the shareholders of Marena, each according to their proportionate interest in the company, in exchange for their ownership of Power Track.

In the Industrial/Manufacturing sector, the steel, O&G, mining, chemicals and adhesives were the most active sub-sectors:

Dubai Investments acquired a 10.00% stake in KSA based South Steel Co., which is scheduled to initiate production in 2010 at a US$350 mn factory to produce steel billets and reinforcement bars with an initial capacity of 1.0 Mt per annum. Technological assistance is from Germany based SMS Group with 15% of the total output will be exported to Yemen and Sudan.

Dubai International Capital LLC (DIC) acquired a 45.00% stake in UAE-based KEF Holding (KEF), an international provider of steel castings for valves and pumps serving the O&G, mining, industrial, and chemical industries in the Middle East, Asia, Europe, and the US. KEF’s with its key target growth markets as KSA and India is looking for an IPO in the near future.

US based adhesives manufacturer H.B. Fuller Co. acquired majority of the assets of privately held Egymelt, Egyptian manufacturer of hot melt and specialty water-based adhesives. (Transaction details not available)

Targets’ Countries of Origin:

During September 2008, maximum volume of the deals was originated in the UAE, mainly in the Investment Services, Real Estate/Construction, and Industrial/Manufacturing sectors.

Acquirers’ Countries of Origin:

The largest number of acquirers were from the UAE, followed by international players from Germany, Japan, Australia, and the US.

Majority of the acquirers were from the Financial Services /Banking, Investment Services, and Real Estate/Construction sectors.

In the Financial Services/Banking sector or Investment Services, the key transactions were as follows:

Bahrain-based Unicorn Investment Bank (Unicorn) has acquired 100.00% in Bahrain Financing Company (BFC), a foreign exchange and remittance company in the GCC through the US$1.0 bn Strategic Acquisition Fund, promoted by Unicorn and established in cooperation with a number of strategic founding investors from across the GCC.

Gulf Baader Capital Markets S.A.O.C. (GBCM), Muscat (Germany based Baader Bank AG, holds 24.90% ownership), specialist for securities trading has acquired 50.00% stake in the brokerage firm Stock Securities LLC, the brokerage arm of Dubai based conglomerate Gulf General Investment Co.(GGICO). The other 50% of GBCM in Dubai is still held by GGICO. The new company, which now trades under the name of Gulf Baader Capital Markets LLC, Dubai, is a member of the Dubai Financial Market (DFM) and Abu Dhabi Exchange (ADX) stock exchanges.

The Jordanian-UAE consortium acquired 52.00% stake in the Industrial Development Bank (IDB) and rebranded as Jordan Dubai Islamic Bank (JDIB). The consortium consists of Dubai International Capital (DIC), Dubai Islamic Bank (DIB), and Jordan Dubai Financial (JDF), the largest contributor to this alliance. The investment in IDB is via its subscription of 26 mn shares offered in a private placement, raising the bank’s capital to JD50 mn (US$70 mn) from JD24 mn (US$33 mn). (IDB is currently trading at a P/E of 10.7 times)

Dubai Group acquired 51.00% of Acacia Real Estate Ltd BVI (Acacia), the real estate investment company of which Bahrain’s TAIB Bank is the principal founding shareholder, through a capital increase; with total investment of US$76.9 mn.

In the Real Estate/Construction sector, the key transactions were as follows:

Six of October Development (SODIC) purchased 29.70% of the Environmental Quality Tourism International Company (EQTI), which invests in environmentally-friendly tourism projects, amounting to US$3.2 mn. The deal increased EQTI capital to LE58 mn, set to be used in EQTI’s project expansion both in Egypt and overseas. Till date, SODIC has closed M&A transactions worth US$111.55 mn (Source: Reuters – transactions)

QIA has been pursuing active overseas investments in the retail and real estate sectors. Qatar Investment Authority (QIA) purchased 20% stake in UK based real estate Company Chelsfield Partners LLP. There is also speculation on QIA’s further purchase of British retail chain J. Sainsbury. (details of transaction not available)

Substantial number of deals occurred in the O&G sector, which reinforces the continued importance of the GCC region in the international O&G sectors:

Petrofac Limited, the international O&G services provider, and Mubadala Petroleum Services Company LLC (MPSC), a wholly owned subsidiary of Mubadala Development Company, established a JV company, Petrofac Emirates LLC; which will provide a full range of engineering, design, procurement and construction services for onshore O&G, refining and petrochemical projects in the UAE.

Taiwan based oil refiner CPC Corp., acquired 5.00% stake in a Qatar liquefied natural gas (LNG) project of Ras Laffan Liquefied Natural Gas (LNG), Qatari JV with Exxon Mobil Corp. (details of transaction not available)

Australia based O&G exploration company DVM International Ltd acquired 20.00% stake in unlisted Sphere Petroleum QSC’s four West African exploration permits.

Sphere Petroleum QSC was formed as a subsidiary of Sphere Investments Ltd, an Australian company. In 2007, it was spun out of Sphere Investments Ltd and established as an independent, private company in the State of Qatar. Major shareholders include Qatari and Saudi Arabian interests, as well as international institutions and individuals, including board members.

There has been significant M&A activity in the Infrastructure/Power & Utilities related sectors:
An important development in the infrastructure sector was the sale of 20.00% interest in Shuweihat: CMS International Power Company (SCIPCO) and a 50.00% interest in O&M Limited Partnership (SOMLP) to Sumitomo Corporation; by the Abu Dhabi National Energy Company PJSC (TAQA).
SCIPCO a power generation and water desalination facility near Jabal Dhana, Abu Dhabi has a net production capacity of 1,500 MW of electricity and 100 mn imperial gallons of desalinated water a day. SOMLP is the company responsible for the management, operation and maintenance of the facility.

Mubadala (Abu Dhabi based investment company) and Veolia Environment (French Company in the businesses of: water & waste management, energy management and freight and passenger transportation), entered into a JV (51.00%-Veolia Water; 49.00%-Mubadala); that will focus on the areas of water production and waste water collection and treatment through municipal concessions and PPPs in the MENA region.

There has been emerging activity in the renewable energy and clean technology sector. Through the Masdar initiative (renewable energy and clean technology initiative), the Abu Dhabi Government bought a US$174.8 mn stake in WinWinD Oy, a Finnish wind turbine manufacturer; marking its entry into the wind energy market.

DIFC Lifestyle Group (DIFC Lifestyle), unit of DIFC Investments, development unit of state-owned Dubai International Financial Centre (DIFC) acquired a majority stake (approx. 70%) in Villa Moda Lifestyle KSCC which offers high-end luxury fashion. This alliance allows complementary benefits for both, as DIFC Lifestyle seeks potential regional and global partners as part of the plans for lateral expansion and organic growth; and DIFC Lifestyle seeks for diversification in other areas of luxury, fine dining and art. The company currently has jointly-controlled entities and associates in Qatar, Bahrain and Singapore. (Villa Moda is currently trading at P/E of 12.86 times)

M&A Speculation:

There is merger speculation between Abu Dhabi Commercial Bank (ADCB) with National Bank of Abu Dhabi (NBAD). ADCB is keen on foreign acquisitions after it lost its bid to buy into an Egyptian bank last year; esp. in some markets in the Gulf, Turkey and SE Asia.

There may be a renewed attempt by QIA on further purchase of British retail chain J. Sainsbury. In July 2008, QIA held an ownership of 27.20% of the Company. (As at Sept. 12, 2008, Sainsbury is valued at US$11.4 bn or GBP6.4 bn at a share price of 365.75 pence).

KSA based Al Rajhi Group, diversified group of manufacturing companies (active in paper, man-made fibers, plastics and foam, water bottling and bedding) has plans to hive off 30.00% stake in the Company in an IPO in the Ist quarter of 2009.

Kuwait based Noor Financial Investment is bidding for mobile phone licenses in Lebanon and Qatar, in addition to that in Oman and Africa. Lebanon plans to auction its 2 state owned mobile phone companies after 6 years of delay to lower debt.

The Libyan Investment Authority is speculated to buy 10.00% of Telecom Italia for US$5.9 bn; may purchase shares in a reserved capital increase at Euros 1.5 to 2.3 each.

Qatar Telecom (QTel) may buy a stake in Indonesia based PT Bakrie Telecom. PT Bakrie & Brothers, which owns a stake in Bakrie Telecom, may sell assets to raise about US$1.2 bn to pay debt.

Country Focus: Morocco

Real GDP growth is estimated to be around 6% in 2008 driven primarily by international tourist and domestic demand, up from a low 2.70% in 2007; due to high dependence on the volatile agriculture sector. The High Commissioner for Planning estimated the GDP growth to be 6.1% this year, with the economy to not be greatly affected by the ongoing in the international financial markets.

Driven by the Government’s reform efforts, the non-agricultural sector and mainly ICT, finance, construction, off shoring, real estate, textiles and tourism; which have grown 8-10% per annum over the last 5 years.

Following the current global economic crisis, the widening of spreads and the decline in stock prices has made it difficult for emerging markets issuers to tap international markets, to finance current account deficits. Morocco is of the countries to be most likely affected including others such as Egypt, South Africa and Tunisia.

Despite challenges, Morocco is one of the highest reformist countries in the MENA region. As per the 2009 Doing Business Report (World Bank), Morocco ranked 128th out of 181 countries and 13th in the MENA region after Egypt.

Morocco encourages foreign investment and has an ambitious program of economic and trade liberalization (has included FTA with the US, EU, North Africa, Egypt, Jordan, Turkey and UAE; privatization of many state-owned enterprises and reform of the financial sector). The 1995 Investment Charter uniting many investment regulations treats foreign and locally owned investments equally, except for some sectors.

Nonagricultural GDP has grown by an average of 5.50% since 2004, driven by strong domestic demand. In the medium term, real GDP growth is estimated to 5.50% - 6.00%, mainly on account of rebound in agricultural production and the continuing expansion of the nonagricultural sector.
Agriculture has been critical to Morocco’s economy; with the sector employing 40% of the country’s workforce, making up to 15% of GDP and 40% of the exports.

In the past few years, the economy continued to be adversely affected by climatic conditions, as shown by the slowdown in real GDP growth to 2.70% in 2007, due to a sharp fall in cereal production, greater diversification of the economy has made growth less volatile.

The country has a comfortable cushion of foreign reserves and inflation rate has been low. However, the fiscal and current accounts deficits are modest, expected to fall in the coming few years.
The Government’s commitments to further liberalize its trade reforms has also led to manufacturing firms facing more competitive pressures on both domestic and foreign markets.

This has also provided challenge for policy-makers is to design appropriate support policies that stimulate domestic firms to invest and upgrade their technologies, ensure labor market flexibility, and create a business environment attractive for foreign investment.

Sectoral Reforms have been gaining momentum:

The Government has adopted a vision for the development of the manufacturing and industry sectors, which aims at diversifying the industry, reinforcing exports and leading to high levels of FDI; along with adoption of the Green Plan (GP), for development of the agricultural sector.

The 2005 Plan Emergence, involved improving competitiveness in existing industrial sectors, such as textiles, and supporting the emergence of newer sectors such as electronic components, outsourcing of automobile manufacturing, aeronautics, and nanotechnology, as well as services such as off shoring and tourism. The Government has also stressed the necessity to reform efforts in sectors such as education, energy, and water.

In the past, fertilizer distribution was entirely state-owned and had little incentive for innovation. However, Morocco has been gradually liberalizing, opening its agricultural markets and systematically eliminating tariffs. This has led to increasing M&A activity in this sector.

In 2008, IFC has renewed funding commitments of US$240 mn up from US$23 mn in 2007 and US$4 mn in 2006; for investments in diversified sectors such as commercial banks, microfinance, waste water local public utilities, investment funds for SMEs and property development in low income housing.

The Government introduced outward oriented structural adjustment measures designed to eliminate the bias against export activities liberalized the import regime and enhanced the allocative role of the financial sector.

The banking sector is currently benefiting from a government-backed investment in transport infrastructure, housing, and tourism, while development of the mortgage market, allied to regional diversification among the larger institutions, is expected to drive growth in assets and profitability going forward.

Morocco attracted approx. US$2.6 bn of inward FDI in 2007, which was more than double the level recorded in 2004, reflecting growing foreign involvement in areas including off shoring, real estate, textiles, telecom and tourism.

The investment charter in 1995 guarantees i) foreign investment against the risks of nationalization and expropriation; ii) unlimited transfer of dividends and profits to foreign investors; and iii) the repatriation of foreign investor’ capital and related capital gains.

Foreign and locally owned investments are treated equally (with the exception of the construction sector) and 100% foreign ownership is permitted in most sectors especially manufacturing except for the mining sector. While FDI is permitted in the agriculture sector, however is prohibited from owning agricultural land (however the law allows for long term leases up to 99 years and permit agricultural land to be purchased for non-agricultural purposes).

There is no screening requirement for foreign investment, except for some sectors and encourages foreign participation in the privatization program.

With the Casablanca stock exchange undergoing privatization in 1996 and market correction in May 2007, it has experienced significant growth, due to new laws designed to make the exchange more efficient and transparent, and to the government’s sale of shares of companies to the public.
The market index has been experiencing a fall in the recent months in 2008, owing to the global financial crisis, with an annual % decrease of 5.3% (Source: http://www.casablanca-bourse.com; as on Oct. 22, 2007 – 2008)

Investment Positives - Morocco

With FDI increasing and tourism receipts from Moroccans living abroad, the balance of payments position should remain comfortable, despite the slight current account deficit and their contribution to GDP should remain relatively stable in the medium term. Tourist numbers increased to 7.4mn in 2007, a 13% jump from 2006; contributing 8% to GDP. The country plans to attract 10mn tourists to its land by 2010. (Source: Government’s Vision 2010 - Plan Azur.)

In spite of the more difficult global environment, domestic economic activity is is estimated to remain strong in 2008 and the principal engine of growth with mildly being affected by external developments.

Country Risks - Morocco

With the recent deterioration in the international economic environment, especially with slower growth in the EU, may offset growth in the Moroccan exports.

The decision to not pass on the increase in world prices to domestic prices to protect purchasing power has led to a significant increase in spending on subsidies.

Such expenditure is estimated to double as a share of GDP in 2008 to reach about 5%, higher than investment expenditure, combined with the impact of the increases in civil service salaries granted in 2008, could lead to a marked deterioration in the fiscal position; leading to higher deficits and slowing the downward trend in public debt and lower public investment.

M&A Activity (Year to date)

The Industrial/Manufacturing (fertilizers, paper), Financial Services/Banking and Infrastructure/Power & Utilities (esp. renewable energy) have been active in cross-border acquisitions and expansions.
There have been a number of transactions in the Financial services/Banking sector, which are as follows:

Consortium Maroco-Koweitien de Développement (CMKD) which is a group whom through its fund has been instrumental in financing many key projects in the tourism, real estate and finance sectors especially in Morocco; acquired Diac Salaf engaged in financing solutions for consumer products for US$57.9 mn.

Banque Marocaine du Commerce Exterieur SA (BMDCE), a retail and commercial bank acquired 3.52% stake in Risma in the hospitality sector (purchase, construction and exploitation of hotels and tourist sets in Morocco) and the Accor’s 35% affiliate; for US$27.1 mn. Historically, Risma, acquired 100.00% of Hilton Rabat from the Abu Dhabi-based National Corporation for Tourism and Hotels (NCTH) for 735 mn MAD. At the end of 2008, Risma is expected to rebrand the hotel under the Sofitel name. (Current P/E of Risma:36.2; BMDC: 36.5)

France based Credit Industriel et Commercial (CIC), a subsidiary of Credit Mutuel, has acquired a further stake of 5% in BMDCE for US$323.6 mn, bringing its overall shareholding to 15% and is expected to hold 20% by the end of 2008; providing CIC with a strategic platform and will enable it to extend its influence on the African continent especially in the insurance, where competition remains undeveloped and households are poorly equipped.

Credit Agricole Asset Management SA (CAAM) ; a subsidiary of Credit Agricole SA, set up a JV with Banque Saudi Fransi, named Caam Saudi Fransi (40:60).
Attijariwafa Bank acquired a 79.15% interest in privately owned Compagnie Bancaire de l’Afrique.
(Current P/E of Attijariwafa Bank: 21.7)

Other transactions in some of the key sectors are as follows:

Morocco based Papelera de Tetuan SA specialized in the paper manufacturing acquired Safripac SA, manufacturer and wholesaler of paper products, for US$113 mn.

TUI AG Germany based diversified conglomerate, with operations in tourism, shipping, and logistics increased its holding in Moroccan low cost carrier Jet4You to 100%. Historically, TUI AG sold off many of its industrial concerns and purchased several major travel and transportation firms.

Emerging Capital Partners LLC (ECP), an international private equity firm focused on investing across the African continent, divested its entire stake in privately owned Charaf Corporation, Morocco’s fertilizer distribution company. The exit was made through a sale of shares to the historical shareholders of Charaf for US$23.3 mn.

There has been growing interest in the renewable energy sector in Morocco leading to positive M&A potential in this sector:

In April 2008, private French renewable energy company Theolia paid US$57.8 mn for 84.50% stake in Moroccan wind farm company Cie Eolienne du Detroit (CED); from Electricite de France SA (‘EDF’). CED operates 84 wind turbines with a total installed capacity of 50.4MW and an output of around 190GW hours per year.

Theolia expects to commission by the end of 2009, an installed capacity of at least 1,135 MW in operation by the end of 2009. By the end of 2011, growth is planned by organic development in Western Europe and in emerging countries, as well as potential acquisitions.

Followed by which, in June 2008, Abu Dhabi National Energy Company PJSC (TAQA) and Theolia agreed 50:50 partnership stake in CED.

TAQA and Theolia are now two major players in the production of electricity in Morocco: TAQA owns and operates a 1,356 MW thermal power station (1/2 of the annual electricity production of the Kingdom) and Theolia, with its 50.4 MW wind farm, is the leading producer of electricity from wind energy in Morocco.

Source- Editor Arab Times http://www.arabtimesonline.com/kuwaitnews/pagesdetails.asp?nid=24342&ccid=12

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