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Acquisition with a view to transition

24 October 2024

 

Adnoc International’s $16.3bn bid for German plastics group Covestro, signed on 1 October, has called fresh attention to the Middle East and North Africa (Mena) region as a source of merger and acquisition (M&A) activity.

The deal by the UAE state energy company’s overseas business arm, which is the largest Mena deal of the year, is just one of a string of acquisitions by regional energy companies seeking to diversify both sectorally and in terms of geography. And energy – notably the low-carbon variant – has emerged as a key focus for buyers.

Within the Mena region, the GCC remains the mainstay of deal flow, with its clutch of sovereign wealth funds (SWFs) and government-related entities (GREs) underpinning activity through transformative agendas that are shaped by government-led ambitions to shift away from oil and gas and embrace newer areas of the economy.

The figures underscore the Gulf bias in M&A deal flow. Ten of the Mena region’s highest-valued M&As in the first six months of 2024 were concentrated in the GCC region. 

The UAE and Saudi Arabia saw a combined 152 deals worth $9.8bn and were among the top Mena bidder countries in terms of deal volume and value, according to data from EY.

The largest transaction came in February, when private equity firms including Clayton Dubilier & Rice, Stone Point Capital and Mubadala Investment announced the acquisition of Truist Insurance Holdings, the US’s fifth-largest insurance brokerage, for $12.4bn – a sign that Gulf entities have the appetite and balance sheet to lock down opportunities in North America. 

Indeed, according to EY, the US remained the preferred target destination for Mena outbound investors in the first half of 2024, with 19 deals amounting to $16.6bn.

Meanwhile, Gulf-based SWFs dominate in regional M&A activity in terms of deal value. Consultancy Bain & Company says they represented 86% of deal value in 2023, either directly or through portfolio companies.

Industrial focus

Sector-specific drivers have come to the fore for some participants, and that is evident in the spread of M&A activity. Take Saudi Arabia’s Public Investment Fund (PIF), which acquired steel companies Al-Rajhi Steel and Hadeed last year, from Rajhi Invest and Saudi Basic Industries Corporation, respectively, creating a national champion in a domestic steel sector that has consolidated.

Similarly, Adnoc’s Covestro acquisition confirms the prominent role that national oil companies continue to play as they morph into energy companies with more diverse product slates, and in turn are required to grow inorganically at times. 

The Covestro deal represents a similar move to the PIF’s steel sector play last year. The German company would become a key plank in Adnoc’s ambition to create a speciality chemicals business. In a similar way, Borealis, in which Adnoc is a minority stakeholder, acquired Austrian chemicals group Integra Plastics in a deal announced in April 2024.

“The acquisitions from Adnoc are in line with a vision that they set out [in 2017], when the company restructured and broadened its scope to be a global business, looking actively for global opportunities to grow and diversify,” says Alice Gower, a partner at Azure Strategy.

She says that the interest in the European downstream sector is “a really smart move, because it not only ensures a market for their products, but it replaces Russian supplies and creates a dependency between Europe and, in this case, the Saudis or Emiratis”.

UAE companies’ interest in buying into European industrial firms has been evident this year. February saw Adnoc complete its long-running effort to acquire a 24.9% stake in Austrian petrochemicals firm OMV, and in May, state held Emirates Global Aluminium completed the acquisition of German aluminium recycling firm Leichtmetall Aluminium Giesserei Hannover. 

Another geographic theme has seen GCC firms target Asia and Africa – the latter increasingly a focus in terms of its resource opportunity, as well as its capacity to provide a growing consumer market with an emergent middle class.

Last year, Asia figured in some of the biggest deals involving Mena companies, such as the $2bn investment by the UAE’s Mubadala in Chinese fashion retail firm Shein, and Qatar Investment Authority’s purchase of a $1bn stake in India’s Reliance Retail Ventures.

Resources – particularly transition minerals – look set to remain a prominent theme for Mena dealmakers. In Africa, the UAE’s International Resource Holding, an affiliate of Sheikh Tahnoon Bin Zayed-headed International Holding Company, completed its acquisition of Zambia’s Mopani Copper Mine in March 2023, paying $1.1bn for a 51% stake. The UAE firm has moved into critical metals and sees this entity as playing a key role in developing the metal and mining supply chain.

Energy transition

The energy transition will continue to push Gulf acquirers’ M&A agendas. 

Abu Dhabi’s Masdar, eyeing a target 100GW of clean energy by 2030, has become an active M&A player. In June, it acquired a 67% stake in Greek company Terna Energy for $2.9bn. 

Deal flow at Masdar has been brisk, with a deal struck in September to acquire renewable energy provider Saeta Yield from US investment firm Brookfield for $1.4bn, handing it significant power assets in Spain and Portugal and a 1.6GW development pipeline. 

Masdar has also been growing its US foothold, closing a deal in October for a 50% stake in US renewables company Terra-Gen, which boasts a wind, solar and battery storage portfolio of 3.8GW.

Meanwhile, with the PIF and Mubadala both committed to net-zero targets by 2050, in addition to working to decarbonise their existing portfolios, the funds are investing in green assets and in technologies that support decarbonisation, notes Bain & Company. 

Azure Strategy’s Gower cautions against reading too much into the professed diversification agenda, however. 

“Everybody talks about diversification, but if you actually look at what they’re investing in, it’s not that far from the fossil fuel industry,” she says. 

“There is a vertical integration logic: you’re upstream and you want to then become more involved in midstream and downstream – that makes sense. But the businesses that they are buying are pretty low-margin, so there has to
be a different reason behind this approach.”

Instead, defensive motivations are in play. “It is about capturing shares in assets across different markets in order to spread risk, and then diversifying revenue streams away from direct exports, given their geographic location,” she says. 

“Look at what is going on in the region at the moment, and the increase in shipping costs, the instability and insecurity risk.”

Banking mergers

M&A in the Mena banking sector has slowed down in the past five years, following a spate of deals that mainly reflected the reordering of state holdings in large Gulf banks.

In March 2024, the Egyptian subsidiary of Bahrain’s Bank ABC completed its merger with the Egyptian subsidiary of Lebanon’s Blom Bank, tripling Bank ABC’s market share in Egypt.

Market speculation is now centring on consolidation within Kuwait’s banking sector.

The proposed merger of Boubyan Bank and Gulf Bank – Kuwait’s third- and fifth-largest lenders – would create an Islamic lender with assets of about $53bn.

“GCC banks in general have been keeping their options open because these are small, concentrated economies and markets, and therefore international expansion will help diversify business models and improve profitability,” says Redmond Ramsdale, senior director for banks at Fitch Ratings.

M&A moves have taken Gulf banks into the wider region. 

“External growth is part of some GCC banks’ strategy to diversify business models and improve profitability,” says Ramsdale. “By deploying capital into high-growth markets, they may be able to compensate for weaker growth in their home markets.”

In the wider Mena region, M&A activity in 2025 will be driven by the big regional SWFs and GREs. The need to decarbonise their portfolios will shape inorganic growth strategies as they look to buy lower-carbon assets ‘off the shelf’ to meet net-zero and emission-reduction targets.

With sizeable acquisition budgets at their disposal, these players do not lack the financial firepower to target assets that will help them meet their goals.

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James Gavin

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    In a region where geopolitical turbulence has amplified by an order of magnitude, Jordan is managing to stand out as a beacon of relative stability, with the Hashemite kingdom’s banking sector acting as a case in point.

    Lending has grown in recent years, with credit up by an average 4.9% between 2020 and 2025, according to the Central Bank of Jordan (CBJ) – a faster rate than average nominal GDP growth of 2.3% over the same period.

    The IMF took care to note an increase in credit to the private sector in its latest Article IV assessment of Jordan, standing at 80.1% of GDP at end-2024, compared to just 66.6% 10 years earlier.

    Banks in the kingdom ended 2025 in a liquid state, but caution remains the watchword for local lenders. The loan-to-deposit relationship bears that out. For that year, deposits ended up 7.1% to JD50bn ($70.5bn), while credit facilities were up just 3.7% to JD36.1bn ($50.9bn).

    Analysts see this as a case of Jordanian banks being prudent, given the tricky operating environment and limited lending opportunities, rather than banks being excessively defensive. 

    According to Christos Theofilou, an analyst at Moody’s Investors Service, it is cautious lending in fraught macroeconomic conditions.

    “On the one hand, we’ve seen a structurally strong and stable deposit base that has been growing more compared to lending. That indicates a certain degree of limited risk appetite, but also the fact that, given the challenging operating conditions, there were limited business opportunities in the market,” says Theofilou.

    Liquidity banked

    Jordan’s banks look able to withstand further shocks, given solid capital positions and relatively strong earnings performances. Arab Bank, the largest lender, saw net profits grow 12% last year to $1.13bn, despite a highly charged geopolitical situation across Jordan and the neighbouring Palestinian territories.

    As Moody’s notes, Jordanian banks’ funding base remains stable, with banks mainly deposit-funded – with deposits at 67% of total assets as of December 2025 – mostly comprising well-diversified retail deposits. The ratings agency noted that banks retain the capacity to increase lending without relying on more volatile and costly external funding, as indicated by the 72% loan-to-deposit ratio.

    The earnings outlook in Jordan may be better than other banking sectors in the immediate region, but this does not translate into a picture of booming profits going forward.

    “Profits should remain resilient, but we’re not expecting any significant improvement,” says Theofilou. “We have the challenging operating conditions, and the lower interest rates that have come down over the past few years. On the other hand, banks have had lower provisioning in the past 12 to 18 months compared to the period prior to that.”

    Asset quality remains a strong point, despite some weakening over recent years. Moody’s sees non-performing loans (NPLs) falling below 5.5% this year from 5.8% in June 2025.

    However, the continuing Iran conflict and its deleterious regional impacts – including on the West Bank, where about 9% of Jordanian banks’ loans are located – suggest that bank exposures to troubled sectors will require focus.

    Concentration bites

    Another challenge is the banks’ high credit concentration among large corporates, with a noted high exposure to real estate.

    Commercial and residential real estate loans accounted for 17.4% of total credit facilities as of year-end 2024, while residential mortgages accounted for 40.9% of household credit. Regulatory oversight may limit the impacts – the CBJ caps loans for real estate at 20% of local currency customer deposits.

    The real estate exposures are meaningful, but Moody’s views overall concentration risk as more material rather than real estate risk per se.

    “So, on the one hand, Jordanian banks have real estate loans, both commercial and residential, slightly below a fifth of the total credit facilities,” says Theofilou. “Banks also face challenges in quickly disposing of properties, but within the context of a relatively lengthy foreclosure process. On the flipside, we see Jordanian banks having fairly high collateralisation, so they do hold a lot of collateral against the real estate exposures.”

    The CBJ has earned plaudits for its regulatory oversight, with the IMF lauding its strengthening of the Financial Stability Committee, while refocusing its role on macroprudential policies and systemic risks. 

    Jordanian banks’ brisk uptake of digital technologies has also been a positive.

    Last year, digital payment systems in Jordan recorded over 184 million digital transactions, exceeding $38bn in value. The CBJ has introduced an AI regulatory framework for the sector and the authorities are now working to burnish the country’s credentials as a fintech hub, based on a 90% plus internet penetration. 

    In the year ahead, Jordanian banks will be looking to find exposures to new lending opportunities, given the past risk aversion that has prevented them from building stronger growth avenues.

    Projects beckon

    Big new infrastructure projects could yet come to the fore as bankable opportunities for local players. For example, the National Water Carrier Project, costed at $5.8bn and aiming to increase water supply by 40%, is looking to achieve financial close this summer. It is the type of project that could prove significant in helping diversify local lenders’ exposure away from real estate towards infrastructure.

    “If we see a lot of these infrastructure projects requiring financing coming to the market, then we could see a bit of a pickup in lending growth as well,” says Theofilou.

    New lending opportunities will come from large corporates and infrastructure-related lending. Those will play the key role in any significant pickup in credit growth, says the Moody’s analyst, in contrast to the small- and medium-enterprise (SME) sector, which poses a different challenge for banks.

    “The SME segment does represent a potential growth opportunity and it’s supported by policy focus, however its expansion is constrained by the operating environment. The sector is exposed to high overall credit risks, and when conditions are challenging, banks tend to be more cautious in lending to the SME markets,” says Theofilou.

    So long as the regional conflict persists, banks will be inclined more towards caution than exuberance in their lending approaches. And yet that strong and stable inclination may be what serves them best in a notably turbulent year in the Middle East’s recent history.

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