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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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    Replacing LNG

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    “Prior to the war, a lot of countries were already somewhat hesitant to develop new LNG import infrastructure,” he said.

    “There were existing concerns about the high price of LNG and potential volatility, and these concerns have increased significantly since the war began, leading several developers to consider other options, which in some cases include renewables projects.

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    Everybody’s starting to realise that there is something inherently insecure about the LNG supply chain and they don’t want to have to deal with an affordability crisis every four years
    Christopher Doleman, Institute for Energy Economics and Financial Analysis

    Second thoughts

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    Speaking at a conference on 4 March, Oliver Naidu from Netherlands-based Royal Vopak said the company now plans to decide on the $3bn terminal in the first quarter of 2028.

    The power station and regasification complex, slated for development in the Durban area, would have had the capacity to produce 1.0-1.8GW of electricity.

    Nuclear and coal

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    Commenting on the restart, KHNP president Kim Hoe-Cheon said: “In a situation where energy supply instability persists, the continued operation of nuclear power plants based on safety is an important means of securing national energy security.”

    Across Asia, there has also been a surge in the use of both solar and coal amid high LNG prices.

    In Pakistan, the country’s Power Minister, Awais Leghari, said that the country would pivot away from LNG to focus on domestically produced coal.

    “With a reduction in LNG generation, plants running on locally mined coal will be able to produce more during off-peak hours,” Leghari told Reuters.

    Similar coal ramp-ups are also taking place in Vietnam, the Philippines and Thailand.

    Coleman believes increased use of both coal and renewables could mean LNG’s role in the global energy mix falls short of previous expectations over the coming years.

    “It’s possible that we will see a dual surge – where both renewables and coal use are ramped up,” he said.

    “This is an interesting prospect because it will effectively remove gas as a so-called ‘bridge-fuel’ and we may see the transition progressing more directly to the use of renewables and battery storage, with less of a role for gas than was previously expected.

    “Really, it’s turned out that LNG was just a bridge to volatility and insecurity compared to something like solar, which is very reliable and predictable.”

    Eroded outlook

    The demand destruction in LNG-importing countries driven by the current energy crisis is likely to mean that the long-term market for LNG exports could be significantly smaller than previously thought, negatively impacting LNG producers worldwide.

    Qatar and the UAE are likely to be hit harder than producers in other regions for several reasons.

    Attacks on infrastructure and disruptions to shipping are preventing them from capitalising on the current period of high prices, while producers in other regions are recording windfall profits.

    In addition, dealing with the logistical and financial consequences of the conflict is likely to divert resources away from progressing new projects, pursuing efficiencies and securing future customers.

    Another factor likely to weigh on LNG operators in Qatar and the UAE is the persistence of customer concerns about the reliability of shipping LNG via the Strait of Hormuz.

    This could compel Adnoc Gas and QatarEnergy to sell at a relative discount compared with sellers in other regions, or to increase contractual flexibility.

    It could even push these producers to rethink future projects to diversify export routes. For Qatar, this could take the form of a gas pipeline via neighbouring countries. For the UAE, one option could be developing an LNG terminal on the other side of the Strait of Hormuz, reducing reliance on the bottleneck controlled by Iran.

    While the current conflict is a major setback for LNG operators in the UAE and Qatar, once the Strait of Hormuz reopens and security risks diminish, it is likely that exports will ramp up relatively quickly and former clients will return.

    However, questions remain about when this will happen. If safe passage for LNG tankers can be secured within days or weeks, the long-term impact is likely to be limited.

    If disruption continues for longer, it could transform the outlook for the Middle East’s LNG sector for years to come.

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    Wil Crisp