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COVID-19: KPMG expects an increase in M&A activity in GCC

In a recent report, KPMG highlights that there is an expected increase in merger and acquisition activity in the GCC region as a result of COVID-19.

|Jun 5|magazine7 min read

As small and medium enterprises (SMEs), and several other large organisations look for equity via capital injections to satisfy working capital needs, Ali Maabereh, Head of M&A at KPMG in Saudi Arabia, expects to see an increase in mergers and acquisitions in the coming months as a result of COVID-19.

"The current pandemic is creating a lot of uncertainties and contradictions in what to expect after the dust settles. The expected key impacts on companies are shortages of liquidity and working capital requirements. Though companies might be running a healthy P&L, there will be significant pressure on working capital requirements," commented Maabereh. “Deal making going forward will favour buyers, but such assumptions are heavily dependent on investors being bullish in seizing investment opportunities.”

However, KPMG does highlight that buyers will be subjected to deals which encompass complex structures protecting and indemnifying buyers, due to the impact of the pandemic. “The need for immediate cash could drive the acceptance of low valuation multiples offered by buyers,” said Maabereh, believing that buyers will have to be creative when it comes to the valuation approach, valuing companies based on historical performance, post-Covid business plans and writing off and normalising the impact of the pandemic. 

“Even though warranties are most probably going to be in-favour and dictated by buyers given the risk associated with any potential transaction, deals are likely to be structured in ways to protect buyers such as earnouts, leveraged buyouts, mezzanine funding and shareholder loans,” added Maabereh.

Another major expected change reported by KPMG to the merger and acquisition landscape will be the sector focus for investors in the region with sectors such as aviation suffering from the pandemic which will require years to recover. While other sectors including food and beverage will emerge as defensive with the focus for investors shifting towards backend businesses such as food production and supply rather than retail.

Due to the unrest in oil prices investors are expected to continue to focus on sectors that emphasise economic diversification and sustainability, with sectors such as manufacturing will continue to attract investors driven by government requirements to push for local satisfaction of economic needs.

“Despite dry-powder increasing globally over the past couple of years, it is not a luxury the region partakes, except for a handful of private equity funds, family investment offices, and regional sovereign wealth funds (like the Public Investment Fund) who are preparing pipelines of acquisitions since the markets are in their favour,” concludes Maabereh. 

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