Consumer sectors will drive Saudi M&A activity in 2017, says PwC

“A recovery in investor and consumer confidence in 2017 is set to breathe life back into the Saudi Arabia M&A market,” said Andrew Nichol, Saudi corporate finance leader at PwC Middle East.

“We have seen a much improved start to the year with a real focus on deals in consumer-led sectors. We expect ongoing deal activity on the back of recent government reform and diversification efforts and, for at least the short term, as a result of a more attractive valuation environment,” he added.

Declines in government spending, liquidity and corporate profitability had impacted overall market sentiment in 2015 and 2016, leading to lower than average deal volumes and values over the past two years, the report noted.

M&A transaction volumes in the kingdom slowed down from an average of 12 transactions per quarter in 2014 to seven per quarter in 2015 and 2016.

Deals that did close were driven by family corporate groups focusing on core activities, leading to sales of assets considered non-central to key business lines.

Consumer-led sectors – such as retail and leisure, healthcare and pharma, and education – dominated the M&A transactions market, constituting 55 percent and 48 percent of 2015 and 2016 activity, respectively, an increase from 25 percent in 2014, the agency said.

Meanwhile, the energy sector’s contribution dropped from 20 percent in 2014 to almost 5 percent in 2016.

Looking ahead, the integration of the secondary stock market (Nomu) is set to enhance the appetite for M&A as issuers seek value creation opportunities pre-listing and use the new market as an additional exit platform.

The government’s move towards boosting privatization will also boost M&A opportunities, the report said. Key sectors that will be affected by ongoing privatization measures include healthcare, transportation and education.

PwC added that it expects Saudi investors to continue to look outside the country for diversification and expansion opportunities. Cross-border activity is also seen increasing with the involvement of regional and international private equity firms, primarily in consumer-led sectors.

Write to Nadeshda Zareen at nadeshda.zareen@argaamplus.com