The purchase of overseas assets by countries in the Gulf region is growing at a record pace, with recent buyouts now totalling $25bn, according to data compiled by Bloomberg. Qatar, in particular, ranked highly this year in foreign asset acquisitions. The country’s sovereign wealth fund, Delta Two, handles most of the country’s investment activity.
In terms of overall global M&A, August was a particularly harsh month; the rate of transactions fell to its lowest in two years, according to international financial information company Thomson Financial. It has been a tumultuous time with ripples from the US sub-prime mortgage crisis affecting debt markets around the world. In turn, the overall value of M&A deals dropped sharply and the subsequent rise in corporate borrowing costs have led to falling stocks.
Companies and private equity firms worldwide closed $544bn worth of deals in July, which shows the effects of the sub-prime crisis had not yet wobbled the M&A boom that started in 2003. One month later, however, Bloomberg reported about $188bn in deals were done, the lowest amount raised since July 2005.
While the M&A slowdown may only be temporary, many industry observers are conservative about their outlooks for Leveraged Buyouts (LBOs), as the financial markets remain turbulent. It is widely agreed that M&A will not continue to enjoy the same boom witnessed in recent years, at least for the near term. However, this is far from the case in Qatar, where large-scale investments outside the country are expected to remain very high. With oil accounting for about 40% of GDP and about 63% of government revenues coming from this sector, there is plenty of room for M&A investment activities in Qatar.
Nicholas Ferguson, chairman of SVG Capital, a private equity investor and fund management business, said, “Going forward, it is expected that banks will lend smaller amounts against target companies’ cash flow.”
This reduction in lending amounts will continue to contribute to a downturn in the volume of new deals until pricing readjusts, and this adjustment will eventually lead to a rise again in the long term. Meanwhile, the Gulf Co-operation Council (GCC) region remains robust and seemingly unaffected as its sovereign funds remain highly active in LBOs, with Delta Two remaining in the global headlines.
As the price of oil has risen to new highs, revenues in the GCC continue to increase. This allows for the purchase of foreign assets that diversify the region’s portfolios and ease the region’s reliance on its hydrocarbon resources. From Abu Dhabi with its $1.35bn, 7.5% stake in The Carlyle Group, an American-based global private equity firm, to Dubai and Qatar vying for competing stakes in US-based Nasdaq, the London Stock Exchange (LSE) and the Sweden-based OMX, the region is growing its coffer of foreign assets at an exponential rate. Not only has this recent spurt in foreign acquisitions helped counter the downturn in M&A, the moves are leading to a significant reshaping of global financial markets. With Qatar having upped its shares in the LSE to nearly 24%, the fast-developing country and its close neighbour and growing competitor Dubai now own a combined 48% stake in Europe’s oldest stock market.
The GCC has already spent $68bn on foreign acquisitions this year and Qatar in particular is standing out in the eyes of global financiers as it seeks to diversify its economy through several, high-profile moves. Earlier this year, the Qatar Investment Authority (QIA) purchased a controlling stake of 25% in J Sainsbury Plc, a UK-based food retailer. More recently, QIA has won approval from the British company to examine the company’s financial records after making a $21.7bn acquisition offer. Local media report the Qatari government has acquired a one-third stake in London’s Shard of Glass real estate development.
Qatar’s sights are not solely set on Europe for asset acquisition, but have extended to Asia with Qatari-led consortiums active in Malaysia as well as to other countries in the GCC and the greater Middle East and North Africa region. Earlier this year, Qatar Telecommunications Co agreed to pay $3.7bn for a 51% stake in Kuwait’s National Mobile Telecommunications, which operates in Iraq, Tunisia, Saudi Arabia, Algeria and the Maldives.
While worldwide expansion and diversification are part of the vision of how to achieve growth at home, the type and scope of investments are also important. “They are not just putting their money in bank deposits and government bonds any more,” said Eckart Woertz, chief economist at the Gulf Research Centre in Dubai. “They are after strategic assets.” This change has not gone unnoticed, with key observers noting a new era in Gulf economic growth taking place.
The current spate of foreign acquisitions by Gulf-based companies has already surpassed all forecasts for 2007, and the buying frenzy is set to continue well into 2008.
As gas and petrochemicals exports, along with Qatar’s domestic demand, are set to see sharp increases, economic growth should continue with real GDP set to expand by 9.5% in 2008. Qatar’s continued non-oil investments in overseas assets will be integral to keeping the country’s fiscal account at a surplus, thus further diversifying the fast-changing and increasingly important Qatari economy.
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