UAE manufacturers eye M&A growth opportunities
The region continues to attract capital, supported by its strong legal framework and established infrastructure
The region’s manufacturing industry is experiencing an uptick in merger and acquisition (M&A) activity, with high interest rates and geopolitical instability driving companies to consider strategic inorganic growth opportunities.
Speaking during a live webinar organised by Mashreq and MEED, industry experts from across the value chain of the M&A process discussed the uptick in market activity and its significance in the UAE manufacturing sector.
Deal flow has been brisk. Abu Dhabi’s food manufacturing sector has witnessed significant M&As, with Ghitha Holding, part of IHC Food Holding, acquiring a 12% stake in Al-Ain Dairy Farm for AED61m ($16.6m) in February 2024. It followed this up in April with the acquisition of Marmum Dairy Farm, without disclosing the value or size of the stake. In July, Ghitha acquired Saudi Arabia-based Arabian Farm Investments for AED240m ($65.3m).
In March, Abu Dhabi-based Unifrutti Group announced the acquisition of 100% of Bomarea and the Peruvian operations of AvoAmerica from the US’ Alpine Fresh, without revealing the deal’s value.
In the industrial sector, Emirates Global Aluminium (EGA) recently acquired an 80% stake in US aluminium recycling firm Spectro Alloys Corporation. In May, EGA acquired a wholly owned stake in Germany’s Leichtmetall Aluminum Giesserei, an aluminium recycling company.
RAK Ceramics undertook a series of acquisitions in 2022, buying German brassware and showering systems specialist Kludi for $42.9m.
These have come amid a backdrop of higher interest rates, which have made the cost of borrowing to make acquisitions more prohibitive. However, for cash-rich manufacturers, this has conversely strengthened their buying power when targeting firms that have struggled under the same economic conditions.
“Manufacturing companies are capex intensive and when borrowing costs go up, they are most likely to be affected,” said Karan Bansal, senior director for investment banking at Mashreq.
With fewer financing options, valuations came under pressure, again strengthening the acquirer’s hand. “The bid-ask spread between buyer and seller tends to increase, while consumer spending tends to slow down,” said Rohit Maheshwari, head of Middle East and North Africa (Mena) M&A Advisory at Deloitte.
But now, as interest rates start to decline, the appeal of inorganic growth increases as companies gain a greater appetite to borrow. “A lot of UAE companies and investors, especially those with strong balance sheets, see the possibility of acquiring portfolios that they could not afford in the past. The valuations are making a lot more sense,” said Maheshwari.
Bhoutik Vyas, head of M&A, corporate strategy and investor relations at RAK Ceramics, noted the sense of better valuations. “Many UAE companies are still struggling with a backlog of inventory. They are open to taking a haircut on the valuation and being available for acquisition,” he said.
Bank advisers nonetheless urge companies to think hard about their debt positions when contemplating acquisitions. “We always advise clients to see how much of the current balance sheet is leveraged,” said Umar Khan, senior vice-president and unit manager, services and manufacturing at Mashreq. “If it is highly leveraged, or there is a long-term debt on the balance sheet, do not load up on more debt.”
Much M&A activity is now directed within Mena, rather than outward.
There are clear drivers. For UAE manufacturers, the incentive to set up a greenfield project in Saudi Arabia or Egypt, for example, is significantly lower than acquiring an existing player.
According to Maheshwari, more and more UAE corporates are becoming ambitious in terms of expansion. “They are constantly assessing for gaps in their portfolio and are undertaking strategic acquisitions, irrespective of the interest rate cycle,” he said.
The UAE remains an attractive destination for capital with its robust legal framework and infrastructure, along with its manufacturing sector, presenting some attractive targets.
“There are homegrown businesses that are looking for deep-pocketed investors for the next stage of their evolution,” said Bansal.
Stakeholders highlighted that structural drivers are as crucial for inorganic growth as favourable macroeconomic trends. These drivers include strengthening supply chains, the benefits of nearshoring – outsourcing to nearby countries – and reducing reliance on single-vendor relationships.
There is also better awareness among company founders looking into succession planning in the region.
“We often see early discussions around these considerations, which opens the door to a larger pool of investors,” said Maheshwari.
Some business owners are wary of putting more equity into the business and are considering ways to cash out or start another opportunity.
The manufacturing space in the UAE has been dominated by sponsor-driven businesses, many of which were set up years ago. Now, second and third-generation family members are involved, who are often not keen to run the business; they are looking for a means to cash out. “The company patriarch would rather sell the business and divide up the fortune among the family, and that’s driven a lot of M&A activity,” said Bansal
The motivation for resorting to M&A here is clear enough. “People are thinking, I’ve been a founder-led business for a long time. When I look to exit this business, I’ll not be able to turn off on day one, so it’s going to be a journey. That implies divesting a controlling stake over time,” said Maheshwari. “Leave it too late, and you may be limited to strategic investors, the ones who can come in and take over the entire business.”
Khan emphasised the importance of evaluating how acquisitions impact the balance sheet, noting: “Sometimes people see a very lucrative offer on the table, and they think they will never get this value again.”
Rushing into deals can open a pandora’s box that swallows cash flow. This reinforces the need to accurately forecast the value an acquisition will generate. “It is important to assess the cash flow impact and have a lot of contingencies in place,” advised Khan.
Once terms are agreed, companies need to consider post-acquisition integration to ensure operational efficiency. Almost two out of three M&A deals fail due to a lack of integration, noted Maheshwari.
The post-deal integration phase of manufacturing M&A deals now involves increasingly complex software, automation and AI ecosystems, which can complicate acquisitions.
“We advise clients to consider integration early and assess the strength of their synergy analysis, so any integration challenges are factored into the pricing,” said Maheshwari.
Ultimately, the consensus is that UAE companies will continue to prioritise acquisitions over organic growth.
“The process becomes challenging when pursued organically, as it often requires building from scratch, involving feasibility studies, consultants and potentially years before operations can begin,” said Vyas.
However, it is still important to conduct thorough due diligence before pursuing any M&A deals.
“Companies sometimes approach us with deals they believe are exceptional, with a 2X Ebitda multiple they couldn’t achieve organically. We caution them – if it seems too good to be true, it probably is,” said Khan.
