EFG Hermes sees manufacturing plays as the dark horse of Egypt M&A activity in 2017, is growing pipeline with UAE and Kuwait transactions: EFG Hermes is coming off a year that saw it become the top-ranked MENA-based house on the Reuters’ Middle East M&A league table for 2016. The firm has been best known in the past three years or so as an equity capital markets house (think: IPOs and secondaries) rather than as an M&A advisor, but Co-Head of Investment Banking Mostafa Gad says that’s changing after last year’s performance, which essentially amounted to a trial run of how the firm could use what he calls a “strong, liquid balance sheet” to kickstart a merchant banking franchise. “If you look at the league tables, two of our transactions stand out from last year. First, the Solb Misr advisory, which at c. USD 1.4 bn is the largest-ever Egyptian-to-Egyptian M&A to take place domestically. Then there’s the acquisition by DIFC-based Advanced Energy Systems, a top regional oil and gas services player, of rigs operating under contract to Saudi Aramco in KSA; the selling party was Hercules, a leading US-based rig operator. On that last one, we used our balance sheet to arrange the debt that backed the acquisition in a very complex multi-jurisdictional transaction.”

For the year ahead, Gad says EFG Hermes has three M&A transactions lined up for Egypt (one of which could close in the first half) and a further four split between the UAE and Kuwait. He’s bullish on IPO flow out of Egypt, the UAE, and Kuwait, but less so about Saudi Arabia. Between Egypt and the Emirates, he expects 4-5 offerings on listing venues including the EGX, London Stock Exchange and Nasdaq Dubai. We spoke with Gad yesterday for the latest in our occasional “Three Questions For…” series. Edited excerpts:

Enterprise: Are there any sectors set to dominate M&A flow in Egypt this year?

Mostafa Gad (MG): Education and healthcare will continue to be very exciting sectors, and I think we’ll see consumer cool off a little bit. There will still be interest in consumer flow given how large the market is, but it won’t be as frenetic as it has been the past couple of years. Companies that manage to provide the market with products that have inherent value propositions — backed by good R&D and prudent SKU management — will win the race. I think what will surprise most people will be the industrial sector — particularly companies with products that are import substitutes or have an export business contributing to their revenue lines

There’s been historically very little interest in manufacturing, particularly from foreign investors, because we had no pronounced or generalized competitive advantage. To be attractive, you either needed to have a strong technology base to go further up the value chain, or a China-type proposition: Low-cost production for a mass market. With the exchange rate where it is today, we can compete with most any Chinese or Southeast Asian producer — we’re simply very, very competitive in USD terms, even with whatever inefficiencies we may have because manufacturing has been challenged until now. The most interesting acquisition prospects will be those that have a maximum of 30-35% imported raw materials or production inputs in their cost structure

The ticket sizes for transactions won’t necessarily be huge. There are big players, but few giants — and even fewer of them will be for sale. But it’s going to be a very interesting sector to watch.

E: Will activity be led by domestic acquirers or by foreigners?

MG: It will be largely inbound. Coming out of our One on One conference in Dubai a couple of weeks ago, there was one theme that really surprised a lot of people: Foreign sentiment on Egypt is in many ways better than is sentiment among local players. Domestic firms are cutting back on capex — don’t expect them to go on an acquisition spree. Foreign investors are usually the skeptical ones, but they’re really excited. They can see the macro picture and how domestic players can springboard off it. Look, we as an economy took the pain for a long time — it’s time to start seeing why there’s room for optimism. The time to invest is ahead of a wave of growth, not after it starts to crest. Anyone who makes it through this year on solid ground will benefit in a very big way.

E: Will it be difficult for buyers to accept that their sale prices will, in USD terms, be half what they were a year ago?

MG: It might be an issue, but you have to remember that one of the reasons there was little activity in the second half of last year was because there was no clear benchmark for the exchange rate. At least today you have a clear rate and you can make an informed decision. There will be price gaps, but it’s about being creative in bridging them with, for example, the structure. But companies — if they’re not exiting 100% — need to take into consideration that yes, valuations have taken a tough hit in USD terms. But you’re going to be selling at higher prices going forward, your EBITDA will pick up as you grow — the numbers will shift for the better.