Reasons to be cheerful

Though 2020 has confronted companies with serious and unexpected challenges, it has come with opportunities for companies to expand through M&A or buyouts. Here, Jonathan Noble, Local Partner in Amereller describes the regional environment for such opportunities, highlighting important considerations and factors to keep in mind when taking action.

The UAE and broader MENA region have long been recipients of foreign direct investment (FDI) via strong international ties with investors and businesses in North America, Europe, and Asia.  While the multiple shocks of 2020 may have shaken investor confidence around the world, the MENA region will continue to be a destination for investment and growth.

In 2019, the UAE registered the fastest annual FDI growth rate in the MENA region with total inbound investment of roughly USD 3.4 billion.[1]  For 2020, the MENA region is likely to see declines of 30-45% in FDI inflows to the region. 

As a service provider of choice for European, Japanese, and American multinationals in the Middle East, we have had a front row seat to how the multiple hits of 2020 have impacted business.   

Even with the gloomy news of geopolitical uncertainty, the COVID-19 pandemic, and oil price shocks – our outlook is largely positive.  This is supported by positive trends in the M&A arena, and the potentially game changing breakthrough of the Abraham Accords. 

Fears of M&A’s Demise are Premature but the Road Ahead May Still be Bumpy

Despite the headwinds, some international companies have been active acquirers in the Middle East in 2020.  While deal value and volume decreased in the Middle East in H1, this trend may have started to reverse.  In most cases, companies identified acquisition targets before the onset of the pandemic and are now consummating deals despite the prevailing uncertainty.  We have seen fewer “opportunistic” deals than we initially anticipated as the pandemic accelerated, but this could change moving into 2021. 

As is always the case, due diligence will be a key factor for opportunistic buyers.  Distressed assets in the Middle East may be in trouble due to macroeconomic conditions but could also be facing sustained business issues not related to the pandemic.  These include consistent cash flow and liquidity problems; management turnover; disputes with third party creditors, customers, suppliers, and other stakeholders; and shareholder conflict. 

Buyers should consider some of the following issues when conducting due diligence on a distressed asset in the Middle East:

  1. Financial Position: examine the state of all loans and credit lines; determine whether cash management is proper; discuss the possibility of alternative financing to plug gaps.
  2. Governance: determine whether there are shareholders (including local owners) that may stymie a smooth transfer; review “drag along/tag along” rights; examine side agreements and shareholder documents, especially with nominal local shareholders; analyze any potential breaches of fiduciary duties and conflicts of interest.
  3. Material Contracts: review change of control provisions, default provisions, assignment clauses, setoff rights, and other contractual clauses that may be triggered by a share sale or asset transfer.
  4. Human Resources: consider whether there are essential employees for business continuity and success; if so, enter into employment agreements with non-compete and non-poach provisions; determine whether employees will be laid off, and, if so, consider when to implement a redundancy program.

As is always the case, crisis brings opportunity.  It will require skilled operators with discerning eyes, and advisors, to properly evaluate companies in the coming days.

Abraham’s Opportunities

The Abraham Accords may prove to be the biggest game changer for inbound investment into the UAE in 2020.  The United Arab Emirates (UAE) and Israel publicly announced plans to normalize economic and political relations on August 13th and consummated the agreement at the White House on September 15th. 

While this political breakthrough was years in the making, the legal infrastructure preventing commercial relations has been quicker to tear down.  On 29 August 2020, the UAE government published Federal Decree Law No. 4 of 2020 dissolving the Israeli Boycott Law, UAE Federal Law No. 15 of 1972 (the “Decree”). 

The Israeli Boycott Law prohibited any person or legal entity from entering, either personally or by proxy, into an agreement with Israeli entities or individuals. This included businesses having interests, branches, or agencies in Israel regardless of their nationality.  A breach of the Israeli Boycott Law was punishable by imprisonment of up to 10 years and a fine.

The opportunities for UAE and Israeli companies after diplomatic normalization are clear:

  1. continued growth in the defense and technology sectors; and
  2. new opportunities in agribusiness, tourism, and healthcare.

Some estimate that bilateral trade between the countries could reach USD 4 billion in the first years and quickly increase.  Startup culture is especially strong in Israel and the UAE, and there are significant opportunities for entrepreneurs to share new talent and ideas.

In addition, we anticipate that multinational companies may move Israel operations from more far flung locales like Hong Kong and Singapore to Dubai to take advantage of the geographic proximity.

Sustaining Momentum

With rising COVID case numbers in the MENA region, the key for businesses in Q4 and Q1 of 2021 will be to sustain any positive momentum that may have come from the summer months. 

Easy opportunities to right size have now largely been seized, and multinationals that have survived the lean period are looking to make investments for the post-Covid future.  We anticipate international companies will continue to invest in both mature markets in the MENA region like the UAE and developing countries like Iraq. 

Responding to the Challenge

The authorities in the UAE have courageously planned for the future while also supporting businesses through the pandemic period.  It is also up to service providers to continue helping clients through the next phase in this pandemic. 

As in many industries, the role we play as lawyers is evolving in unpredictable ways.  Business leaders will still look to us for hard-nosed legal advice, but we are increasingly being asked to act as business facilitators, practical problem solvers, and even IT troubleshooters.  These are challenges that we accept with gusto – just don’t ask me how to fix it when a Zoom meeting room closes without notice! 

[1] Foreign Aid Investment Trends in Asia Amidst Covid-19, Dubai Chamber of Commerce, The Economic Bulletin, September 2020, Volume 10, Issue 195