Deal activity in Industrials, Manufacturing and Transport sector to rise in Africa and the Middle East in the next two years

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Sonia de Vries of Baker McKenzie

Baker McKenzie’s Global Transaction Forecast shows a rebound in global M&A transactions in the Industrials, Manufacturing and Transport (IMT) sector in 2018, with global M&A rising to US$531.4 billion, up from US$483 billion in 2017. The Forecast predicts that M&A activity in the IMT sector will be worth US$2.9 billion in Africa and the Middle East in 2018, up from US$ 2.7 billion in 2017. In 2019, deal value in the IMT sector in Africa and the Middle East will increase further to US$ 3 billion.

Transaction value is forecast to be highest in Asia Pacific, with transactions totalling US$183.8 billion, followed by North America with US$162.9 billion, Europe with US$154 billion and Latin America with US$27.8 billion. In 2017, North America topped the list with US$195.6 billion in IMT deals compared to US$149 billion in Asia Pacific, largely because of tighter currency controls the Chinese government imposed in 2016 that reduced outbound investment in the entertainment, leisure and real estate sectors.

“This prevented some almost certain transactions from coming together in the industrials and utilities markets even though strategically, these transactions were in the interest of the Chinese economy,” Nikolaus Reinhuber, global chair of Baker McKenzie’s Industrials, Manufacturing & Transportation (IMT) Industry Group says. “Because of this, Chinese bidders lost some credibility with sellers.”

Now that the Chinese government has loosened the restrictions, Chinese investors are rebuilding that trust, and IMT deal activity in Asia Pacific is rising.

The top IMT deals completed in 2017 include Chinese state-owned subway operator Shenzhen Metro Group’s purchase of a 29% stake in China Vanke Co, one of the world’s largest home builders, in two transactions totalling US$9.7 billion. US heavy equipment maker Deere & Co acquired Germany’s Wirtgen Group for US$4.9 billion to expand its road construction operations amid slowing farm equipment sales.

The Forecast notes that the rise of emerging technology and the easing of key economic risks and political uncertainty that cooled global deal-making in 2017 will likely fuel the rebound in M&A activity and push IPO activity higher in 2018, along with deal drivers that vary by subsector.

“A number of IMT companies face disruption by things like digitisation and are having to rethink their business models,” Reinhuber says.

“This leads to carve-outs and spinoffs on the one hand, and the need to develop strategies to invest in smaller technology businesses on the other.”

Meanwhile, the industrials sector was the most active by IPO volume in 2017, with 284 listings worth US$43.8 billion. The largest of those transactions was Italian tire maker Pirelli’s US$2.8 billion listing in Milan just two years after the company was taken private in a deal involving ChemChina, followed by US industrial machinery maker Gardner Denver Holding’s US$950 million listing on the New York Stock Exchange.

In 2018, Baker McKenzie expects the number of these megadeals to rise even further now that volatility in the US stock market has calmed to record lows, concerns about China’s economic slowdown have eased, and world trade is accelerating at the fastest rate since 2011.

Sonia de Vries, Partner and Head of the IMT Sector Group at Baker McKenzie in Johannesburg says that China’s One Belt, One Road initiative to build trade and transport links across Asia and Africa, is likely to accelerate infrastructure spending throughout the region, providing new M&A opportunities for construction companies in 2018.

“Countries in Africa that will benefit from the One Belt One Road initiative include Kenya, Tanzania, Ethiopia, Djibouti and Egypt. East Africa has an integral role in the initiative, owing to Djibouti’s ports, Ethiopia’s manufacturing, and the region’s existing plans to connect rail, road and energy network. Infrastructure is incredibly important for the development of the energy sector in the region, which is in turn key for economic growth.  Major transactions related to projects in the power and infrastructure sector and related financing are also in the pipeline.  This will contribute to the increase in deal volume and value in the IMT space in 2018,” de Vries adds.