It might seem anecdotal to pitch Lebanon as a market for mergers and acquisitions. Be it in terms of the number or the size of deals, Beirut wouldn't make it to the top of any decent league table.
Excluding financials, only 10 deals were closed in the past five years, according to Zawya's database. Examples include Qatar First Investment Bank's acquisition of shares in Al Rifai, the nuts and crackers producer, France's Unibel's investment in Biomass Holding, and Khoury Home's deal with Hokayem Bros, both retailers.
There are obvious reasons for the scarcity of transactions so far: the size of the economy, to start with. Lebanon's USD 42 billion GDP is only a fraction of the region's output, which is dominated by Saudi Arabia's USD 652 billion GDP followed by the UAE's USD 386 billion. Moreover, the very notion of an investment banking culture is dwarfed when measured against the role of mainstream commercial banking activities in the country.
To put it simply, the Beirut stock exchange's entire capitalization is a mere 21% of the country's GDP, while total deposits reach a record 291% of the country's annual wealth creation. This reflects the tendency of corporations to rely on plain-vanilla lending and depositing instead of going up the balance sheet for more sophisticated financing schemes.
Finally, more often than not, business owners - typically long-established families of Levantine traders - would be extremely sensitive with control and ownership issues. Families consider potential dilutions induced by M&A transactions to be the first step on the road to losing an asset built through at least two generations.
Despite these fundamental factors hindering the development of a decent M&A market in Lebanon, the nation is not condemned to remain Lilliputian. New trends could unfold into supporting drivers of the M&A market; we believe four of these trends are worth mentioning:
First, the most "macro" trend that might spur GDP growth is the expected exploitation of Lebanon's offshore hydrocarbon reserves. Although commercial exploitation is not foreseen before six to seven years, the massive impact such a remote event might have justifies its inclusion in this list.
Just one of several offshore fields located in the southwest corner of Lebanon's waters could contain 12 trillion cubic feet of gas, with a potential market value of USD 36 billion. If this is confirmed, Lebanon's M&A activity might well come of age, triggered by massive investments, soaring public expenditures and booming consumption.
Second, ongoing efforts to revive financial markets in Lebanon have led to the promulgation of Law 161 in August 2011, which among others provides for the privatization of the Beirut stock exchange, and the creation of a Financial Markets Authority, similar to the American SEC or British FSA. An enhanced stock market provides better valuation benchmarks and a potential exit route for M&A transactions, while a specialized regulatory authority encourages M&A activity by mitigating legal and regulatory risk. A draft law on preferred shares issuance is in the pipeline, adding a flexible tool to the financing options of corporations.
Third, management succession and inheritance issues are increasingly pressuring family owned businesses and groups. Simply put, heirs multiply in family businesses typically established in
Lebanon around the 1950s and 1960s, i.e. a couple of generations ago. Owning a business, controlling it, managing it, investing in it, cashing out or diversifying away from it, etc. might generate significant conflicts of interests among those descendants.
Potential antagonisms might quickly become more threatening than the control preoccupation mentioned above. Opening up the capital brings many advantages in such situations: a strengthened financial capacity, an increased footprint, price and liquidity for the shares, implementation of corporate governance best practice, etc.
Fourth, besides Lebanon's decent participation in debt markets through its issuance of sovereign Eurobonds, the country might increasingly appear on the international investors' radar as a destination for M&A and public equity investments: it all comes down to the words "Frontier Markets". These smaller, less sophisticated markets compared to the famous Emerging ones offer the much sought-after advantage of "decorrelation".
Ironically enough, when in relative terms a country's market capitalization is tiny, and it lacks depth and liquidity, its stock market behavior is decorrelated from the international benchmark indexes of the likes of the DJIA or the FTSE. In other words, a frontier market is a safe-haven for investors battered by the global financial crisis that have infected every investable market place.
While one shouldn't expect to see Lebanon becoming the next big thing in M&A anytime soon, a prudent observer might definitely believe that something is in the making.
Stéphane Abichaker is head of investment banking at Blominvest Bank.
© Zawya 2012
