Management buyouts:an attractive alternative [Archives:2008/1119/Business & Economy]

By Rami Bazzi
For Yemen Times
This article sets out a new possibility to finance growth of private companies in the MENA region, namely with Private Equity and through Management Buyouts (“MBOs”) in particular. MBOs have established a presence in many other parts of the world and it is expected that this type of transaction will soon gain popularity in the emerging Middle East. MBOs have become possible in the MENA region following the rise of Private Equity (“PE”) that supports managers to become shareholders through MBOs. MBO also represents a new attractive alternative for the various shareholders of the many state-owned and family-owned businesses in the Middle East to exit or rationalise their assets. To managers, an MBO can create the opportunity to execute their vital strategies for growth, aligning the interests of employees and business strategy through equity ownership.

Limited access to capital form hurdle for growth

Unlike other parts of the world, the majority of Arab businesses are family owned with only a few of the largest companies in the region listed on a stock exchange. The OECD reports that the largest twenty companies in Bahrain, Lebanon, Egypt, Kuwait, Morocco, Oman, Saudi Arabia and in the United Arab Emirates are not listed on any stock exchange. In contrast, 17 out of the 20 largest corporations in Jordan have a listing on the Jordan stock exchange. The Saudi, Kuwaiti and Omani economy are dominated by few state-owned enterprises and privately owned companies such as Abdul Aziz Al Barahim, Abdullah Taha Bakhsh, Al Amoudi, Al Ghurair, Al-Waleed, Al Kharafi and family, etcetera. These businesses can be huge, The net worth of Al Kharafi and family, for example, is estimated to be over USD 5 billion.

These types of ownership often form a hurdle for the growth of private companies as expansion capital is often limited and room for entrepreneurship is restricted. Capital markets can offer access to resources that are crucial for growing companies to establish the size it takes to succeed in the global economy. Besides the money to support growth, capital markets install proper corporate governance which in turn enables companies to become more transparent and efficient.

In emerging markets like the MENA region however, access to capital markets is not well developed yet and as such companies find it difficult to secure financing. The banking industry is conservative in the region with banks financing, for services companies for example, reaching only 20% to 40% of total capital or 3 to 4 times EBITDA while requiring in many cases personal guarantees of all shareholders. Companies that are fortunate enough to obtain bank financing are faced with high costs of debt reaching 9% to 14% or even higher.

The rise of the Private Equity sector

An alternative to bank financing and capital markets is provided by the Private Equity (“PE”) sector which is becoming more popular in the region. Private Equity is provided by investment institutions and wealthy individuals who are prepared to back private companies, some of them lacking proper structure, corporate governance and efficiency, in exchange for shares in the company. The equity provided is often coupled with the support of professionals that help institutionalise family businesses, implementing among others, a proper corporate governance framework that is key to sustainable growth of today's enterprises.

The figure illustrates the rise of PE in the MENA region as reported by Zawya in 2006. The 2007 Dow Jones Private Equity report an even sharper growth with a total of USD 16 billion of PE funds of which USD 10 billion in 2006 alone.Private Equity funds are surging as the number of funds and their sizes grow, both stimulated by the increase in liquidity in the region following high oil prices and government initiatives to foster privatisations.

Management Buyout – a major market in other parts of the world

The emergence of PE as a new form of capital for growth has also introduced a new phenomenon to the Middle East, namely Management Buyout (“MBO”). A Management Buyout is a form of transaction whereby a company's existing managers acquire a large part, or all of the company, supported in many cases by PE.

European MBO market ($ billion), 2000 to 1H2007

To date however, few MBOs have taken place in the Middle East even though this form of transaction has been rising globally over the last two decades. Besides the USA, where the MBO market first took off, buy-out markets are well established in Western Europe while growing rapidly in both Asia and Eastern Europe.

This global popularity of Management Buyouts is brought about by:

– Large conglomerates selling non core activities through MBOs;

– Managers who consider their company undervalued buying out existing shareholders;

– Managers of bureaucratic companies that can execute their growth strategies through MBOs;

– Incentive realignment through enhanced equity ownership of employees;

– Family owned businesses that wish to exit or rationalise part or all of their assets;

– Strong financial results of the majority of post-MBOs;

Management Buyout – an alternative in the Middle East

So why have MBOs not previously been considered in the Middle East? To begin with, there were few financiers supporting such transactions. In addition, structuring an MBO transaction can be very time consuming and requires finance professionals to negotiate potentially complex financing structures, especially when leverage is involved. The rise of Private Equity funds as earlier described in this article, could easily solve this problem. A second reason refers to the simple fact that business owners never thought of their own managers as potential shareholders as they did not have the funds. At the same time, managers would not risk their jobs by discussing opportunities with investors with little knowledge about MBOs. This is all expected to change as family owned businesses are showing a growing interest in rationalising their assets while governments are liberating markets and preparing for the privatisations of state-owned enterprises.

A rare, but very successful example of an MBO in the region is ATOS Origin Middle East (“AOME”). AOME had all the right ingredients for a fruitful MBO; AOME was a commercially viable business, run by a capable, committed and well balanced management team. In 2006, AOME's parent company ATOS Origin France was willing to sell at a reasonable valuation price to its management, hereby supported by a Private Equity firm. The PE firm realised an exit through the sale of AOME to HP, securing an internal rate of return of 75%.

The Middle East, and the Gulf region in particular is ready for MBOs. With increasing pressure on family-owned businesses and governments to thrive in the global economy, Private Equity vendors may well hold the big shiny key to success.

Rami Bazzi is the Principal of Injazat Technology Fund, a USD 50 million private equity MENA-focused technology fund that is managed by Injazat Capital Limited, delivering innovative solutions to institutional and individual investors.
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