Event Report

Highlights from The Legal 500 Middle East M&A Summit 2020

With healthcare and education driving M&A volumes across the Middle East in recent years, it was fitting that the first session of our debut Middle East M&A Summit tackled trends in these sectors. The discussion was opened with Morgan, Lewis & Bockius partner Chadi Salloum presenting an overview of deal activity in the sectors. At the most basic level, he noted, transactions were being fuelled by population growth and rapid technological developments. However, each sector has unique drivers shaping both the types of deals that are being pursued and the ways lawyers approach them.

Human capital: M&A in healthcare and education

In healthcare, market players have focused on building up scale through joint ventures and acquisitions. An increasingly lucrative market in medical tourism is also driving moves for specialised facilities such as IVF clinics and long-term care centres. In the education sector, he continued, private-equity backed commercial operators are looking to expand portfolios outside the saturated UAE market, with Egypt and Saudi Arabia seen as promising candidates for expansion. In the case of Saudi Arabia, where fully 60% of the student population now attends a private school, it is not only the large market size that is attracting investors. The Kingdom is updating its regulatory frameworks, relaxing foreign ownership requirements and reviewing the type of curricula that gets taught in its schools. Meanwhile, the establishment of the Saudi National Center for Privatization has already led to tenders for healthcare assets.

Following this overview, Joanna El-Khoury, a senior associate in Morgan Lewis’s corporate team, turned to the panel to get a better sense of why education has become such big business in the Middle East.

Mayank Dhingra, senior education business leader at HP, started by noting that the UAE is by far the largest education market in the world. Indeed, with over 600 international schools catering to more than 600,000 students, the UAE’s education market is over two or three times the size of its nearest competitors.

For investors, the returns can be attractive. Across the GCC as a whole there are some 1,600 schools generating a total fee revenue of around $13bn, and offering profit margins of 20% to 30%, between two and three times the global average for the industry. The market is also ripe for consolidation, allowing greater efficiencies, and higher profits.

Demographic indicators show this growth will continue. Not only is a sizable fraction of the GCC’s population of school age, it is increasingly moving toward private education. ‘Ten years ago less than 25% of the local population was privately educated at international schools’, he said. ‘Now, around 50% to 60% of the local population is educated privately.’

Arvind Mathur, formerly general counsel of GEMS, the largest private school operator in the world, added that the returns offered by education were inherently stable. ‘Parents are unlikely to consider education as a discretionary expense and are therefore likely to give priority to both the quality of education and the continuity of that education over the long-term’, he noted. Further, underinvestment by governments in the region has led to aging infrastructure and large class sizes, all of which suggest the market will continue to grow. The opportunity may be obvious, but anyone looking to capitalise on it will have to deal with significant barriers to entering the market. As Marthur said, ‘It takes time to build a brand and a reputation, it takes time to obtain consents and permits. Unless you have a land bank then sourcing becomes an issue because real estate is scarce, particularly for school properties.’

Retaining staff, added Dhingra, was a further barrier to new entrants: ‘A career in education, particularly for those who work at international schools, can be experiential as much as anything else. You want to spend two years in Dubai, two years in Tokyo, and two years in Paris. It can be difficult for a new provider to match that level of aspiration unless they have sufficient scale to move people around within their network.’

The panel then turned to the opportunities in the healthcare sector, with Nils Vormelker, head of legal and compliance for the Middle East and Africa with Siemens Healthineers noting parallels with education in a sector largely driven by demographic development and the economics of consolidation. By 2050 the world’s population will be roughly 10 billion, a 25% increase on today. At the same time, disease is set to become much more prevalent, particularly in the parts of the world where population growth is likely to be highest. Finding ways to meet this growing demand for medical services in a profitable way will be a big challenge for the industry.

From this, the panel turned their attention to the transactional side of things, exploring how deal risks are identified and managed in the two sectors. Drawing on his experiences at GEMS, Arvind Marthur said that one of the first priorities for legal advisers in the region was understanding regulatory frameworks which vary in both scope and application. Within the UAE, for example, education providers must contend with both Federal regulators and legislations and separate institutions and laws in each Emirate. With so much regulation to deal with, Marthur advised GCs to focus on the essential points that could impact a deal: ‘What are the regulations around new schools vs existing schools? What are requirements for ongoing accreditation or inspection? What framework governs revenue recognition? All of these aspects would be considered pertinent legal risks that fall on a GC’s desk.’

Dhingra added that the risks could also be financial. ‘People shy away from talking about productivity when it comes to schools, but as an investor it is something you need to be aware of. Can you raise productivity within a school or not? Within the education space there has been a general change in the outcome orientation and style of pedagogy. If you take on a school that has old-style pedagogy you will have to invest a fair bit to bring in new ways of learning – has that been factored in to your risk analysis? Then there is the issue of ancillary revenues, such as income from letting out sports facilities, which a lot of schools rely on. What sort of revenue models been created around that? It is important to know this before going in.’

For Nils Vormelker, managing risk in the M&A process was closely related to understanding the dynamics of the market. ‘For MedTech providers, M&A will either introduce new technology or add new markets to an existing portfolio. In either case, that is potentially adding risk to the overall business. There is a lot of uncertainty in the legal frameworks governing medical technologies and it is extremely difficult to say precisely what a regulator’s position will be, so as GC you need to ensure there is lots of contingency in the deal. The question is not only whether you will be permitted to expand a particular part of your portfolio, but of whether you will be able to monetise it if you do.’

The issues raised by Vormelker led discussion to the subject of data privacy. Joanna El-Khoury noted that laws modelled on GDPR are being planned in the UAE. How, she wondered, would the introduction of such laws shape deal making.

Vormelker said that data privacy was key for the healthcare market, but in the Middle East and North Africa laws governing it tend not to be well harmonised. As a result, ‘in a deal that covers a lot of countries you are exposing yourself to a lot of risk. One of the big trends we have seen is toward localisation, which essentially prevents you from exporting or transferring data out of a country. This is a big issue when you are running due diligence on an asset. Do these laws mean you will need huge data centres in each country to hold the data? Who will provide 24/7 support to those centres? Increasingly, we also need to examine how the data was gathered and how the consents were obtained. Medical provider rely on hospitals for those immediate data processing consents, and the extent to which they were obtained within the regulatory framework will determine their value.’

While questions over data privacy are still generally not treated as a priority in the Middle East, Arvind Marthur argued thaty paying attention to the way in which a company has treated data could give useful insight into its overall risk profile. Here he offered a timely example that regulatory enforcement is not just a theoretical risk. In 2019, the UK regulator fined hotel chain Marriott £99m for a cyber incident that occurred in connection with the Starwood guest reservations database, which Marriott had acquired in 2016. The remarkable aspect of this case is that the data breach had occurred two years before the acquisition. As Marthur pointed out, the fine was in effect issues because a buyer had failed to conduct sufficient diligence.

Finally, the panel turned its attention to the countries in and around the GCC where significant transactional activity could be expected. Mayank Dhingra took up a theme from Chadi Salloum’s introductory comments and highlighted the potential of the African market. ‘Across the continent, 40% of the population is below the age of 15. That is a huge potential, and it is a potential already partly realised. Cairo alone has 72 private international schools, which makes it a larger private education market than Singapore. Expat populations are continuing to grow in many African cities, so the opportunity in the market is huge.’

Recent advances in the process of M&A: A view from the Middle East

For our second panel of the day, Mohammad Tbaishat, head of corporate at Pinsent Masons’ Dubai office, led a discussion of recent advances in the process of M&A. He was joined by some of the region’s leading GCs for broad-ranging session that covered everything from the roles of external and internal counsel in M&A to the use of artificial intelligence in conducting due diligence.

The discussion began with Zahid Kamal, managing director and head of legal at prominent Sharia-compliant private equity firm Fajar Capital, commenting on the growing divergence in the use of external counsel in small-to-mid-size M&A deal and large-scale transactions. ‘For the smaller deals’, he noted, ‘the tendency is now for legal departments to conduct most work internally, while on more sizable transactions, or those requiring multiple areas of expertise, it is still deemed operationally efficient to rely on external firms to deliver a project on time and within budget.’ However, he added, with M&A markets in the Middle East currently dominated by smaller deals the trend had been for in-house counsel to be much more closely involved in matters.

Yasser Aboismail, general counsel and compliance officer at Schindler Middle East, agreed internal counsel were becoming more involved in M&A transactions, but added that broader changes in the nature of the in-house legal function were partly responsible. ‘The trend has been for GCs to focus not only on laws or processes but on the goals business is seeking to achieve’, he argued. ‘GCs need to understand deals from a strategic perspective and are therefore concerned with how things like due diligence can be used to meet certain commercial objectives. While it may feel like we are doing more work internally, I do not think the share of work being sent to law firms has diminished all that much. Rather, we have seen a rebalancing of the workload. The in-house team is increasingly involved in interpreting the needs and goals of business and translating that to the external lawyers to execute.’

Nadim El Haj, head of legal and a member of the executive management committee at Abu Dhabi National Hotels Company, commented on the increasing tendency of M&A teams in the region to conduct a two-stage due diligence process, with a limited diligence used to identify the main commercial terms and legal risks followed by a more rigorous diligence once an in-principle agreement has been reached.

‘The advantages of such an approach’, he noted, ‘are of course to reduce costs. However, this inevitably increases the strain on legal teams once the heads of terms have been agreed and a full-fledged due diligence must be conducted in a very short space of time.’

Tbaishat raised the issue of using artificial intelligence in the due diligence process, something which has become prevalent in a number of jurisdictions, and particularly in the US, but which has so far failed to gain traction in the Middle East. All participants agreed there would be greater use of AI in the coming months, but were sceptical that it would become widespread in the local market. Fajar Capital’s Zahid Kamal pointed out law firms were less likely to offer tech-based solutions in a region where business was still driven by relationships of trust.

‘Decision makers to see people. Culturally, we don’t want to receive a report from a law firm that looks like a box-ticking exercise or an automated summary of the contracts.’ Kamal, who is also a board and executive committee member of several Fajar Capital portfolio companies, including the Cravia Group, added that automation was less useful in the world of private equity.

‘The issues and red flags we are looking for as a private equity investors are quite different to those of a strategic investor. We are looking at deals not just as buyers but as potential sellers five years down the line, and perhaps once again as buyers five years after that. There are so many different angles we have to cover that existing technology would struggle. Robots can determine black and white lines but, as lawyers, it is extremely rare for us to be asked our opinion on a black and white situation. That’s why people use the phrase “trusted adviser” so much in this industry. It is essentially a matter of trust in grey areas.’

Roula Khaled, an experienced M&A counsel with more than 15 years of experience in cross-border and domestic dispositions, mergers and acquisitions, including the acquisitions of data centres as well as a wide variety of corporate and commercial strategic transactions in the GCC and Africa, noted that the issue was not unique to the Middle East.

‘Even international law firms have a long way to go on the use of technology’, she commented. ‘It is not just a question of bringing in software but of training people to use it effectively. There is a lot to do on this in the US and UK and we should not imagine there is a ready-made solution that can simply be imported into this region. Introducing technology into the lawyer-client relationship also raises questions of privilege, accuracy, liability, and privacy and it is no surprise that people are reluctant to embrace it at this stage.’

Another notable trend in recent years has seen legal teams outsource the project management components of their M&A transactions. Many firms, including Pinsent Masons, now appoint internal project managers to help manage matters as a cheaper and more efficient resource. Would this, wondered Tbaishat, become more common in the region.

Yasser Aboismail responded that project management was a crucial yet often overlooked aspect of M&A. ‘Having someone who can really capture all the needs and aspects of the deal and manager the process is critical, and outsourcing that management component is necessary. For multinationals in the Middle East it takes on an added significance as central M&A teams may be geographically remote from the deal. M&A activity is generally lower in this region and it would be rare to find a local organisation that has a dedicated business level covering its domestic M&A matters. For that reason, outsourcing the project management components of a deal is likely to be the solution for many companies. However, the project manager would have to understand the cultures of both buyer and seller, their strategies and agendas. If the project is being managed by a firm that has not had a long-standing exposure to the business then it would require a lot of time-consuming elaboration.’

Finally, the panel drew on their experiences of large, complex M&A transactions to offer tips on how to effectively manage the process.

In late 2018, Nadim El Haj was closely involved in the negotiation and closing of Abu Dhabi National Hotels Company’s acquisition of five Emaar hotels in Dubai, one of the largest ever M&A transactions in the UAE hospitality sector. Dealing with an incredibly ambitious timeframe was one of the biggest challenges he had to face.

‘From signing the SPA to final closing we had under three months to do everything. That is not much time to negotiate a deal, particularly one that involves acquiring five assets containing one thousand rooms and valued at AED 2.2bn. Compounding this difficulty, we had applied a two stage due diligence and had to run the second stage while simultaneously negotiating agreements that covered everything from site management to IP and real estate development. Aside from the time pressure, it was a transaction that required a high degree of emotional intelligence. The seller was one of the biggest developers in Dubai, the hotels were retaining their branding, and we were entering a long-term relationship with the operator. To cope with such a situation you need both strong external legal counsel and strong leaders who can drive things forward relentlessly. You also need to have a system in place that allows immediate legal input on risks during the negotiations process.’

Prior to joining Schindler, Yasser Aboismail worked for a number of leading multinationals including EY, PepsiCo and Eaton Corporation. At Eaton he experienced more than 75 M&A transactions over the course of a ten year period that saw the company’s revenues grow from $5bn to $23bn. ‘This type of growth is something everyone dreams of, but it is not easy to manage’, he noted. ‘In fact, from what I have seen in the market, I would say that many companies – even those with a vast experience of M&A – encounter common pitfalls.’

His advice was to M&A counsel was to develop a marketing and business plan for asset before entering into any negotiations. ‘Make sure that this target will fit with your strategy, not just now but in five or ten years’ time. An acquisition will change the nature of your business and what it offers to customers. That means you need to have at the outset a clear plan of who the customer is and how you will communicate with them post-M&A.’

The second essential lesson he offered was to take integration seriously. ‘M&A teams have a target’, he noted. ‘They need to close the deal ASAP and often don’t have time to think about the operational integration team who will run things later on. As a lawyer, if you close a deal without understanding the main operational paint points you really have not conducted a strong due diligence. You may have covered all the contracts and liabilities, but unless you know how an asset will be integrated you will have no idea what the important operational flags are.’

Small things, he continued, can make a huge difference from an operational perspective. ‘If a company was dominated by a founder can you be sure it will achieve the same outputs when integrated with a larger business? Do you have a plan for how to integrate a business with a completely different culture of compliance? It can be tempting to assume you can work with them on this after the closing, but once you drill down into how the company has been operating it may not be so simple. Overlapping all of this is communication. Even within the M&A team communication can fail. You can have a team of 20 people drawn from finance, HR and legal but often there is no common platform for them to communicate and ensure things are not being overlooked. That is why GCs are so crucial to the whole process. We are not experts in many of the things that take place during the process, but we are in a position to see it all taking place from beginning to end. We should leverage that to help ensure things stay on track.’

The Psychology of Dealmaking

On paper, the deals on which a corporate lawyer works take place between corporate entities, but it is a handful of individuals who drive them forward, bringin their own psychology, motivations and sentiments to the deal process. In our penultimate session Jeremy Miocevic, Dubai managing partner at Curtis Mallet-Prevost Colt & Mosle, took up the question of psychology and asked how general counsel can mitigate against, or potentially take advantage of human idiosyncrasies in the negotiations process.

He started by noting a form of cognitive dissonance prevalent among lawyers: the desire to appear composed, rational and articulate. Communicating by email allows parties to sustain an illusion of rationality, which not only drains negotiations of their natural dynamics, but means that when parties do eventually meet they can feel removed from the personas they have constructed.

Just as the human interactions underpinning an M&A are often overlooked, the basic tools and techniques of deal making can go unnoticed. Here Miocevic turned his attention to that most fundamental of all documents, the term sheet.

‘It is becoming more common, he noted, ‘for parties to use the term sheet as a way of getting momentum behind a deal. In these situations deal teams are reluctant to engage with some of the key issues you would expect to be dealt with in a term sheet, both because they don’t want to kill the momentum and because the term sheet is really only being used as a lever to move the deal along. Then of course that term sheet gets approved by the board and there is suddenly a lot of personal investment in it. No one wants to be seen as unable to close the deal, but the resulting negotiations do not reflect the inherent power balance between buyer and seller.’

How difficult is it to pull out of a deal once a term sheet has been approved by the board, he asked. David Weir, general counsel of international luxury hotel chain Jumeirah Group, said that his experience pointed in the opposite direction, with parties generally being extremely cautious when agreeing to terms that may prove to be challenging in future. It was, he said, more likely that negotiating teams would build in more complexity than necessary to cover themselves.

He added that the format a document takes can be hugely important. ‘If something looks like a legal document it can cause unnecessary distractions, whereas if something looks almost like a marketing presentation people are much more likely to get on with it and not fight over every inch of ground.’

Daniel Parry, managing director and general counsel of Abu Dhabi-based Gulf Related, one of the largest private developers in the region, said that his position as GC was unambiguous: ‘I have no problem aborting a deal and I have no problem strenuously arguing with commercial teams as to why they should abort it. I think it’s wrong for lawyers to play at being the deal maker or to become emotionally invested in the deal. Our job is to give advice to the client and as in-house counsel that client is the board.’ However, he added, an experienced GC should be able to distinguish between the normal rhythms of a deal and gamesmanship. ‘When deal fatigue sets in it is sometimes appropriate for the lawyers to encourage commercial teams and remind them that protracted negotiations are a facet of the transaction. On the other hand, if it looks like psychological games are taking over it is entirely appropriate for lawyers to intervene and tell people it needs to be stopped.’

Markus Federle, managing director, general counsel and head of compliance at Samena Capital, a private equity fund active in the Middle East, India and South East Asia added that there were just as many situations in which term sheets contain too much detail. ‘When it comes to things like parties using the term sheet to demand particular warranties or a statutes of limitations I find it is really getting ahead of yourself. Obviously, if there’s a significant issues that you may not be able to overcome then you have to have that discussion upfront, but you do not need a detailed summary of every single thing that will happen in the deal. Sitting down with the counterparty and going through warranties is an extension of the due diligence. Trying to legislate for that in the term sheet is effectively running the due diligence before you’ve even reached an in principle agreement you would ideally like to stick to.’

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