Saudi companies were seen to undergo consolidation process both domestically and internationally, NCB Capital, Saudi Arabia's largest investment bank and leading GCC wealth manager, said in a report Wednesday. The report noted that there are many drivers for consolidation, but obstacles exist. Vertical consolidation is more likely than horizontal, it said, with industrial sectors more likely to see the vertical form, while consumer focused sectors are more likely to undergo horizontal consolidation. Farouk Miah, acting Head of Equity Research at NCB Capital, said "from our analysis, we believe vertical consolidation is more likely for Saudi companies in industrial/manufacturing sectors such as cement and petrochemicals, as well as technology sectors such as telecoms," said Farouk Miah. "In these areas, we believe the control of suppliers, as well as the potential from cost synergies and revenue diversification, are key drivers for consolidation." He further said "overall, we find that there are many compelling reasons for leading Saudi companies to take part in consolidation both domestically and internationally." "However obstacles to this are high. These include the high family ownership of companies, access to financing, and government subsidies, which limit the incentives to consolidate." In many sectors, key listed companies may find it beneficial to acquire companies further up or down on the vertical chain of their respective sector. NCB Capital believes vertical consolidation is more likely than horizontal, not particularly due to the greater benefits of this form, but rather due to the fewer obstacles it entails. "Horizontal consolidation is more likely in consumer areas," Miah added. "Retail, food & agriculture and insurance are key sectors in Saudi Arabia which we believe have a high likelihood of horizontal consolidation. The low margins, fragmented and highly competitive nature of the sectors, coupled with high operating costs are some of the key drivers for consolidation in these sectors." The report noted many key obstacles remain present in Saudi Arabia holding back the pace of consolidation. These include a high concentration of family owned business, limited financing options, lack of know-how, and high government subsidies, which limit the incentives to consolidate. For the petrochemical sector, firms in Saudi Arabia have undertaken aggressive investments in recent years to expand their product range and market reach. The majority of new projects are joint ventures with local or global partners. For example, SABIC formed alliances with global players such as ExxonMobil and Sinopec and SIIG formed a joint venture with Chevron Phillips Chemicals Co. Along with joint venture initiatives, producers in Saudi Arabia have in instances also acquired their foreign counterparts. Consolidation outlook in the petrochemical sector is highlighted by the fact that SABIC and Tasnee are actively seeking M&A opportunities globally. According to news released by ICIS, SABIC is seeking opportunities (both acquisitions and joint ventures) to enhance its presence in Asia. According to the same source, Tasnee has maintained its focus on diversifying its product mix through acquisitions and/or alliances. Globally, M&A activities in the petrochemical industry are gaining traction as firms target strategic opportunities for capacity rationalization, to create economies of scale and to move ahead in the value chain. The total value for announced deals in the chemical sector during January-April 2011 stood at $50 billion, broadly in line with the levels in 2007. A total of 293 deals were announced in 1Q11.
