Nicholas Watson in Prague -

The M&A stats for the first half of 2009 show that European deals were down by 66% on the same period of last year, with Germany and the UK/Ireland the most active regions. But with Central & Eastern Europe expected to overtake those two in the medium term, the question is where that money will flow from. Recent evidence suggests a significant amount could come from the Middle East.

In its half-yearly data, the financial data provider mergermarket said that despite the upturn in the financial markets over the second quarter, the first half of 2009 was still a weak time for M&A across the board, with the total volume of deals falling 47.4% from the same period last year to 3,800. Of that, Europe saw 1,472 deals valued at $171.1bn, which was a decrease of 66.1% by value and 53.6% by volume from the first half of 2008.

51% of the total value of European M&A so far this year has taken place in the Energy, Mining & Utilities sector compared with only 15.6% a year earlier, with eight out of the top 10 announced deals for the region so far this year falling into that sector. In terms of the number of deals, the consumer, industrial and chemicals, and technology/media/telecommunications sectors have dominated. "Based on mergermarket intelligence, these sectors look set to continue to dominate, again accounting for half of the potential deal opportunities identified on the mergermarket heat chart," the financial data provider said.

The Germanic region has been the most active region by volume so far this year, accounting for 18.5% of European M&A transactions, compared with the UK & Ireland which contributed 18.2%, down from 25.3% in the first half of last year. "Both regions are expected to continue to dominate European M&A over the coming months, though will probably be overtaken by Central & Eastern Europe, which currently tops the European deals pipeline on mergermarket's heat chart."

Sheik, rattle and roll

This is consistent with the findings of the Financial Times' analytics division fDi Intelligence, which said earlier this year that as foreign direct investment (FDI) flows "begin to feel the impact of the financial crisis, investors' heads are turning towards developing economies."

Within Europe, Turkey and Russia were the fastest-growing locations for FDI in 2008. This year, amounts will be smaller, though Turkey is still expected to pull in about the $10bn level compared with the $18bn of last year, Turkey's Foreign Investor's Association said earlier this year.

Some recent news suggests that Middle East money, particularly from the wealthy Gulf states, is starting to fill the vacuum in Turkey left by departing western investors, a process that the mildly Islamist government in Turkey has been happy to promote. Turkey's exports to the Middle East region grew by 65% in 2008, with the volume of trade hitting $12bn.

On July 3, the daily Sabah newspaper reported that the Saudi prince Velid bin Tallal, after meetings with Prime Minister Recep Tayyip Erdogan and President Abdullah Gul, said he was looking at projects in the country worth around $5bn.

President Gul followed this by hosting in July the foreign ministers of Bahrain, Kuwait, Qatar, Oman, Saudi Arabia and the United Arab Emirates - all members of the Gulf Cooperation Council (GCC), with which Turkey signed a memorandum of understanding last year to boost ties, particularly in the economic field. Turkish officials had their first "strategic dialogue" meeting with the GCC in Jeddah, Saudi Arabia, back in September. Officials from both sides are now working on a free trade agreement.

Of course, oil and gas will be a major focus of any FDI from the Gulf, especially given Turkey's crucial role in the EU-backed Nabucco gas pipeline project as well as the opening up of oil and gas fields in the Black Sea. However, Turkey is looking to attract money into other sectors too, such as real estate, financial and retail. Local reports in July said that a delegation of Qatari and Syrian investors, led by Sheikh Khalid bin Abdullah bin Thani Al Thani, visited Ankara recently to discuss plans to set up the Islamic bank in Turkey. And earlier this year, Deyaar Real Estate set up a division to acquire distressed assets in countries such as Turkey with the aim of expanding its land bank.

Balkans and beyond

Though Turkey would be a natural destination for Middle Eastern money, other countries in Southeast Europe are also attracting interest, especially given the range of assets on offer in these straightened economic times. "In fact, most of the [Gulf] private equities companies are now actively looking for distressed assets," says one Middle Eastern banker, who declined to be named.

In March, Gulf investors made two separate forays into the Balkan financial sector. Albania's finance ministry signed an $8m sale contract with the Islamic Development Bank for the sale of a 40% state-owned stake in United Albanian Bank. A few days earlier, the Oman State General Reserve Fund, one of the key investment institutions of the government of the Sultan of Oman, paid $129m for a 30% stake in Bulgaria's Corporate Commercial Bank.

Gulf money is also starting to increasingly find its way into Central Europe. On July 1, Polish Prime Minister Donald Tusk announced he wanted his country to become a hub in the EU for Middle Eastern investors, not a traditional source of direct investment in Poland, after his government revealed it had sold the struggling Szczecin and Gdynia shipyards to the Qatari investment bank QInvest and sealed a 20-year liquefied natural gas deal with QatarGas. The two deals are complementary, as the Gdynia yard is set to turn out three to four LNG tankers a year to help ship the 1m tonnes per year of the crucially non-Russian gas going to Poland. "These two deals indicate that investors from the [Middle East] region will have a sustained interest in strategic cooperation with Poland," Tusk said. "There is a possibility of new injections of capital in our country" from the Middle East, he said, adding he is planning a trip to the United Arab Emirates and Saudi Arabia.

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