FOR YEARS, SAUDI Arabia was considered one of the most opaque places in which to do business in the world. Most considered that the Kingdom’s apparently sealed-off economy consisted of oil and not much else, while few outsiders had close contacts with the thousands of family-owned companies that still dominate the private sector.
Times have changed, though, and outsiders are not only doing business with Saudi family firms, they are also trying to buy into them. With the non-oil sector beginning to take off against the background of an improving business environment, foreign groups are keen to get in on the action. The same can be said for the increasingly competitive and swelling ranks of investment banks operating in the country.
The attraction is clear enough. "If the Saudi economy performs to its potential, the boom will eclipse the entire rest of the Gulf put together," says an investment banker, raising the question of how foreign players can claim a slice of the region’s largest pie.
And while the strategies of these outsiders have increasingly often taken the form of joint ventures in recent years, more and more focus is being pointed towards acquiring stakes in family-owned companies, especially those with strong positions and prospects in the domestic or regional market.
Encouraging them has been the growing realization for some of these family firms that fully to benefit from Saudi’s potential requires a helping hand, whether in the form of expertise, technology, better management techniques or simply a global name.
But although that potential is doubtless huge, most watchers say the opening-up process is likely to be slow, initially limited to smaller firms operating in high-growth sectors. A key obstacle is that few of the family-owned firms seem to need the money: with most sectors experiencing double-digit growth, why should they sell out now?
For Saudi’s investment bankers, then, with no shortage of interest on the buying side, the trick will be spotting the opportunity in an increasingly crowded market.
A family affair
Even more so than other markets in the Middle East, Saudi’s economic fabric is dominated by family-owned firms. Many are diverse empires operating across a broad range of sectors that have traditionally been reluctant to divulge much information on their activities, reflecting the previously isolated nature of the Kingdom’s economy.
Yet with Saudi’s non-oil sectors already opening up rapidly and integrating into the regional and global economies, investment bankers are beginning to see a wealth of opportunities emerge as family-owned firms come out of the shadows.
For Tim Gray, chief executive of HSBC Saudi Arabia, transactions involving such firms are becoming a more common sight, especially with the emergence of second-generation family leaders who have often been educated abroad.
"We are seeing more and more of these deals, and it is definitely becoming a trend," he says. "The main reason behind it, if you look at many Saudi companies with family shareholders, is that you have diversified groups built up over the years that operate in a whole range of different businesses. Often the next generation will come in, look more strategically at the group and identify the areas where they can’t compete so well. Maybe they lack the technology, or they don’t have good growth opportunities in that particular area, or they’re having difficulty maintaining their position in the market. For that reason they are often willing to sell these non-core businesses."
This reasoning hints at a good deal of consolidation across family businesses in the future, as patriarchs – or their sons – streamline their companies in order to get an upper hand in the market.
One recent deal that exemplifies this emerging trend was the sale of a majority stake in Saudi Industrial Gases (Sigas), headquartered in the eastern province city of Al Khobar and owned by five Saudi families. Sigas, the second-largest industrial gases company in the Kingdom, reported sales of $42 million in 2007 and has established markets domestically and across the Arab world.
The buyer was the Linde Group, the Munich-based engineering and industrial gases conglomerate that in 2007 earned revenues of €12.7 billion. Linde, which already does business in the Saudi market, paid an unspecified amount for a 51% stake in Sigas.
"This geographical expansion of our gases business combined with the strong presence of our engineering division in the whole Arabian Peninsula will fundamentally strengthen our position in a highly attractive region," says Aldo Belloni, a member of Linde’s board.
While buying into a family-owned firm provided a way to tap into the Saudi and regional boom, it also made good sense for the seller. Thamer Radwan, managing director of Sigas, explains that the deal was not about cashing in.
"Our main motivation for this agreement was not financial but was to benefit from the transfer of technology and know-how," he says. "The major companies in Europe spend heavily on research and development, and this agreement was the best way to acquire the latest technology, which is otherwise very difficult to do. Our sector is experiencing about 13% growth and we wanted to have a strong foreign partner and a strong name to support our bids for the larger contracts."
Saudis to sell?
With no apparent lack of capital or interest from potential buyers, the question is how many more Sigas-style deals will emerge. One factor that bankers say augurs well is a greater openness of Saudi family-owned firms to consider a full or partial sale.
While various motivations are playing their part in this, including the continuing liberalization and opening-up of the Saudi economy, other factors are also important. One is the issue of succession, long a thorny issue for many GCC-based family companies with multiple children – sibling rivals who in some cases have caused inheritance disputes so severe that they have broken up family empires following the death of the original patriarch.
But disposing of some or all of the business, whether to a local or a foreign firm, private equity outfit or industry player, is one way of removing the succession altogether. And, especially with some families taking a longer-term view towards flotation, allowing in outside capital might also help improve management.