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M&A deals, alternative approach towards Iran market

By Mohsen Mohammadi, MA in Finance from Imperial College London Business School (source: Tehran Times)

Mergers and Acquisitions

Like any other opened up economy, the Iranian economy- recently relieved from sanctions - has been tried to be penetrated in the past few months. There is no argument that the second economy of the Middle East with around 80 million population which has been neglected for the past ten years in the current competitive business environment is hard to pass. Thanks to the lack of business infrastructure, hotels have turned into a shared office in the past few months with businessmen with the same aim: Having a slice of Iran pie.

The businesses from variety of fields, sizes, origins and risk tolerance have approached private and public sectors of the Iranian economy with different strategies. Many tried to offer their product or maybe their niche services without considering the fact that their clients in host country need a while to catch a breath and get quiet there after 10 years of isolation and severity.

For instance, Sophisticated European business consultancy firms kindly offered to give an expensive hand to Iranian conglomerates which is highly appreciated but they didn't realize that the senior executives in those companies have other priorities and are not quiet convinced for such - as they probably may recognize - costs.

On other cases, top tier machinery manufacturers arrived with their latest state-of-the-art equipment to fulfill Iran's industry-oriented economic ambition while they missed to consider how they are going to get paid by struggling cash flow statements. On the other hand Iranian policymakers have made it clear repeatedly that they will not let the country to become solely a consuming market for imported foreign brands and will continue to support the domestic goods and production by making their flashy foreign equivalents less competitive and keeping them away from the borders.

It is now that the pie seems a bit resistant to be cut; however, there are alternatives to those approaches.

Transfer of capital, technology and expertise are the key requirement of a successful approach to Iranian market which will make all parties including regulators and officials, local partners and newcomers happy and aligned. This strategy will open a lot of doors and expresses a great deal of commitment which is highly valued. A keen mind will find these characteristics in a Merger and Acquisition deal.

The textbook definitions of M&A indicate a fast penetration to a market for relatively small costs which avoids many headaches compared to something like green field projects investment. There are distressed Iranian businesses in different sectors which have high potential to growth with minimum market risk. On the other hand, the government through structures, such as FIPPA licensing, provides a high level of foreign investment protection and let face it with the terrorist attacks and coups happening in the region, Iran is a safe haven in the MENA region with the untapped resources for growth. Such investment decisions definitely require a full understanding of the business environment and will be very rewarding if are taken correctly.

There might not have been a lot of samples just yet but even one can make the point. The Savola Group is a Saudi Arabian company with major holdings deals in edible oil, sugar, plastic packaging, retail hyper markets and real estate in the Middle East, Central Asia and North African countries. In 2004 and when Iran was deep in the nuclear conflict the company took a strategic investment decision for entering to the country's edible oil market and acquired around 80 percent of the Behshahr Industrial Company (BIC) and formed Savola Behshar Company (SBC).

Since then BIC revenue has experienced the cumulative average growth rate (CAGR) of 32% and reached to almost USD 600 Million. Even the political tension between Saudi and Iran in January 2016 which caused a cut in diplomatic ties between the two countries did not interrupt Savola business in Iran. This is a proof of foreign investment protection provided by Iranian officials which lowers the political risk significantly.

In another recent deal, Henkel acquired 30 percent of an Iranian detergent company for 150 million euros, although the German company has had a long history in the market.

The short history of current international deals in Iran indicates that the acquirers face the same pattern of challenges which might be unique to Iranian businesses. One of them is lack of transparent and standard financial reports especially in the non-listed target companies.

Many private or family businesses do not keep a clean and detailed accounts for various reasons which make financial due diligence very difficult and lengthy. The other is the lack of enough corporate law firms which can represent either the acquirer or the target. The corporate lawyers are required for the legal due diligence and drafting the Share Purchase Agreement (SPA).

All together the M&A in Iran is a new and hot topic which has its own excitement and at the same time challenges, and the next few years will give a better view of how it pays off in Iran.

... Payvand News - 07/27/16 ... --

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