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Megatrends in M&A: 3 Key Regional Opportunities

Posted in M&A/ Private Equity, United Arab Emirates

With the rise in frequency of mergers & acquisitions (M&A) in Africa, the 26 percent growth of M&A in the Middle East this year and the global volume and value of M&A at its highest for years in the first three quarters of 2014, global M&A activity is expected to continue its growth through 2014 and into the first quarter of 2015. Latham & Watkins recently hosted, in collaboration with PwC and the Dubai Economic Counsel (DEC), an industry event entitled ‘Megatrends in Mergers & Acquisitions’ at the Dubai International Financial Centre (DIFC). The event was held under the Patronage of Sultan Bin Saeed Al Mansouri, Minister of Economy, UAE.

The following is a brief overview of 3 key regional opportunities discussed at the event:

1. Evolving M&A Landscape in the Middle East

The United Arab Emirates (UAE) is considered the nineteenth most attractive country globally for M&A, with recent significant growth in both inbound and outbound M&A transactions. The growth is attributed to factors such as lower cost of debt, increase in globalization, liquidity and appetite for risk. Aramex, a leading global provider of logistics and transportation solutions based in the UAE, have put in place a successful growth model of franchise and majority acquisition, most recently announcing that revenues were at a 12 percent increase compared with last year.

2. Growth of M&A in Africa

Having had a slow start to the year, M&A deals in Africa have now greatly increased. Although principally the main deals have been in the energy sector over the last few years, there is now a real interest from companies wanting to invest in sectors reaching African consumers, such as financial services, telecoms, healthcare and retail. Private equity is also set to be critical to Africa’s economic growth.

3. Investment Climate in Russia/CIS

The geopolitical conflict happening in Eastern Europe and Western sanctions have slowed investment growth in Russia. As energy assets have been effectively nationalised, there is particular M&A growth in sectors such as consumer and telecoms. For example, investment is expected from specialist investment funds to drive development in the Russian e-commerce market, one of the world’s fastest growing online markets.

Click here to view further discussion by Latham & Watkins partners on these and other Middle East M&A considerations.

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Rise in Middle East IWPs as Demand for Water Increases

Posted in Project Development and Finance

IWPsThe majority of the world’s desalination plants are located in the Middle East and we are likely to see a further increase given the region’s increasing water consumption and general water scarcity. GCC demand for desalinate water has increased at a rate of 9-11 percent in recent years according to Frost & Sullivan. By 2020, it is expected that the Middle East will add an additional 39 million cubic metres per day of desalination capacity since 2010, which indicates an approximate investment of US$50 billion.

Desalination plants in the Middle East have to date been a relatively small bolt-on to a much larger scale power project forming what are commonly known as independent water and power projects (IWPPs) i.e., an integrated water and power plant developed by an independent producer,  which is typically a global industry player.

However, given the increasing demand for water, it seems regional governments are increasingly adopting an independent water project (IWP) model to expedite supply and, given the introduction of solar and nuclear power projects in the region, IWPs are likely to become more prominent going forward.

Regional IWP Projects

One of the region’s earliest and Oman’s first IWP was the 80,000 m3/d Sur IWP commissioned in 2009. Five years into the 20 year operation period and the owners are reportedly planning to expand the plant’s capacity by a further 48,000 m3/d (12.7 million imperial gallons per day (MIGD)) to meet projected demand for water in the Sharqiyah region of Oman. Oman has since launched the Al Ghubrah IWP –a 191,000 m3/d (42 MIGD) 20 year desalination project expected to be commissioned by the end of 2014– and the Qurayyat IWP – a 200,000 m3/d day (44 MIGD) 15 year desalination project which is targeting commissioning by H1 2016.

UTICO, a UAE based private power and water utility company, has this year launched the Al Hamra IWP, a 22 MIGD 20 year desalination project which is targeting commissioning by Q1 2016.

Bidding, Building and Licensing

The region’s IWPs are largely being awarded, following a competitive bidding process, as long term concessions on a build-own-operate (BOO), build-own-operate-transfer (BOOT) or design-build-operate (DBO) basis to global industry players such as Abengoa, Acciona, Cadagua, Hitachi, Malakoff, Sembcorp, Sumitomo Corporation, Tedagua and Veolia. Each IWP is required by law to be licensed by the national regulator to carry out water desalination.

To a lesser extent some IWPs are being awarded as engineering, procurement and construction (EPC) contracts such as that awarded by the Iraq Ministry of Municipalities and Public Works to Hitachi and Veolia in 2014 for the construction of a 199,000 m3/d desalination plant in Basrah which will be Iraq’s highest capacity single water purification plant. In addition Marafiq, a Saudi based private power and water utility company, awarded Acciona in 2012 the construction of a 100,000 m3 per day (22 MIGD) desalination plant in Al Jubail expected to come into operation by the end of 2014.

Desert Design

The Middle East has historically utilised thermal desalination technology such as multiple-effect distillation (MED) and multi-stage flash evaporation (MSF) although more recently has increasingly utilized membrane technologies such as reverse osmosis (RO), which often require their own supply and maintenance arrangements.

Environmental conditions in the Middle East such as red tide, high sea water temperatures and salinity, mean the pre-treatment facilities need to be designed or adapted to handle those conditions and/or the project documents need to address the occurrence of those risks as, for example, force majeure events with corresponding relief for the developer.

Whether awarded as a long term concession or EPC, there are increasing opportunities for global industry players in Middle East IWPs.

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3 Top Legal Issues to Tackle on Solar Projects

Posted in Capital Markets, Project Development and Finance, Renewables

The Middle East and North Africa region is on the cusp of a new energy revolution. US$50 billion has been set aside for investment in solar power projects by 2020, as MENA governments seek to maximise the long term value of their hydrocarbon resources by utilising solar energy to meet growing domestic consumption. Whilst these ambitious targets present a significant opportunity for potential sponsors of solar power projects in the region, there are a number of key considerations which sponsors may wish to bear in mind in establishing a framework for their investments.

3 Legal Considerations for Solar Development

  1. Ownership and Structure: Middle East solar power projects typically adopt the Independent Power Project (IPP) model, in which a project company is formed for the sole purpose of managing the development, financing, construction, operation and maintenance of the project and holds all of the project’s associated assets. The project sponsors hold their interests through one or more immediate holding companies which protect the sponsors from liability to the project company’s contractual counterparties. In turn, the project company will be subject to a multifaceted contractual framework entered into with its senior lenders and project counterparties.
  2. Risk Allocation: Sponsors should seek to insulate the project company from as many risks as possible, principally by passing those risks through to the project company’s various subcontractors. To achieve this, the project company will enter into a number of project documents through which risks of, for example, construction/completion, operations, feedstock supply and market/offtake, will be passed to contractual counterparties such as EPC contractors or O&M services providers. Such risk allocation determines the risk profile presented for financing.
  3. Financing: Once the risk profile for the project has been finalised, sponsors will seek to structure the financing arrangements in such a way so as to achieve the most competitive levelised cost of electricity (LCOE) and maximize their own equity rate of return. Sources of financing in the MENA region include:
  • Syndicated loan markets: Traditionally, commercial banks have been the preferred source of financing for solar projects as they are willing to lend to project companies during the construction phase of the project and are prepared to assume some of the risk of that construction.
  • Capital markets: Typically, bond investors have been unwilling to take on construction risk and, as a result, have been primarily used to refinance loan facilities after a project has achieved operational status and developed a substantial financial track record. At this stage, capital markets can be an extremely attractive option offering more competitive pricing than loan facilities and longer tenors.
  • Public sector lenders: Export credit agencies, development banks and similar institutions may offer more competitive pricing and longer tenors than commercial banks in certain circumstances.  In addition, many such institutions offer other products such as political or commercial risk insurance or guarantees.

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As Bitcoin Gains Momentum, Focus on Regulation Increases

Posted in Banking and Finance, Capital Markets, Regulatory, Technology, United Arab Emirates

The virtual currency market has emerged in the United Arab Emirates with Dubai’s first Bitcoin ATM introduced in April 2014. Middle East entrepreneurs have begun launching Bitcoin payment products and SMEs are beginning to realise the potential of such technology, with The Pizza Guys becoming the first restaurant in the UAE to accept Bitcoin payments.

Virtual currencies, such as Bitcoin, combine financial and technological instruments and incorporate characteristics of money, accounting, networks and remittances into one concept. As this innovative concept gains momentum, there is a heightened focus on the regulatory framework to reduce the operational and systemic risks associated with the virtual currency industry, and to protect consumers from financial harm is paramount to ensure the survival of a multibillion-dollar system with more than one million users.

Regulating Virtual Currencies

The New York State Department of Financial Services (NYSDFS) is pioneering regulation in the cryptocurrencies industry.  NYSDFS released its proposed regulations governing the use of virtual currencies in New York. Drawing heavily from New York’s banking industry regulations; the strict regulatory regime is set to drastically change the business practices of those currently operating under the virtual currency model.  NYSDFS has defined “virtual currency” as digital units that are either used as: a medium of exchange or a form of digitally stored value; or incorporated into payment system technology.

Most recently, the U.S. Commodity Futures Trading Commission (CFTC) acknowledged the increasing number of merchants accepting Bitcoin as payment for goods and services and that these merchants face considerable risk due to price fluctuations in the value of virtual currencies. October 2014 saw TeraExchange, a swap execution facility (SEF) regulated by the CFTC, offer for trading the first Bitcoin swap to be listed on a CFTC-regulated platform. CFTC noted that TeraExchange’s development of a proprietary Bitcoin price index was central to the CFTC’s review and approval, particularly with respect to the contract’s ability to comply with SEF Core Principle Three, which prohibits SEFs from listing contracts that a readily susceptible to manipulation.

Innovation vs. Regulation

As the virtual currency industry continues apace despite some challenges, regulators and agencies in the US and other markets strive to find the right balance between fostering innovation and implementing regulations. Ultimately, the development and global expansion of virtual currency markets hinges on an effective regulatory regime that can protect consumers from fraud and cybercrime.

As Bitcoin and other virtual currencies continue to grow, and as US regulators pave the way for drafting a virtual currency regulatory framework, it remains to be seen how the United Arab Emirates will develop its own policies that govern cryptocurrencies.

Click here to read more about NYSDFS’ proposed regulations for virtual currencies.

Click here to read more about the first Bitcoin swap listed on a CFTC-regulated platform.

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Is Green Sukuk a Viable Option for Clean Energy Initiatives in the GCC?

Posted in Capital Markets, Islamic Finance, Qatar, Renewables, Saudi Arabia, United Arab Emirates

A number of GCC governments, including those in the UAE and Saudi Arabia, have set ambitious clean energy and energy efficiency targets. As the fastest growing region in the world, the GCC’s population is expected to grow more than 53 million by 2020. Substantial amounts of investments will be required to finance the clean energy and energy efficient projects necessary to meet the needs of the future population.

Capital markets allow investors a low-cost alternative

Green bonds, which tie the proceeds of the bond to environmentally friendly investments, have been used to finance green projects since 2008, when the World Bank pioneered the first-ever green bond. Since then, the World Bank has raised US$6.4 billion in green bonds through 67 transactions in 17 currencies.

Although historically international agencies have issued green bonds, the private sector has begun to use green bonds to finance their green activities.

Investors typically are attracted by the ability to easily integrate environmental initiatives into their investment portfolio, as well as the ability, in some cases, to offset the risks of their portfolio being exposed to climate change. Therefore not only public-sector investment funds, but increasingly asset managers and financial institutions are also buying these bonds.

Islamic finance liquidity

The global Islamic finance industry has seen remarkable growth in the last few years. Sukuk structures are an attractive alternative to conventional bonds due to the liquidity available in the market and it can be tailored to finance green initiatives. Green sukuk could mobilise essential finance needed to fund the rising number of clean energy initiatives throughout the GCC since the majority of clean energy projects will rely on large, long term infrastructure spending. The recent and successful 30-year international sukuk issuance by Saudi Electricity Company has already demonstrated the investor appetite for long term Shari’ah-compliant paper. Sukuk also could potentially fund shorter term energy efficiency projects, for which low cost funding has traditionally been harder to come by.

Who will be first?

The Dubai Supreme Council of Energy announced its partnership with the World Bank to develop a green investment strategy incorporating sukuk. If this strategy succeeds, governments in the GCC could play a key role in developing a green sukuk market. Such a market could play a key role in financing the region’s ambitious clean energy and infrastructure projects.

For more information about green sukuk, please click here for a special report published in Islamic Finance news and here for a Q&A on financing the Gulf’s region’s renewable energy infrastructure.

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Why International Investors are Watching the Tadawul

Posted in Capital Markets, Saudi Arabia

Tadawul

The MSCI upgrade of Qatar and the United Arab Emirates to “emerging market’ status marked the beginning of increasingly liberalised GCC stock exchanges.

Saudi Arabia’s stock exchange, the Tadawul, is by far the largest securities exchange in the GCC by market capitalisation. It is also the most liquid in terms of daily trading volumes and the most diversified in terms of issuers.

Most recently, The National Commercial Bank (NCB), Saudi Arabia’s largest bank, issued 25 percent of its shares at an offer price of SAR45 per NCB share. This US$6 billion initial public offering (IPO) is the largest equity offering ever in Saudi Arabia and in the Arab world, and is also the second largest IPO globally so far this year.

Tadawul Set for Foreign Investment?

This landmark offering has not only encouraged increased liquidity in the Middle East’s equity capital markets, but has also attracted the attention of international investors. Direct investment in the shares of Tadawul-listed companies has historically been limited to Saudi and other GCC investors. Yet in August 2014, the Saudi Arabian Capital Market Authority (CMA) published its draft rules for qualified foreign financial institutions, a proposal which will permit non-Saudi’s to participate directly in the Kingdom’s stock exchange. Although subscription to the NCB IPO is limited to Saudi nationals, the awaited opening of the GCC’s largest stock exchange to foreign investment has heightened interest in the Tadawul among global investors.

It is expected that the final rules will not be announced before 2015. Once in force, eligible foreign investors will benefit from the opportunity to invest directly in Tadawul-listed companies. Yet in order to access the Kingdom’s stock exchange, applicants will be subject to a registration regime where aspiring Qualified Financial Institutions (QFI) must satisfy certain eligibility criteria, including license standards, asset value  and experience in securities related activities.

The draft rules propose that QFIs must have assets under management of no less than US$5 billion. This threshold will therefore limit all but the largest foreign institutions from investing directly in the Tadawul. Although the opening of the Tadawul is limited, it represents a significant change in Saudi Arabia’s capital markets policy.

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5 Ways to Protect your Business from a Cyber Attack

Posted in Qatar, Saudi Arabia, Technology, United Arab Emirates

Data protection in the Middle EastGlobal cyber-attack threats stand at the highest ever recorded level, jumping 14 percent from 2012 to 2013 (Cisco 2014 Annual Security Report). Furthermore, a recent Microsoft Security Intelligence Report found that operating system infection rates in the GCC countries were almost twice the worldwide average, with up to 13 computers out of every 1,000 being infected.

The general lack of cybercrime disclosure has made measuring the financial impact of cyber breaches challenging. Reporting of cyber attacks remain low as companies fear significant financial losses that might be incurred in litigation resulting from security breaches. Yet the US and Europe are set to take a tougher stance on cybercrime disclosure as information sharing becomes a vital component of creating a more robust cyber security strategy.

As cybercrime continues to evolve and develop, businesses need to ensure they combine effective technology, proactive strategy and qualified and diligent staff to best protect against cyber attacks.

1. Governance: Cyber attacks require an integrated and cross-functional incident response involving IT Security, Communications, Business and Legal representatives and strong project management.

2. Forensic Analysis: Businesses need to consider engaging independent forensic experts to investigate, evaluate and report on any perceived intrusion.

3. In-House Training: Test and improve the incident response function by training IT, legal, audit and risk management teams – ensuring key personnel are familiar with the issues faced  and can anticipate the legal and technical risks arising from an attack.

4. Contracts: Organisations should understand their contractual and legal reporting requirements.

5. Cyber-insurance: Insurance is an important tool for businesses in managing and transferring risk. It is anticipated that businesses in the Middle East will begin to invest in cyber-insurance as awareness of cyber vulnerability increases.

Protect your business from cybercrime. Learn how by joining Latham & Watkins at our complimentary Cyber Attack Masterclass in Abu Dhabi and Dubai in October 2014.

We have convened a panel of experts – Gail Crawford (Partner, Chair of the Data Privacy Committee and Co-chair of the Internet and Digital Media Industry Group, Latham & Watkins LLP), Seth Berman (Managing Director, Stroz Friedberg), Andrew Moyle (Partner, Chair of the Global Outsourcing Practice, Latham & Watkins LLP) and Brian Meenagh (Associate, Latham & Watkins LLP) – who will guide you through an interactive ‘real life’ scenario that will help you identify the critical elements of an effective incident response plan.  Click here for more information.

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Top 3 Employment Issues in the United Arab Emirates

Posted in Employment, United Arab Emirates

The Dubai Chamber of Commerce and Industry has reported a 24 percent increase in newly registered companies since last year; in part due to the recent successful World Expo 2020 bid, among other positive economic forces.

As companies look to establish in the UAE, the Gulf state’s economy is expected to boom across many sectors including trade, logistics, tourism and finance, in the process creating thousands of jobs.

The following are 3 important issues to consider regarding employment in the United Arab Emirates (but expert advice should  be sought in relation to these and all other employment law issues in the region):

1. Immigration. All non-UAE nationals must obtain a work permit and residency visa which enables them to live and work in the country. This is obtained through employer sponsorship (or a local sponsor), which is registered with the Ministry of Labour. If an employee is employed by an organization which is based in a Free Zone, such as the Dubai International Finance Centre (DIFC) or Jebel Ali Free Zone, the free zone authority will be the employee’s sponsor.

2. Employment Termination. Following a probationary period lasting up to 6 months, generally speaking, employees are entitled to a statutory minimum notice period of 30 days, unless they are being dismissed for one of the permitted reasons such as persistently failing to perform their duties. If there is a dispute relating to employment/termination, it should be raised with the Ministry of Labour, which can submit the matter to court if necessary. Employers may be ordered to pay compensation of up to three months’ salary if it is deemed that the employee was dismissed without fair reason.

3. Employee Benefits. Employees are entitled to 30 calendar days paid holiday after being employed for one year, fully paid sick leave for the first 15 days of sickness absence and basic health insurance. The UAE government does not collect income tax, however, with respect to UAE nationals, both the employer and employee are required to make contributions to the General Pension and Social Security Authority. Employees who have provided more than one year’s service may be entitled to an End of Service Gratuity (ESG).

Read about these and other employment considerations in the UAE in a memorandum authored by Latham & Watkins partner Stephen Brown.

Download our guide to the legal system and laws in the UAE: Doing Business in the United Arab Emirates.

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3 Changes in Europe’s Energy Policy that Offer Lessons and Opportunities for the Middle East

Posted in Oil & Gas, Regulatory

Energy Policy

The European Union is seeking to re-regulate Europe’s energy sector to improve security of supply, sustainability and competitiveness. Energy transformation in Europe has exposed the shortcomings of over-regulation and national-centric policy, providing the Middle East with valuable lessons to manage supply, competition and future investment in its own market.

1. Supply Diversification: Shale gas development in North America has exemplified supply diversification. Yet opinion on shale remains divided in Europe as environmental concerns are often perceived as outweighing diversification gains. The EU has enabled countries to pursue their own national policy on unconventional resource development by publishing environmental requirement guidelines earlier this year. The Middle East is host to the world’s largest energy producers and exporters with abundant conventional reserves. Yet with supply, export relations and policy impacted by the unprecedented growth in unconventional resource development, Middle East energy stakeholders may begin to explore their own unconventional deposits or invest in global shale plays.

2. Regional Integration: Historically, the EU has approached energy targets and supply mix from a national perspective. Yet an integrated and regional approach would be more sustainable and would allow the region to tap into generation and distribution capacity where it is located. Similarly, the Middle East has not demonstrably integrated its national energy markets with GCC states independently pursuing development and distribution projects to reach their own national targets. However, the GCC Interconnection Authority (GCCIA) is currently developing an interconnection grid, a project often referred to as the backbone of GCC energy cooperation.

3. Energy Assets: As the EU continues to face significant market uncertainty, Europe’s energy leaders are shifting their strategy to focus on core geographic markets and core business operations. This has resulted in the sale of certain network (distribution and transmission) and generation assets. To date, these assets have typically been repatriated and sold back to states (for example, Hungary is nationalizing assets) or being acquired by funds that are capitalizing on Europe’s distressed energy assets. As such, Europe’s key energy companies scale back their operations, expansion opportunities are being created for cash-rich Middle East energy stakeholders with global ambition.

Do you want to know more about unconventional resource development?  Please join Latham & Watkins and AmCham Abu Dhabi at our complimentary seminar, The Energy Revolution on the 24 September 2014 at the Rosewood, Abu Dhabi.

A dedicated team of Latham specialists – Mike P. Darden, Robin Fredrickson, Lars Kjølbye, Javier Ruiz Calzado, David Blumental, Villiers Terblanche and Eyad Latif – will discuss policy and global trends in unconventional resource development. Click here to register.

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Saudi Capital Market Authority Publishes Draft Rules for Qualified Foreign Financial Institutions Investment in Listed Shares

Posted in Capital Markets, Saudi Arabia

Following last month’s announcement by the Saudi Arabian Capital Market Authority (the CMA) of its proposal to permit participation by qualified financial institutions directly on the Kingdom’s stock exchange (the Tadawul), the CMA has now published its Draft Rules for public consultation.

The Draft Rules include detailed provisions relating to qualified foreign investor (QFI) eligibility, assessment and approval process of investment applications by QFIs, investment limits on shares and the procedure for applications. The Draft Rules represent a significant step towards the liberalisation of the Tadawul, and the opening up of the Kingdom’s capital markets to foreign investment.

To read more about the Draft Rules and other ongoing requirements, please click here.

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