MerchantBridge cements $220m Iraq deal

The 15-year lease for control of Iraqi cement plant Karbala is reportedly the largest private equity deal transacted this year in the MENA region.

MerchantBridge, a Middle East-focused private equity firm backed by families in the GCC region, has invested $220 million (€159 million; £138 million) in Iraq’s Karbala cement plant. The transaction is the largest private equity deal in the MENA region this year according to the firm, and gives MerchantBridge, alongside technical partner Lafarge, official control of the plant for a 15-year lease period.

Karbala cement plant, Iraq

MerchantBridge and Paris-based cement producer Lafarge will now take on full operations and management of the plant from the Iraqi government. In accordance with the lease contract, the pair has 13 months to rehabilitate the plant to its nominal production capacity of 1.8 million tons. Its current annualised output is less than 300,000 tons.

“We’ve been very active in Iraq since September 2003,” MerchantBridge chief operating officer Eric le Blan told PEO. The firm has now made several investments in Iraq including a 49 percent stake in one of the country’s largest mobile network providers Asiacell. In 2004, alongside Qatar National Bank, it established Iraq’s second-largest commercial bank, Mansour Bank.

Le Blan, whose 30-plus years in finance have included capital markets advisory work for Middle Eastern governments, said Merchantbridge identified cement as a key sector for Iraq investments. In 2003 and 2004, he worked with the Iraqi ministry of industry and minerals on a project to lease 35 state-owned factories. “A cement plant is not a small investment,” he said. “The government needed advisors to help it successfully launch auction processes for these assets. So we were involved in this project before eventually bidding ourselves.” When it came time to bid, the process was by sealed envelope “so there was no conflict of interest”.

[Local investors]…can see much clearer that the high risk – and Iraq is still a high-risk area – can generate what can only be described as spectacular returns

Eric le Blan

Though the firm in 2008 launched a Middle East-focused fund in partnership with UBS, the deal was financed directly by a group of co-investors. “We actually tried to get some interest from the UK and Europe, and we spent quite a lot of time trying to show this transaction to hedge funds and sophisticated institutional investors in the UK,” said le Blan. However, the majority of investors who eventually came on board were regional players.

This situation was mirrored in the auction process, which also yielded little interest from foreign investors and private equity firms, he said. “Very unfortunately for Iraq, most of the bids which came in were very much from local bidders,” said le Blan.

Le Blan said that investors outside the region were troubled by the risks the country posed. Local investors “understand better the framework and political situation of the country,” he said. “They also can see much clearer that the high-risk – and Iraq is still a high-risk area – can generate what can only be described as spectacular returns.”

There will be some spectacular investments made…[in oil and gas services] which will dwarf everything else. Including the $1.4 billion we have already invested in Iraq, that's for sure

Eric le Blan

MerchantBridge is now looking at the oil and gas services sector in Iraq, where le Blan sees an endless list of opportunities. “There will be some spectacular investments made here which will dwarf everything else,” he said. “Including the $1.4 billion we have already invested in Iraq, that’s for sure.”

In May, the firm launched the $50 million Iraq Mesopotamia Fund, which will be run in partnership with Mansour, to invest in the country’s stock exchange, according to its website.

In 2008, it teamed with UBS Global Asset Management to form Dubai-based MerchantBridge-UBS Private Equity, which launched a $500 million private equity fundraising to invest in the Middle East's oil and gas services, financial services and light and medium industries. The fund has been anchored with $120 million from both MerchantBridge and UBS, according to a statement.

MerchantBridge and UBS had previously partnered in Saudi Arabia to set up UBS Saudi Arabia; the latter was established when it took over Development and Management House for Investments (DMHI), a Saudi investment bank MerchantBridge had previously established.

MerchantBridge is led by founder and managing partner Basil Al Rahim, who was previously the managing partner of MENA-focused Safron Partners. He was also previously a managing director for the Carlyle Group.