It is not necessary to know very much about either the capital markets or the Middle East to work out that 2005 was a good year for the region's economies and its IPO market. As oil consumers squirmed and crude prices scaled new heights, the region's hydrocarbons exporters reveled in the happy and unusual confluence of rising prices and increasing production. Less touted, but more importantly for the region in the longer term has been the performance of the non-oil economy, reaping the rewards of government reform efforts, WTO developments, the balancing of government accounts, privatization of state assets and substantial investments in infrastructure projects.
Investor confidence in the economy was evident in both primary and secondary markets. Appetite for the secondary market while healthy was dwarfed by the frenzied demand that greeted many the IPOs that came to market, many of which recorded staggering oversubscriptions amid stories of physical fights for precious share application forms. In addition, the year saw regional barriers to investment increasingly ignored with both primary and secondary shares issues increasingly being offered to the expatriate community. The underlying proposition has been access to liquidity, most prominently exemplified by the Dana Gas IPO.
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But despite the mammoth list of announcements that came out regarding potential issues, the majority did not materialize begging the question as to why? In retrospect the main issues which have restricted the growth of the IPO market in the region are the cumbersome rules and regulations that impede the transformation of private companies to publicly traded ones, as well as the valuation methods used to price the issues. But supposedly things are about to change, Khalid Sifri, Managing Director of Investment Banking at Shuaa Capital has stated that "although the regulations related to the new companies law in the UAE are not yet formal, our company whole-heartedly agrees with the intended changes to be made to the percentage of ownership that must be floated," furthermore he commented that "there are positive attitudinal changes from the Ministry of Economy and Planning in dealing with these issues, and the new committee recognizes that the risks associated with allowing start-ups to go public far exceed the benefits of avoiding the valuation issue."
Of the original list of initial public offerings, privatizations, and rights issues that were coming to the market before year end, 57 transactions have actually materialized generating over $19 billion of new funding into the capital markets. In all, we estimate that by year end IPOs in the region this year will raise over $ 7 billion compared with $ 3.9 billion in 2004. Many issues that were slated for Q4 of this year have been delayed and will likely go public in the upcoming year. More specifically the telecom sector will likely continue to provide an ample number of opportunities in the next year. Of the larger offerings are the two privatizations--the sale of an estimated $1.3 billion, divestment of its 25% holding in Mobile Telecommunications Company by the Kuwait Investment Authority, as well as the privitization of an estimated $800 million stake in Bahrain Telecommunications. Other telecom offerings could include Jeraisy Group, Yemen Mobile, Al Babtain, Nawras Telecom, Thuraya Satellite Telecommunications, Axiom Telecom, Telecom Egypt, Jordan Telecom, Fastlink and the second tranche of the Etihad Etisalat offering.
Of the companies that were looking to apply as public joint stock companies earlier this year were Al Mal Capital and Al Noor Capital. These two companies decided to continue raising the remainder of their funding through private placements instead of IPOs and have recently held their first AGMs. The fact that there is a budding private equity culture is noteworthy, with the recently formed Gulf Venture Capital Association (GVCA) setting itself the task of developing industry standards, statistics and regulations.
So will new issues continue to be a major theme in the region's stock markets in the year ahead? Given the following facts we believe that the answer is a resounding YES! IPOs permit companies to raise funds and provide currency for both organic and inorganic growth within an organization; they offer an exit avenue for both private equity and venture capital funds. In addition, they enable family owned enterprises to raise cash for their stakeholders enabling more plausible succession planning strategies and allow governments to reduce public debt. All of the aforementioned factors, compounded by the continued shortage of investment products in the region and limited investment avenues for most participants indicate that there is still room for growth in this industry.
Expected IPO Issues for the month of December
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Gulf Business 2005
