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Gulf 'heading in right direction' as global IPO markets recover

GCC initial public offering (IPO) markets continue to remain subdued in the third quarter of 2009, while international markets have started to show signs of recovery.

According to PricewaterhouseCoopers' IPO Watch Europe Survey for the third quarter, there have been two IPOs in the GCC this quarter raising $728 million (Dh2.67 billion), compared to the six new listings in the three months to June 2009, which raised $1.12bn.

The results for Q3 are also down in comparison to the corresponding quarter of 2008, which saw four IPOs raising $810m. Both the share offerings this quarter were in Saudi Arabia, which continues to be the most active IPO market in the GCC.

The Tadawul in Saudi Arabia hosted both of this quarter's listings, the largest of which was the National Petrochemical Company raising $640m.

However, there is good news for the beleaguered world economy as the US and European IPO markets are showing signs of recovery in the third quarter after several poor quarters. In Q3 of 2009, European exchanges recorded 44 IPOs raising $2.62bn compared to the 28 which raised just $664m in the previous quarter. The value was a modest increase over the $2.33bn raised in the Q3 of 2008.

International companies dominated the listings across the main European exchanges accounting for 97 per cent of the total money raised. A total of 13 IPOs by international companies raised $2.54bn. These IPOs by non-European companies have in turn been dominated by Global Depositary Receipt (GDR) offerings. Eight GDRs this quarter raised $2.32bn.

In Q3, 2009, the US exchanges saw an increase in IPO activity with 20 IPOs raising $5.78bn, compared with 11 IPOs raising $1.36bn during the corresponding period in 2008, an increase in offering value of more than four times. The US attracted five international IPOs, four of which were from China and one from Hong Kong, which together raised $1.13bn.

Talking about the GCC markets, Steven Drake, head, Middle East Capital Markets Group, PricewaterhouseCoopers told Emirates Business: "The GCC stock markets are still following an upward trend and investor sentiment is improving. We are a long way off the values seen before the crash in 2008 but things are heading in the right direction. Many companies in this region are now starting to re-evaluate previously postponed IPO plans and we are starting to see IPO mandates again.

"While the third-quarter IPO results for the GCC are perhaps not as positive as those in Europe or the US, I think it's too early to read too much into this. Typically lower IPO activity occurs during the summer break, which tends to result in the third quarter underperforming the second quarter of the year."

Confirming a report in Emirates Business this week which said the UAE would witness share offers in 2010, Drake said: "I am aware of companies looking to list in the UAE in the next six months, but I don't think we will see much activity before the year end. The Securities and Commodities Authority announced that they were expecting an IPO in the UAE after the end of Ramadan - although we haven't seen this yet.

"The economic backdrop remains uncertain and while its difficult to predict the timing of a pick up in IPO activity, I continue to believe that we will see companies returning to the markets in the first half of 2010. Those companies that are well prepared, with a strong management team, a good story and strong cash flows are those that will be best positioned to take advantage."

Discussing the challenges faced by the companies in the GCC, which are planning to come out with IPOs, Drake said: "One of the biggest challenges facing many companies in this region that are considering IPOs are the changes in governance, controls and transparency that they will need to make before listing. These changes are driven by a combination of new investor expectation and public company regulatory requirements. These changes often involve cultural ones within an organisation, as much as procedural ones in systems and controls.

Many common features of privately-run companies are often unsuitable for a public company environment. The common issues that we routinely see facing GCC companies considering an IPO are financial systems and controls often only provide the minimum information needed to run the business and are not capable of meeting the increased reporting demands of being a listed company.

"Then there is usually significant potential for management override of controls. There is limited management reporting or use of Key Performance Indicators. Financial reporting is generally not timely or sufficiently detailed. Formal governance structures are often not in place. And owners/managers are not used to answering or explaining their actions to others. There may also be no clear distinction between personal and business transactions. These are all matters that have to be addressed prior to any planned IPO."

According to Drake, new investors have high expectations on the flow and availability of quality information. They want to see a clearly articulated strategy to understand where a company is headed, how it is going to get there and how success will be measured. As a public company, the business needs to be run for the benefit of all shareholders and this means having a balanced board of directors that includes independent non-executives, with the board being accountable and having clear responsibilities.

"Investors will expect that there is a sound system of internal controls in place to safeguard shareholders' investment and the company's assets. Companies will need to comply with the chosen market's corporate governance requirements which will often mean restructuring the board and creating new committees," said Drake.

"Nearly all GCC markets require companies to have a number of independent non-executive directors for example. Recruiting independent non-executives of the right calibre and with relevant industry experience can be difficult and takes time. Improving a company's governance structure and increasing transparency levels are critical but often time consuming and so need to be addressed early in the listing process."

According to Drake, most companies will need to enhance their financial reporting and governance capabilities by introducing additional checks and balances into the business. It include implementing a regulatory compliant corporate governance structure and developing the processes and procedures necessary to manage their ongoing dialogue and information flows to the market, he said.

"Practically this can often be a six- to nine-month process - sometimes longer. It is therefore important to consider these issues early on in the process if a planned IPO timetable is to be achieved," said Drake.

The transition from life as a private company to a public one can often be a difficult one. Those companies that are best prepared are those that tend to succeed as public companies. Regional firms that are thinking of an IPO in 2010 should plan and prepare now ahead of an upturn in the markets and any planned IPO dates they may have."

According to the PWC survey, Russia saw no IPO activity this quarter. However, in Q3 of 2008, the country issued six IPOs, none of which raised any money.

The European markets have continued to attract non-European companies. There were 13 IPOs by non-European companies in the quarter raising €1.74bn (Dh9.57bn). This represents an increase in both volume and offering value from the Q2 of 2009 when there were eight international IPOs raising just €24m. The activity of non-European companies compared to the same quarter in the previous year is consistent with the overall trend with volume decreased from 21 international IPOs, however the offering value increased from €915m in Q3 of 2008.

The money raised by non-European companies represented 97 per cent of the total in Q3 of 2009, compared to 57 per cent in the Q3 of 2008. Non-European companies chose London, Luxembourg, Oslo and NYSE Euronext as their destination.

The majority of the IPOs by non-European companies in the quarter related to GDR offerings. In total, there were eight GDR offerings this quarter raising a total of €1.59bn, representing 91 per cent of the total money raised by international companies.

London attracted two GDR offerings, a Russian power generation company which listed on its main market, and an Indian steel producer which listed on its PSM market. Additionally, London attracted two other international companies, an Indian based wind-farm company which listed on its AIM market, and a Jersey-domiciled investment company which listed on its main market.

Luxembourg hosted six international IPOs during the quarter, two Indian GDR offerings and four GDR offerings from Taiwan.

Oslo Axess attracted one Dubai-based specialised shipping company, which raised €84 million. NYSE Euronext hosted two non-European IPOs on its Marché Libre market, a Hong Kong food and beverage company and an airline company operating flights in Guyana and the Antilles, neither of which raised any funds. The total offering value of IPOs on the European markets in Q3 of 2009 was €1.79bn, a modest increase compared with the €1.6bn raised in Q3 of 2008.

The largest IPO of the quarter, raising €424m, was the GDR offering of Rushydro, a Russian power generation company, which is comparable in terms of offering value to the largest IPO in the same quarter last year, that of Commercial Bank of Qatar which raised €444m.

The average offering value for European IPOs raising new money increased by 67 per cent to €55m this quarter compared with €33m in the same period last year. There was also a marked increase compared to the average of €21m achieved in Q2 of 2009.

This quarter, London was the largest market in terms of money raised with €873m from five IPOs.

Most active sectors
The most active sectors by number of IPOs this quarter were the industrial goods and services sector with six IPOs and the technology and utilities sectors, both of which had five IPOs each.

The activity in these sectors represents a decrease from 10 and eight IPOs, in the industrial goods and services and technology sectors respectively, in the corresponding quarter of 2008.

The utilities sector saw an increase from four IPOs in the third quarter of 2008.

Those sectors which have shown the largest decreases since Q3 of 2008 have been investment companies, which fell from nine IPOs in Q3 of 2008 to three in Q3 of 2009, and oil and gas, which fell from six IPOs in Q3 of 2008 to one in the current quarter.

The pharmaceuticals and biotech sector has shown the largest increase when compared to Q3 of 2008.

Top five GDR offerings
Rushydro, a GDR offering hosted by London's main market, which raised €424 million
Tata Steel, a GDR offering by an Indian steel production company which listed on London's PSM market, raised €355m
Shin Kong Financial Holding, a GDR offering by a Taiwan-based insurance company, which listed on Luxembourg's EuroMTF market and raised €266m
Epistar Corporation, a GDR offering by the Taiwanese technology company, which listed on the EuroMTF market in Luxembourg, raised €210m
KGI Securities, a GDR by a Taiwan financial services company, which listed onto Luxembourg's EuroMTF market, raised €201m

By Reena Amos Dyes

© Emirates Business 24/7 2009