07 May 2008
Corporate Gulf is growing up - exploring new territories, expanding its business and investment horizons and dabbling with different forms of funding. No more beholden to government handouts and incentives, Corporate Arabia is making bold moves and charting its own path. And as it grows confident, it is looking to share its wealth and alternatively create wealth by opening itself to public ownership.
According to Zawya.com, close to a hundred companies are looking to list on the Gulf markets this year alone 43 of these have already appointed a lead manager. Clearly, not all will see the light of day at least this year, but the strong pipeline suggests that companies are not afraid to be subjected to public scrutiny.
And it's not just Gulf governments offloading their prized assets. The IPO pipeline is a mixed bag with greenfield companies, public-private partnerships and family enterprises coming out to play.
Already, the Gulf IPO market has made a strong start this year, with the first quarter bucking the global trend, raising nearly $4 billion in nine IPOs in the period. This was a 400% improvement over the same period last year, when the same number of IPOs raised a little under $1 billion.
The spate of IPOs in the region is in sharp contrast to the public offering trends worldwide, which fell 11% to $36.3bn during the same period. It could have been worse, but the global IPO markets blushes were saved by the Visa IPO, which accounted for more than half that figure.
The Saudi Tadawul dominated the proceedings, hosting no less than five of the new companies that came to the market, including the $1.86bn Mobile Telecommunications Company Saudi Arabia and the $1.23bn Rabigh Refining and Petrochemical Company. The other three Saudi IPOs were focused on the insurance sector.
The flurry of activities in the first quarter was followed by the announcement of many IPOs such as Depa United, Basic Chemicals Industry and Mohammad Al Mojil Group IPO, highlighting the strong pipeline of IPOs in the Gulf, especially in the UAE and Saudi Arabia.
"The outlook for the IPO market in the Kingdom is positive as it is primarily supply and demand determined," Emad Mansour, head of investment banking, Samba Capital, told Zawya.com.
"On the supply side, many companies have made a strategic decision to go public, and although the timing for IPOs is important, many companies are determined to go public whatever market conditions are in the short term, taking a view that the longer term view is looking very strong and positive."
There is an abundance of liquidity in Saudi Arabia, and the demand for new equities continues to be strong. "Saudi Arabia's regulations are probably the most sophisticated in the Gulf, and the regulations have helped companies going public thus benefiting from the abundance of liquidity," says Mansour.
Walid Shihabi, director, head of research at investment bank Shuaa Capital, says 2008 will be a record year in terms of public offerings in the Gulf, in the key markets such as the UAE and Saudi Arabia.
"2007 was a record year for the UAE for instance in times of total size of the IPOs, but the numbers were limited to only three. What we are seeing now is that the number of issues will be significantly higher this year. In Saudi Arabia, the number of issues is also going to be higher this year, with much larger transactions, which will push the overall size of the IPO market higher than last year.
"For the UAE we see a higher number of issues, with much bigger sizes. We are going to see quite a few listings on the DIFX. The UAE IPO market will be evenly split on the size of offerings across all three UAE exchanges."
Greenfield
In this spirit of free-wheeling capitalism, greenfield IPOs have also been extremely popular among Gulf investors as was evident with Ajman Bank's offering. It was the UAE's second IPO this year after Methaq Islamic Insurance Company, and the most heavily subscribed (at 85 times) since the Dubai government sold shares in DFM Company in November 2006.
Ajman Bank, which is expected to list in May, will be the fifth Islamic bank on the country's trading floor, after Dubai Islamic Bank, Abu Dhabi Islamic Bank, Emirate Islamic Bank and Sharjah Islamic Bank.
But not all IPOs in the UAE have gone smoothly, though. In February, Nano Dynamics pulled out its offering from the DIFX and in March Al Qudra Holding postponed its $1 billion (Dh3.67bn) IPO and last month Future Pipe pulled out citing market conditions.
Makram Kubeisy, Co-Head Investment Banking Group at Shuaa Capital, which is advising Al Qudra, says the company pulled back from going public as it was waiting for a new company law in the UAE.
"Things are moving very quickly," says Evans Haji-Touma, Managing Director of CEEMEA, HSBC, told Zawya.com. "The UAE local markets have a lot to catch up in terms of reforming the laws. The Emirates Securities and Commodities Authority (ESCA) is looking at proactive approach to introduce short selling and borrowing which is a good sign - and also basically open up in foreign ownership. I am hopeful this will happen towards the year-end, or may be beginning of next year. We also hear that there are plans to develop international methodology for pricing securities for pubic offerings, which should stimulate the market."
The new law is expected to be extremely conducive for new offerings and should address some of the limitation of the existing law for companies coming into the market, especially related to issue size, total percentage of outstanding shares, which had limited the size of the market.
"We saw the adoption of such a law in Saudi capital market, where the floating percentage was reduced to 30%," says Shuaa's Shihabi. "It was extremely conducive in the primary market and we saw it becoming active in 2007."
In the UAE, there is also talk of the adoption of a book building process for IPOs and more flexibility in terms of pricing, which is much more in line with global standards.
Shihabi expects the new law to be effective in 2008.
"Regardless of the law, there is a pretty impressive pipeline for the UAE, because of the DIFX. Of course, DIFX laws are very independent and different from the laws adopted by the Emirates Securities and Commodities Authority and are not subject to the federal laws," says Shihabi.
Spreading the practice
The UAE is not the only market eager for public offerings. Other latent markets of Kuwait, Bahrain and Qatar are also getting into the act.
"There are a few highly rumoured IPOs expected in Kuwait," says M R Raghu CFA, Head of Research at Kuwait Financial Centre.
In early January, Kuwait's National Assembly approved three financial laws which include turning the Kuwait Airways Corporation (KAC) into a private shareholding company, regulating the establishment of companies to construct and develop public warehouses and customs outlets and handling and protection of public properties. All three laws have been referred to the Council of Ministers for execution.
Twenty-four percent of the company's shares will be owned by the government and affiliated authorities, while 26 percent of the shares will be issued for public auction in which KSE companies can take part.
"Fifty percent of the shares are issued in a public subscription for Kuwaitis."
Despite Kuwait being the healthiest stock markets for the past few years, few Kuwaiti companies are looking to test the IPO water.
"The listing option is not as enticing, as it is elsewhere in the Gulf," says Raghu. "Companies here can go for private placements and don't have to go through the regulatory hassle of listing and serving shareholder interest. So there is less appetite for it."
Still some Kuwaiti IPOs are tentatively expected to come to the market, including Global Clearinghouse System and Kuwait Foreign Petroleum Exploration Company, according to Zawya.com pipeline.
Saudi pipeline: Bursting?
In Saudi Arabia, the reasons to go public are different as the government sees initial public offerings as a wealth distribution tool. No wonder more than 50 IPOs are tentatively forecast to list on the Saudi Tadawul Index this year alone, as the Kingdom unloads public-private enterprises and national companies on the market, along with family companies coming to the fray.
The Saudi market has already seen five listings in the first quarter and the pipeline is far from dry.
Mohammad Al Mojil Group is expected to make a public offer in early May and Basic Chemical Industries later in the month. Meanwhile, Saudi National Air Services is planning an IPO in the third quarter and Saudi Petrochem is looking to double its capital to SAR4.4B through an IPO soon.
All eyes are also on Al Inmaa Bank IPO, which began its public offering in early April. The IPO is expected to garner interest from close to nine million Saudis, or roughly half the population.
Al Inma was Samba's first mandate as lead manager this year, after emerging as the region's biggest lead manager in terms of amount raised in 2007.
Samba may have had a quiet quarter as far as IPOs were concerned, but it is preparing for a busy period ahead. "The market continues to be very strong. More often than not, we have to turn down more deals than those we are accepting. We have traditionally been very selective particularly in our ECM business," Says Samba's Mansour. "We have a very healthy pipeline for 2008 as we have around six IPO mandates for this year (including Inmaa Bank). Our pipeline also includes other ECM transactions such as private placements and we have a number of sukuk and M&A transactions, as part of the investment banking unit."
In the first quarter Banque Saudi Fransi was first among the lead managers and financial advisors. The bank raised $1.86bn for the Saudi Mobile Telecommunications Company Saudi Arabia, which listed in late March.
HSBC too, has been busy in the first quarter, advising UAE's Ajman Bank, Qatar's General International Services, Saudi Arabia's Petrorabigh and Bupa Arabia.
But the arrival of fresh new players from overseas and launch of regional investment banks, means that competition in the financial services industry is on the rise.
"Some banks have a strategy that focuses on margin cutting to win businesses and obviously that is affecting overall pricing - I don't think that is healthy for the market," says Haji-Touma. "Other banks have certain levels they will not go under, but unfortunately, with what is happening in Europe and other emerging markets, we are seeing pricing being impacted."
Shihabi notes that as the investment banking arena grows, so does the IPO pie there is enough to go around and keep international and regional lead managers busy during this very monumental period.
As good as the markets look right now, it is important to note that the IPO sector is cyclical and very fickle. While the outlook is promising, investors will do well to take note of the global financial turmoil that could infect the mood of regional markets.
"There are risks related to secondary market performance," says Shihabi, although he deems it unlikely. "If the secondary markets go very sour, the appetite for primary markets is reduced. Another area of risk is performance of company shares post-listing. If the majority of recently-listed companies don't do well, the appetite will decrease."
But for now most analysts see nothing but clear blue skies for the regional markets.
Corporate Gulf is growing up - exploring new territories, expanding its business and investment horizons and dabbling with different forms of funding. No more beholden to government handouts and incentives, Corporate Arabia is making bold moves and charting its own path. And as it grows confident, it is looking to share its wealth and alternatively create wealth by opening itself to public ownership.
According to Zawya.com, close to a hundred companies are looking to list on the Gulf markets this year alone 43 of these have already appointed a lead manager. Clearly, not all will see the light of day at least this year, but the strong pipeline suggests that companies are not afraid to be subjected to public scrutiny.
And it's not just Gulf governments offloading their prized assets. The IPO pipeline is a mixed bag with greenfield companies, public-private partnerships and family enterprises coming out to play.
Already, the Gulf IPO market has made a strong start this year, with the first quarter bucking the global trend, raising nearly $4 billion in nine IPOs in the period. This was a 400% improvement over the same period last year, when the same number of IPOs raised a little under $1 billion.
The spate of IPOs in the region is in sharp contrast to the public offering trends worldwide, which fell 11% to $36.3bn during the same period. It could have been worse, but the global IPO markets blushes were saved by the Visa IPO, which accounted for more than half that figure.
The Saudi Tadawul dominated the proceedings, hosting no less than five of the new companies that came to the market, including the $1.86bn Mobile Telecommunications Company Saudi Arabia and the $1.23bn Rabigh Refining and Petrochemical Company. The other three Saudi IPOs were focused on the insurance sector.
The flurry of activities in the first quarter was followed by the announcement of many IPOs such as Depa United, Basic Chemicals Industry and Mohammad Al Mojil Group IPO, highlighting the strong pipeline of IPOs in the Gulf, especially in the UAE and Saudi Arabia.
"The outlook for the IPO market in the Kingdom is positive as it is primarily supply and demand determined," Emad Mansour, head of investment banking, Samba Capital, told Zawya.com.
"On the supply side, many companies have made a strategic decision to go public, and although the timing for IPOs is important, many companies are determined to go public whatever market conditions are in the short term, taking a view that the longer term view is looking very strong and positive."
There is an abundance of liquidity in Saudi Arabia, and the demand for new equities continues to be strong. "Saudi Arabia's regulations are probably the most sophisticated in the Gulf, and the regulations have helped companies going public thus benefiting from the abundance of liquidity," says Mansour.
Walid Shihabi, director, head of research at investment bank Shuaa Capital, says 2008 will be a record year in terms of public offerings in the Gulf, in the key markets such as the UAE and Saudi Arabia.
"2007 was a record year for the UAE for instance in times of total size of the IPOs, but the numbers were limited to only three. What we are seeing now is that the number of issues will be significantly higher this year. In Saudi Arabia, the number of issues is also going to be higher this year, with much larger transactions, which will push the overall size of the IPO market higher than last year.
"For the UAE we see a higher number of issues, with much bigger sizes. We are going to see quite a few listings on the DIFX. The UAE IPO market will be evenly split on the size of offerings across all three UAE exchanges."
Greenfield
In this spirit of free-wheeling capitalism, greenfield IPOs have also been extremely popular among Gulf investors as was evident with Ajman Bank's offering. It was the UAE's second IPO this year after Methaq Islamic Insurance Company, and the most heavily subscribed (at 85 times) since the Dubai government sold shares in DFM Company in November 2006.
Ajman Bank, which is expected to list in May, will be the fifth Islamic bank on the country's trading floor, after Dubai Islamic Bank, Abu Dhabi Islamic Bank, Emirate Islamic Bank and Sharjah Islamic Bank.
But not all IPOs in the UAE have gone smoothly, though. In February, Nano Dynamics pulled out its offering from the DIFX and in March Al Qudra Holding postponed its $1 billion (Dh3.67bn) IPO and last month Future Pipe pulled out citing market conditions.
Makram Kubeisy, Co-Head Investment Banking Group at Shuaa Capital, which is advising Al Qudra, says the company pulled back from going public as it was waiting for a new company law in the UAE.
"Things are moving very quickly," says Evans Haji-Touma, Managing Director of CEEMEA, HSBC, told Zawya.com. "The UAE local markets have a lot to catch up in terms of reforming the laws. The Emirates Securities and Commodities Authority (ESCA) is looking at proactive approach to introduce short selling and borrowing which is a good sign - and also basically open up in foreign ownership. I am hopeful this will happen towards the year-end, or may be beginning of next year. We also hear that there are plans to develop international methodology for pricing securities for pubic offerings, which should stimulate the market."
The new law is expected to be extremely conducive for new offerings and should address some of the limitation of the existing law for companies coming into the market, especially related to issue size, total percentage of outstanding shares, which had limited the size of the market.
"We saw the adoption of such a law in Saudi capital market, where the floating percentage was reduced to 30%," says Shuaa's Shihabi. "It was extremely conducive in the primary market and we saw it becoming active in 2007."
In the UAE, there is also talk of the adoption of a book building process for IPOs and more flexibility in terms of pricing, which is much more in line with global standards.
Shihabi expects the new law to be effective in 2008.
"Regardless of the law, there is a pretty impressive pipeline for the UAE, because of the DIFX. Of course, DIFX laws are very independent and different from the laws adopted by the Emirates Securities and Commodities Authority and are not subject to the federal laws," says Shihabi.
Spreading the practice
The UAE is not the only market eager for public offerings. Other latent markets of Kuwait, Bahrain and Qatar are also getting into the act.
"There are a few highly rumoured IPOs expected in Kuwait," says M R Raghu CFA, Head of Research at Kuwait Financial Centre.
In early January, Kuwait's National Assembly approved three financial laws which include turning the Kuwait Airways Corporation (KAC) into a private shareholding company, regulating the establishment of companies to construct and develop public warehouses and customs outlets and handling and protection of public properties. All three laws have been referred to the Council of Ministers for execution.
Twenty-four percent of the company's shares will be owned by the government and affiliated authorities, while 26 percent of the shares will be issued for public auction in which KSE companies can take part.
"Fifty percent of the shares are issued in a public subscription for Kuwaitis."
Despite Kuwait being the healthiest stock markets for the past few years, few Kuwaiti companies are looking to test the IPO water.
"The listing option is not as enticing, as it is elsewhere in the Gulf," says Raghu. "Companies here can go for private placements and don't have to go through the regulatory hassle of listing and serving shareholder interest. So there is less appetite for it."
Still some Kuwaiti IPOs are tentatively expected to come to the market, including Global Clearinghouse System and Kuwait Foreign Petroleum Exploration Company, according to Zawya.com pipeline.
Saudi pipeline: Bursting?
In Saudi Arabia, the reasons to go public are different as the government sees initial public offerings as a wealth distribution tool. No wonder more than 50 IPOs are tentatively forecast to list on the Saudi Tadawul Index this year alone, as the Kingdom unloads public-private enterprises and national companies on the market, along with family companies coming to the fray.
The Saudi market has already seen five listings in the first quarter and the pipeline is far from dry.
Mohammad Al Mojil Group is expected to make a public offer in early May and Basic Chemical Industries later in the month. Meanwhile, Saudi National Air Services is planning an IPO in the third quarter and Saudi Petrochem is looking to double its capital to SAR4.4B through an IPO soon.
All eyes are also on Al Inmaa Bank IPO, which began its public offering in early April. The IPO is expected to garner interest from close to nine million Saudis, or roughly half the population.
Al Inma was Samba's first mandate as lead manager this year, after emerging as the region's biggest lead manager in terms of amount raised in 2007.
Samba may have had a quiet quarter as far as IPOs were concerned, but it is preparing for a busy period ahead. "The market continues to be very strong. More often than not, we have to turn down more deals than those we are accepting. We have traditionally been very selective particularly in our ECM business," Says Samba's Mansour. "We have a very healthy pipeline for 2008 as we have around six IPO mandates for this year (including Inmaa Bank). Our pipeline also includes other ECM transactions such as private placements and we have a number of sukuk and M&A transactions, as part of the investment banking unit."
In the first quarter Banque Saudi Fransi was first among the lead managers and financial advisors. The bank raised $1.86bn for the Saudi Mobile Telecommunications Company Saudi Arabia, which listed in late March.
HSBC too, has been busy in the first quarter, advising UAE's Ajman Bank, Qatar's General International Services, Saudi Arabia's Petrorabigh and Bupa Arabia.
But the arrival of fresh new players from overseas and launch of regional investment banks, means that competition in the financial services industry is on the rise.
"Some banks have a strategy that focuses on margin cutting to win businesses and obviously that is affecting overall pricing - I don't think that is healthy for the market," says Haji-Touma. "Other banks have certain levels they will not go under, but unfortunately, with what is happening in Europe and other emerging markets, we are seeing pricing being impacted."
Shihabi notes that as the investment banking arena grows, so does the IPO pie there is enough to go around and keep international and regional lead managers busy during this very monumental period.
As good as the markets look right now, it is important to note that the IPO sector is cyclical and very fickle. While the outlook is promising, investors will do well to take note of the global financial turmoil that could infect the mood of regional markets.
"There are risks related to secondary market performance," says Shihabi, although he deems it unlikely. "If the secondary markets go very sour, the appetite for primary markets is reduced. Another area of risk is performance of company shares post-listing. If the majority of recently-listed companies don't do well, the appetite will decrease."
But for now most analysts see nothing but clear blue skies for the regional markets.
By Yadullah Ijtehadi, Managing Editor, Zawya.com
The article first appeared in May edition of Gulf Business.
