When Jordanian transport company Masafat started trading last month, it opened at over 300% above its IPO price, showing that the appetite for new public companies is still strong. The first half of 2006 saw a significant increase in public offerings despite a marked decline in the Amman Stock Exchange (ASE). Jordan's only regulatory body is well aware of the trend and is trying to tighten the screws to protect the integrity of the system and investors. A gaping loophole, however, is that start-ups are being IPOed without a track record. Henry Azzam, CEO and founder of Amwal Invest, a company taking many firms public, looks at the direction the IPO market is taking.
Middle East IPO activities in 2005 raised $7.61 billion through 35 IPOs, representing 10.7% of the total $71 billion raised in IPOs worldwide. In terms of both the number of deals and capital raised, 2005 was a benchmark year for IPO activity in the Middle East. Jordan, following the trend, witnessed seven IPOs, mostly in the real estate and financial services sectors, last year. The total paid-up capital for these companies was JD54.7 million ($77.15 million). The biggest IPOs were Amwal Invest and the Jordanian Real Estate Company for Development (see chart on the following page).
Despite the drastic price decline witnessed in stock markets across Arab countries, a surge in IPO activities was recorded in the first half of 2006. The Jordanian market saw 13 IPOs during this period, with a total paid-up capital of JD328.5 million ($463.32 million).
The hottest IPOs were the Jordanian Company for Real Estate Development Tameer, Masafat for Specialized Transport Company, First Islamic Financing Company (Al Oula), Al Sanabel International Financial Investments Company, and High Performance Real Estate Company (see chart on the following page). Among the upcoming IPOs in Jordan this year is First Jordan Investment Company, with a paid-up capital of JD150 million ($211.57 million), where the size of the public offering will be JD60 million ($84.63 million). The company will invest in various industry sectors through acquiring and owning controlling interests in one or more existing companies in Jordan, and it will take charge of economic projects and help existing companies to expand by increasing their capital. Another to watch out for is Arab Future Investment Company, with a paid-up capital of JD15 million ($21.16 million), where the size of the public offering will be JD3.75 million ($5.29 million).
From private to public
Many private and family-owned companies, which make up 90% of businesses in the region, are opening up to the prospects of a public listing. Scores of them are opting to convert from limited partnership companies to private shareholding companies in preparation for going public. Increasingly, more private companies are abiding by more stringent requirements of disclosure and transparency, which make it easier for them to go public in the future. IPOs have become a feasible option for family-owned businesses who want to realize the value of their companies, either partly or fully, or to raise additional capital. (Shukum's Petra Aluminum, Fakhr El-Din's restaurant and hotels, Al Hunaidi and Al Kurdi groups are set to go the IPO route).
Instead of having 100% ownership, companies listing on the Amman Stock Exchange (ASE) will be able to share the risk with other smaller investors, without necessarily losing the identity of the firm. They will also get the benefit of enhancing the company's corporate image and public recognition in the country and the marketplace. The additional capital raised will allow the firm to expand while maintaining the optimal financial structure in terms of debt to equity ratio.
What next?
The IPO market in Jordan in the past year and a half has been characterized by oversubscription, unrealistic opening stock prices, and excess leverage. Only a small fraction of the amount subscribed for has been allocated. In most cases, investors have been compensated by the rise in the share price on the first few days of trading. The need for loans by investors in order to obtain reasonable allocation in an IPO has provided an important source of revenue for banks in Jordan. However, it has also resulted in a high cost to those investors. This excessive leveraging by banks has created an artificial demand for IPOs. It is expected that the boom in the IPO market last year and so far this year is likely to cave in and a flight to quality IPOs will take hold. As banks reduce their excessive IPO financing, estimated to have reached 70% of these offerings in 2005, it is forecast that overall demand per IPO will drop and oversubscription rates will fall.
Equally important, the performance of share price after its IPO date will become more realistic, and prices are less likely to double or quadruple in the first few days of trading. In the future, the successful IPOs will be those of solid companies with good growth potential that are traded at fair market price. Furthermore, the appetite of investors for future IPOs is shifting towards companies operating in untapped sectors such as light industries, hotels, restaurants and tourism, airlines, and distribution outlets, amongst others.
© Jordan Business 2006
