Buoyant stock markets may fuel Gulf IPO revival
Friday, 04 May 2012 | 00:00
A resurgence of stock market trading in the Gulf Arab region is raising hopes for a revival of initial public offers, more than three years after the global financial crisis brought share sales to a grinding halt.
Traditionally a popular source of funding for companies in the region, IPO activity suffered a sharp drop during the global financial crisis as moribund equity markets and a lack of investor appetite deterred companies from trying to raise funds through that channel.
It still has not recovered. Equity capital markets issuance in the Middle East, the vast majority of it in the Gulf Arab oil exporters, totaled a meager $1 billion in the first quarter of 2012, a 21 percent decline from a year earlier, Thomson Reuters data shows.
The trend may be about to reverse, however, as a pick-up in regional stock markets, high oil prices and a rebound in economic growth give companies a strong incentive to tap public markets in order to expand.
The Saudi Arabian stock market has gained 18 percent so far this year, while Dubai is up 20 percent. That compares with a 12 percent rise in the MSCI emerging markets index. Just as importantly, stock trading turnover in the Gulf has expanded severalfold from last year's levels, suggesting supplies of new shares could be absorbed more easily.
This appears to be forcing a rethink toward public offers at Gulf corporations across a range of sectors, from private equity firms to water bottling and construction companies.
They are being encouraged by difficulties in obtaining other forms of financing. Bank loans are hard to get for many companies as the euro zone debt crisis prompts European banks to reduce their exposure in the Gulf. And while big companies with high credit ratings are issuing bonds heavily - Middle East debt issuance nearly doubled to $11 billion in the first quarter - this channel is not open to many smaller firms.
"What we are seeing is that a number of companies are interested in tapping the IPO route in the region," said Jon Breach, Dubai-based chief executive of BDO Corporate Finance Middle East.
"Stock markets have had a steady start to the year and bank financing is still tight. IPOs are becoming a viable option and a source of development or acquisition capital for the right businesses."
The biggest potential magnet for IPOs is Saudi Arabia's stock market, the largest in the Arab world, both because of its sheer size and because there is a large pipeline of companies which earlier suspended plans for IPOs.
For example Saudi Fransi Capital, the brokerage arm of Banque Saudi Fransi, has six IPOs in the pipeline, including three that might launch in the first half of the year, its chief executive said in an interview in February.
In 2011, the bourse saw five IPOs, but values were tiny in comparison to big offers conducted a few years ago; telecommunications operator Zain Saudi's 2008 debut raised SR17.8 billion ($4.7 billion).
"The rationale for doing an IPO in places like Saudi hasn't changed. People who have been considering an IPO on the markets have not gone away," said Phil Gandler, regional head of transaction advisory services at consultants Ernst & Young.
"When the markets dropped, they backed away for a while but now that the pricing mismatch is narrowing, we are seeing more interest."
Local firm Al-Tayyar Travel Group has received approval to sell a 30 percent stake to the public, the bourse regulator said in April, two years after the firm scrapped a similar sale due to a lack of demand.
Other potential IPO candidates include Construction Products Holding Co., Saudi Arabia's largest manufacturer of building materials and a unit of Binladin Group. It has mandated the investment banking arms of Gulf International Bank and Samba Financial Group for an IPO in 2012, industry sources said.
Health Water Bottling, held by Saudi Arabia's family-owned Olayan Group, has picked Morgan Stanley for a potential Saudi IPO, sources told Reuters last month.
"Sectors such as consumer and construction in Saudi Arabia have fared relatively better and have been immune from the impact of global and regional factors," BDO's Breach said.
Other Gulf countries also have IPOs pending. In Oman, Bank Nizwa, the sultanate's first Islamic bank, plans to raise $156 million by selling 40 percent of its capital in an IPO on the Muscat Securities Market.
Another Islamic bank under formation in Oman, Al Izz International Bank, is expected to conduct an IPO of 40 percent of its 100 million rial ($260 million) capital by June 2012, the central bank said earlier this year.
Meanwhile, Swiss lender Credit Suisse is advising Qatar First Investment Bank, a private equity firm, on a listing of all of its shares on the Doha bourse, two bankers with knowledge of the deal told Reuters in April.
Even Dubai, which has not seen a single public listing in over three years, is gearing up for potential IPOs in 2013.
"Dubai has been surprising us recently in terms of private company interest in a local IPO. It is still early stages and we don't expect a listing this year, but sentiment has moved slightly," said Declan Hayes, managing director for transaction services at Deloitte Middle East.
Cross-border listings by Gulf companies, which fell out of favor after several planned IPOs stalled and Dubai's DP World received a lukewarm reception for its dual listing in London last year, may also pick up after the recent IPO of Abu Dhabi-based NMC Health in London.
The healthcare firm raised 117 million pounds ($187 million) in last month's offer. Although priced at the bottom of its expected range, the sale is causing other strong businesses in the Gulf to consider overseas listings, bankers said.
"For cross-border IPOs, we are seeing some interest in potential listings in London and Hong Kong," Hayes said.