Axiom Telecom still in good shape

Axiom Telecom has good growth prospects despite abandoning a planned IPO to raise nearly $400 million.

Axiom Telecom has strong growth prospects despite pulling out of its planned initial public offering (IPO) but its debt and a revaluation of its strategy will be the biggest challenge the company faces, analysts say.

The retailer, based in Dubai, aimed to raise as much as US$382 million (Dh1.39 billion) by selling 332 million shares on the NASDAQ Dubai, which would go towards working capital, pay down a portion of its bank debt and to finance its expansion into new markets.

Although the IPO has been called off, the retailer said it would continue to expand in its two main markets, the UAE and Saudi Arabia, and consolidate its presence in its other markets, but had no plans for any mergers and acquisitions.

Dr Christopher Laing, the managing director and head of MENA for Deutsche Bank, which was the sole global co-ordinator and joint bookrunner for the public offering, said the aborted share sale was a reflection of market conditions.

"Investors very much liked the growth story," he said. "The story was well received internationally, there were very high-quality international investors that wanted to invest and consider it a great pity that they can't."

Axiom Telecom, which has more than 600 stores across the Gulf, India and the UK and supplies the bulk of the independent mobile retailers in the Emirates, was established in 1997. Last year, it had operating profits of Dh105m but experienced losses of Dh250m in 2008. In the first six months of this year, operating profits have risen to Dh117m.

Axiom is 40 per cent owned by Dubai Holding Commercial Operations Group (DHCOG), a company owned by Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai. DHCOG is the parent company of the Jumeirah Group, a hospitality business that owns Dubai's Burj Al Arab luxury hotel, and TECOM Investments, which owns and operates several economic free zones in the emirate. Al Bannai Investment owns 53 per cent and 7 per cent is owned by Al Zarooni Enterprises.

While Axiom has had rising profits this year, it was hit hard by the economic downturn in late 2008 and needed assistance from its shareholders. The al Bannai and al Zarooni families transferred property worth Dh500m to the company to act as collateral for borrowings, according to the IPO prospectus. But last month, the shareholders bought back the property for Dh202m to clear the balance sheet with loans from banks that would have been paid back with the proceeds from the IPO. Without the sale proceeds, it is unclear how the shareholders will repay the loan.

Dr Laing said the shareholders would have access to other facilities.

Axiomis also facing debts of more than Dh1 billion, a portion of which the proceeds would have been used to pay down.

Dr Laing said the bulk of the financing was for working capital - mainly inventory - and Axiom would not have a problem paying it down.

Lindsey McDonald, a consultant who specialises in information and communications technologies at Frost & Sullivan, said the ability to service the debt would be a key issue.

"As long as it's able to show all stakeholders, clients, government and investors that they are able to service this, then the company should be fine," she said.

Axiom's newly signed deal with Research In Motion to distribute its popular BlackBerry smartphones in the Middle East would help to boost its profits by lowering its margins, or give it a competitive edge in the market, Ms McDonald said.

But it may need to revisit its strategy, particularly its plan to assume the role of a mobile virtual network operator in the UAE and other Gulf countries, similar to Virgin Mobile in the UK, because few were profitable, she said.

Axiom is likely to regroup and return to the market in between six months and a year, Ms McDonald said.

40234Rami Sidani, the head of MENA portfolio management for Schroders in Dubai, said Axiom was attractive at the lower end of the range and would have been a good option for fund managers looking to diversify away from property and the banks.

"It's a great success story with great branding, strong presence in the UAE and the region - and we lack representation in the market of consumer and retail."

* With reporting by Hadeel al Sayegh