Companies keen to go public

Across the Gulf many organisations are all set to make initial public offerings but with the world economy only showing limited signs of recovery, most are happy to wait for better market conditions.

There are dozens of companies in the region itching to go public and the first trickle could start to come to the market by the end of the year. The demand for initial public offerings (IPOs) has been anaemic this year with only nine offerings throughout the GCC, eight of which were in Saudi Arabia. But analysts say there is no shortage of companies with strong fundamentals who hope the nascent global recovery will mark a return to more favourable conditions in the capital markets.

"What we are seeing and the entities we are working with, we are predicting that opportunity could be as early as late this year or first quarter of next year," said Steve Drake, the head of Middle East capital markets at the consultancy PricewaterhouseCoopers. Part of Mr Drake's reasoning for recovery in the IPO market is the "faster than expected pick-up in the public debt market" in the region after the global financial crisis.

"There has been a lot of activity in the regional public debt market and what you generally see is a lag of six months between debt markets and equity market pick-up. I think it is a contributing factor here as well," he said. Istikhlaf Bank of Bahrain is one of the largest announced IPOs next year, with the lender hoping to raise US$3.5 billion (Dh12.85bn). From the UAE, the postal and courier services company Emirates Post has said it wants to raise $272 million by offering a 40 per cent equity stake to the public later in the year, while the food and dairy products company Al Rawabi is looking to raise $435m by offering a 55 per cent stake.

None of these companies has fixed a date for an IPO, according to the business information company Zawya.com data. And while the companies have announced their desire to go public, they will wait until they have a fair valuation of their shares. So far this year, almost all IPO activity has been confined to Saudi Arabia, home to the GCC's biggest economy and stock exchange. The other offering was in Qatar, where Mazaya Qatar Real Estate Development Company raised $144m in the first quarter.

Still, the eight IPOs during the first half of the year - the ninth took place in the present quarter - raised a total of only $830m, a drop of 31.4 per cent from $1.2bn raised during the first half last year. The largest by the end of the first half this year was Knowledge Economic City, raising $272m, equivalent to more than 32 per cent of the total capital raised in the entire region. The telecommunications operator Vodafone alone had raised $952m in the first quarter of last year in Qatar.

There has been only one IPO this quarter, in which Saudi Arabia's Al Jouf Cement Company offered 50 per cent of its stake to the public and raised $173.3m. The next wave of IPOs will also be dominated by Saudi companies but some UAE firms could join the party as well, said Mr Drake. The problem is that both the Dubai Financial Market (DFM) and Abu Dhabi Securities Exchange (ADX) are seeing minimal institutional investment and a chronic lack of retail liquidity. They are the two biggest losers since the start of this year among the regional peers, with DFM dropping 16.1 per cent and the ADX retreating 7.2 per cent. The Saudi bourse, on the other hand, has gained overall so far this year and yesterday closed up by 3.3 per cent at 6,326.03.

There was some excitement in May when Sameer al Ansari, the chief executive of Shuaa Capital, the biggest investment bank in the country, said the company would manage a Dh1bn IPO in Abu Dhabi the following month. He did not name the company but the announcement at that time was considered a final ice-breaker for the IPO market in the UAE, which has not seen a public floatation since July 2008 when Drake & Scull International raised $332.6m.

According to Mr al Ansari, his bank has three signed mandates for public offerings but market volatility stemming from the Greek debt crisis and talk of a double-dip recession has put those plans on hold. The other positive announcement this year came from the DFM-listed Dubai Investments, which said it would float part of its private equity arm M'Sharie on NASDAQ Dubai. That also is not expected to happen before the end of the first half of the next year.

Yazan Abdeen, a fund manager at ING Investment in Dubai, expects low valuations and a persistent lack of risk appetite for equities to keep buyout firms and family businesses on the sidelines for the next few months. "I don't really see any reasons why there should be any IPO activity in the UAE during the second half unless there are fundamental changes," said Mr Abdeen. "A family which has spent 20 or 30 years building a business can wait a little longer to exit. They are not in a hurry and the same goes for the private equity as they would want to exit at the right price."

But Mr Drake argues that with name-lending coming under tighter scrutiny across the region, family-owned companies are increasingly looking at the equity markets as an option to raise capital. "With family businesses there are two things: they are at the life cycle of maturity and owners see markets as a good way of realising value, also they need to continue to grow and raise business capital," he said.

In the medium term, the IPO market will be further strengthened by increasing interest from the regional governments to privatise public-sector entities, Mr Drake said. He pointed out that there was interest in going public from private operators in the telecoms, healthcare, retail, tourism and education sectors. [e-mail]