Ready for another IPO frenzy?

The bloodbath that we have seen and the severe correction is hopefully over," Albert Momdjian tells Arabian Business. Momdjian, the managing director and CEO of the DIFX branch at Calyon, Crédit Agricole's corporate and investment bank, is confident that the market is in much better health today and the panic and the emotional concern that retail investors had towards the market has improved. "It could be a good market for IPOs," he says.

The region's insatiable appetite for new listings is something all companies, bankers, and investors examine closely. While their attractiveness is not a mystery, Imad Ghandour, the head of strategy and research at Gulf Capital, a regional private equity firm, very succinctly explains investors' rationale. According to his analysis, GCC markets have decreased by 32% during 2006 and the first half of 2007. On the other hand, IPOs launched during the same timeframe appreciated by 156%.

Furthermore, by mid 2006, IPOs launched in 2005 were still up by 177% when the overall GCC index was down by 12%. Imad Awad, the head of equity capital markets at the NBD Investment Bank (NBDIB), also highlights this demand. "Air Arabia and Deyaar were listed over the past few months in the UAE.

Air Arabia was oversubscribed but it opened at a 20% gain, which was excellent - that means that there is a lot of demand in the equities market." The difference in performance between new listings and existing stocks is so striking that any investor can discern that the safe bet is to get in on the IPO. The problem is that over the past 18 months, new offerings have markedly decreased.

Private equity firms tend to keep an eye on equity markets because IPOs serve as a good option to exit investments, and Ghandour is no exception. His research shows that US$13.5bn was raised in initial public offerings in the GCC in 2005 and 2006, but new offerings in the three year period between 2007 and 2010 will only raise US$15.3bn. The reasons for the decrease are complex, and Ghandour says that to properly understand the decline one must look at each individual GCC marketplace. However, almost everyone agrees that market conditions, or the severe correction of the past 14 months, affects both the supply and demand of new listings.

It is necessary here to clarify some semantics. Market experts in region still refrain from using the word ‘crash' but Dr John Sfakianakis, chief economist at the Saudi British Bank (SABB), does not shy away from using the term.

He explains that the International Monetary Fund (IMF) defines the term "when the market goes down more than 34%", and given the Saudi Tadawul's decline of 61%, the use of the term ‘crash' is more appropriate than correction. By agreeing that a crash occurred, it is likely that expectations about future performance will be adjusted and investors will become more patient. Dr Sfakianakis says: "Empirical evidence shows that when you have a crash, usually people will come back to the market after four or five years, and if it is a real estate crash it might take even longer for those people to come back."

Using historical data is not always the best gauge of future performance, but in this case it can shed light on the severity of the crash and how long the recovery will take. The Gulf is not alone in engaging in the debate over terminology. In the last four months, finance experts argued about the subprime lending crisis, the stock market shock and a global liquidity crunch. The consensus seems to be that the dip marks an era of ‘increased volatility'. GCC bankers are quick to point out that the global market turmoil did not affect regional markets, and they are right. Equity markets rebounded across the GCC this summer; conditions seem ripe for new listings.

A few weeks ago, an announcement from Saudi Arabia seemed to confirm this sentiment. PetroRabigh, a US$9.8bn petrochemical joint venture between Saudi Aramco and Japan's Sumitomo Chemicals, said that it was planning to float a 25% stake before the end of the year. Dr Sfakianakis says that the PetroRabigh IPO will be "one of the biggest in the history of Saudi, well over US$2bn". He believes that the Saudi market will see more listings "coming on stream in Saudi Arabia... 2008 looks like a good year for IPOs".

NBDIB's Awad sings a similar tune about the UAE, and says that "there are a few IPOs coming up on the Abu Dhabi stock market and that they should soon be announced."

The simple (and rather nebulous) reason for the drop in new listings is an oft-repeated phrase: ‘due to undesirable market conditions'. While it is certainly true that the market crashed, the demand for IPOs remained somewhat robust. A quick glance at more of Ghandour's research shows that the average oversubscription rate in the first half of 2006 was 60, and dropped in the first half of 2007 to 6.5, which signifies weakened demand, but nevertheless, offerings were still oversubscribed. If companies were successfully listing during the crash, why then are things going to pick up now? And with more robust equity markets, why aren't projections for future fund raising higher?

When Arabian Business reached out to the experts to explain this phenomenon, we did not expect to find that everyone agreed with the answers to these questions. The main reasons for the decline in new listings (and some would say the decline in the markets) are mostly regulatory. The good news is that governments are enacting sweeping changes in record time. The three most promising reforms are in the valuation process, the facilitation of the listing process for family owned businesses, and the increased participation of institutional investors.

Book Building

When the Capital Market Authority (CMA) in Saudi Arabia began adjusting its pricing mechanism and introduced the book building and price discovery mechanisms, Calyon's Momdjian was very pleased. He explains the significance of this development. "In normal markets you have three ways of deciding the valuation of a company. You have the corporate finance valuation, the research valuation, and the market valuation.

"The most important one is the market valuation. As corporate financiers, we prepare a company and package it to go to the market, then we sell the story to research analysts, and then at the end of the day it is up to the management and the market to decide if they want to pay a premium or not on the company," he adds.

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