Saudi Aramco’s planned initial public offering (IPO) has put the region’s companies and stock markets in sharp focus for global investors. As regional countries continue to experience shifts in economic activity, including governments being less willing to spend, more companies, both state and privately owned, are looking to IPOs to tap investment.
This was seen just last week when Abu Dhabi National Oil Co (ADNOC) said it will look at an IPO of minority stakes in some of its services, and it is part of a growing trend. In the first half of 2017, IPO activity in the Middle East and North Africa increased by 100 percent when compared to the first half of 2016, according to global consultancy experts EY Advisory Services.
A home away from home
While many GCC companies will opt to list (at least in part) in their home countries or in the region, there is still a large portion who harbour aspirations to list on foreign markets, in an attempt to capitalise on a huge emerging market investor base and longstanding ties to the market. To this end, London remains a popular venue for regional companies that choose to list, but is there another option that provides companies with an even greater investor pool?
The most obvious choice, the New York Stock Exchange (NYSE), is often overlooked by GCC companies, despite being the largest exchange in the world by traded volume and total market capitalisation. The reasons for this are varied. There is intimidation or misinformation about listing requirements or regulations; or an unfamiliarity of just what the exchange can offer in terms of investor base, particularly when it comes to the energy sector.
However, a closer look shows that there are many benefits to listing on the NYSE, some of which might even outweigh the perceived challenges.
Due to the NYSE’s size and quality of listed companies, the exchange attracts investors from across the globe. Coverage by a broad array of sophisticated analysts, in conjunction with the US’s extensive disclosure regime, bolsters investor confidence, and may result in enhanced valuations of NYSE listed securities. These benefits can provide companies with the opportunity to market their securities to a deeper pool of capital – estimated at $19 trillion, compared to London’s $6.19 trillion, which makes the NYSE larger than the next top four global exchanges combined.
From a wider perspective, the branding and credibility of the NYSE are arguably unrivalled. The advantages of the acquisition currency in US dollars are numerous, and the listing provides a ready platform for strategic expansion into the US.
In addition to its size, the NYSE allows for observance of home-country corporate governance standards, providing foreign private issuers (FPIs) the flexibility to comply with shareholder voting requirements, quorum requirements for shareholders’ meetings, structure and composition of the board of directors and related continued listing criteria that might be less stringent than US domestic company standards.
That said, a NYSE listed company’s board of directors must maintain an independent audit committee regardless of home-country standards – but it does not require a majority-independent board, or a compensation or nominating committee
Additionally, the NYSE allows financial statements to be prepared in compliance with International Financial Reporting Standards (IFRS), US Generally Accepted Accounting Principles (GAAP) or home-country GAAP reconciled with US GAAP. FPIs are required to file an annual report with audited financial statements, but otherwise are only required to provide semi-annual unaudited financial information, which need not be reconciled to US GAAP. Additionally, they do not need to receive shareholder approval for equity compensation or other stock issuances.
How to list
An FPI may elect to qualify for listing under either the NYSE’s alternate listing standards for FPIs (where there is already a broad, liquid market for the issuer’s shares in its country of origin) or the NYSE’s domestic listing criteria.
A GCC company looking to list on the NYSE in connection with its IPO would have to represent that it expects to have at least 400 round-lot shareholders, a minimum of 1.1 million shares held by the public, and a public float of at least $40m.
Additionally, the GCC company would have to meet one of two financial tests, either: pre-tax earnings of at least $10m in the aggregate for the previous three years; or expected global market capitalisation of at least $200m. Notably, the NYSE offers FPIs the opportunity to undertake a confidential review of listing eligibility at no cost.
A note of caution
The benefits of listing on the NYSE must be balanced against the vigorous disclosure and compliance requirements of the United States. For example, FPIs listed on the NYSE are subject to many provisions of the Sarbanes-Oxley Act, including obligations to implement and periodically assess the company’s internal controls and disclosure controls and to have an independent audit committee.
There are other challenges to GCC businesses. While many of them are working hard to develop their corporate governance and disclosure practices, there is still much work to be done. Understandably, there are concerns about ‘running before you can walk’, as any governance missteps as a publicly traded company would be more publicised in the United States. Moreover, the amount of resources and time needed for shareholders is steadily increasing in the US, as are the costs relating to compliance with regulatory requirements.
The path to IPO can be an equally exciting and daunting prospect for a privately-owned company. But by identifying the right bourse to list on, the process can be a far smoother and ultimately more successful one for all parties involved.
For many GCC companies looking to list, the NYSE should certainly be actively considered.
Christopher Williams, managing partner, Bracewell, Dubai
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