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Mon 5 Dec 2011 11:19 AM

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Saudi’s EXtra set for share sale in gloomy IPO market

Arab Spring upheaval, GCC debt restructurings have dented investment confidence

Saudi’s EXtra set for share sale in gloomy IPO market
The GCC generated just $219m from IPOs in the third quarter

Saudi Arabia is set for its worst IPO year since 2004 after
political unrest and the global economic slowdown crimped companies’ expansion
plans.

Today’s sale by United Electronics Co won’t change that.

The share sale by the electronics retailer, also known as
eXtra, is the fourth this year after Saudi Integrated Telecom Co, United Wire
Factories Co and Hail Cement Co. raised a combined $312m. Companies in Saudi Arabia
sold shares valued at $655m last year compared with $9.6bn in 2008.

Political uprisings that ousted leaders in Tunisia and Egypt
and investor concern that global growth is faltering hurt regional financial
markets in 2011. Saudi Arabia’s Tadawul is down 6.8 percent this year compared
with a 4.9 percent gain in the same period in 2010.

“You wouldn’t see a lot of people willing to sell their
companies at low valuations” even if the local economy is doing well, said Fadi
al Said, head of equities at ING Investment Management (Dubai). Investors are
being deterred by “risk aversion and uncertainty in global economies,” he said.

The six-member Gulf Cooperation Council, comprising Saudi
Arabia and the United Arab Emirates, generated $219m from two IPOs in the third
quarter, according to PwC Capital Markets Middle East. By contrast, the pace of
IPOs in Europe has “remained relatively stable despite the market turmoil,” with
121 share sales raising $12.7bn in the period, PwC said in a report dated Nov
20.

Debt restructuring in the Middle East also dented investor
confidence and slowed transactions. Saudi Arabia’s Saad and Algosaibi business
groups defaulted on at least $15.7bn of loans in 2009 and Dubai World roiled
global markets after seeking to delay payments on $25bn of debt.

“Debt restructuring was an ongoing theme since the initial
crisis back in 2008 and 2009, and obviously didn’t help matters,” said Shehzad
Janab, the head of asset management at Dubai-based Daman Investments.
“Depressed valuations in the market is not exactly the best of times to be
selling equity, which by definition is the costliest form of raising finance.”

Regional companies that delayed share sales this year
include Qatar Airways, the Middle East’s second-biggest carrier. Topaz Energy
& Marine, a Dubai-based oil and gas services provider, pulled an IPO in
London, citing “market conditions.”

Still, Saudi Arabia has outperformed the Gulf in share sales
in 2011. The kingdom’s economy may expand 7.5 percent this year, almost double
last year’s pace, the International Monetary Fund said in April. Protests
earlier this year in the eastern Shiite region failed to gain traction after
King Abdullah announced a $130bn plan to build homes and create jobs.

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“The Saudi capital market is more profitable than the rest
of the GCC markets because the market’s size is larger and there is money
looking for the various investment channels,” said Turki Fadaak, head of
research at Riyadh-based Albilad Investment Co.

“If the market opens to direct foreign investment, demand
for IPOs may increase.”

Saudi Arabia’s market regulator is in discussions with
international banks to open the stock exchange to foreign investors in 2012,
three bankers familiar with the matter said Oct 24.

The Saudi benchmark index, the biggest in the Middle East,
has a market capitalization of $326bn, compared with $126bn in Qatar and $98bn
in the UAE, according to Bloomberg data.

The plans of more Saudi companies’ to sell shares may hinge
on the performance of eXtra. HSBC Holdings is managing the sale of 7.2 million
shares, which have been priced at SR55 after an institutional book-building
process and will open to the public today.

Saudi Integrated has surged 42 percent since it started
trading June, while Hail Cement gained 16 percent and United Wire Factories, a
metal-wire producer that began trading in August, advanced 11 percent.

Saudi Enaya Cooperative Insurance Co seeks to offer shares
from Dec. 19, while Najran Cement Co. may sell stock in the first quarter. ACWA
Power International, a Saudi investor in utilities, plans an IPO by 2013.

“There are many family offices who in light of the global
crisis prefer to refocus on their core business and avoid dilution,” said Ahmed
Talhaoui, head of asset management at Abu Dhabi-based Royal Capital.

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