By Claire Ferris-Lay
Listing was all the rage three years ago, but IPOs have since dropped from a surge to a trickle
In the first nine months of 2008, companies in the Middle East and North Africa raised a staggering $13.1bn from investors in a total of 51 initial public offerings (IPO). As the global economic downturn hit the region, stock markets plummeted and liquidity dried up; so too did this region’s IPO market.
Despite 44 companies selling their shares and listing on regional bourses from 2009 to date, the picture remained just as grim in the first quarter of this year as it did back in the final few months of 2008.
“It’s not like the old days when you go to the markets, get by the regulator and the public will invest and you’ll be oversubscribed ten times. Now you have the regulator saying ‘I don’t want another failed IPO or a withdrawn IPO,’” says Phil Gandier, MENA head of transaction advisory services at Ernst & Young.
IPOs in the Middle East and North Africa plunged 95 percent to their lowest in five years in the first quarter of the year, according to data from Ernst & Young. Regional firms raised just $21.7m in the first three months of the year compared to $420.4m for the same period a year ago as underperforming stock markets and regional political unrest weighed on investor sentiment.
Nine IPOs, which were expected to raise around $4.7bn, were postponed or withdrawn in the Middle East and Africa region during March 2011, the largest monthly estimated volume since October 2008, said Ernst & Young. One of this region’s highest profile casualties was Topaz, the oilfield services unit of Oman-based Renaissance Services, which pulled its $500m listing citing the “increasingly uncertain investment climate”. The firm said it would review the sale later this year.
“If there is one thing that markets don’t like it is uncertainty so people are waiting to see how that develops before ploughing ahead. People aren’t really going into the market because they know investors are uncertain about the future and want to see how things settle out,” says Christopher Laing, managing director, head of MENA equity capital markets at Deutsche Bank AG.
The Arab Spring has brought with it plenty of uncertainties. As thousands of people marched in anti-government protests across the Middle East, regional stock exchanges plummeted. The market capitalisation of sixteen Arab bourses lost $140bn from January 25 to March 4, according to a report by the Arab Monetary Fund. Even countries that haven’t been affected by mass demonstrations have seen volumes decline; Casablanca Stock Exchange’s volume is down approximately eleven percent so far this year, its chief executive told Dow Jones last week.
Political unrest might be unique to the Middle East but it is by no means the only factor deterring companies from listing. Japan’s earthquake and subsequent nuclear panic has plunged the country back into recession while Greece, Ireland and Portugal have all been forced to turn to support from the EU bailout fund. So far this year, 96 IPOs have been pulled globally, 21 of which were post-launch, according to Dealogic.
“Markets in certainly this time zone, Europe, Middle East and Africa, have been very choppy this year so while there has been a lot of IPOs launched, only about half of them have successfully made it to the finish line in Europe. We have seen some very large deals fail,” says Laing. He adds that in Russia only five out of nine deals have been successfully priced, all of which are now trading below market value.
Non-starters in Europe include Russian Helicopters, which was forced to postpone its $500m dual listing in Russia and London, and the online payments company, Skrill, who cancelled its $260m in April, citing poor market conditions for new issues.
Analysts have, however, suggested that it might not be all doom and gloom. Several successful IPOs in the second quarter of the year indicate that the market could be looking up. The Swiss commodity trader Glencore International raised $10bn in its IPO in May, the biggest so far this year. Regional investors included Abu Dhabi’s sovereign wealth fund and the Saudi billionaire Prince Alwaleed.
Closer to home, the UAE’s first IPO in over two years saw Abu Dhabi’s Insurance House raise $18m in March (though it only reached its threshold hours before its deadline) while the Middle East Exchange Company in Syria raised $3.1m.
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Other IPOs include Islamic insurer Wataniya’s $22.4m, whose stock was oversubscribed at least six times, and the UAE property firm Eshraq which raised its target of $225m in an oversubscribed offer last month, indicating renewed interest in the country’s battered real estate sector.
“The reason that I would expect to see them pick up… [is that] there are hundreds of announced and rumoured IPOs and the reason that these companies need to go public is not going to go away,” says Gandier.
“The strategic rationale for them to transform themselves from a family owned business into an institution is still there, it’s just a matter of timing. A lot of these are not for financing, they are actually the owners selling some of their shares so it’s almost like cashing in or monetising some of their wealth.
“If they don’t necessarily need the money and they know the price is going to get better then they would just rather sit and wait until the price in the stock market gets better before they sell some shares,” he adds.
One of the most significant moves that could boost institutional interest in the region’s bourses is the June 21 decision from the MSCI Emerging Markets Index on whether or not it will reclassify Qatar and the UAE from frontier markets — which typically applies to economies and financial markets that are less developed - to emerging market status. If successful, the move, which would see the two Gulf states become the first to be reclassified, is likely to boost liquidity on local stock exchanges.
“If successful, then it’s harder for emerging market investors to ignore the MENA region. They are taking a very negative stance rather than 'it's easy now because it’s not attracted to the index' and that will have a big factor potentially on markets,” says Laing.
Rising oil prices and strong projected GDP growth coupled with large government infrastructure spending are set to increase interest on the secondary markets, making institutions more likely to list their shares. The International Monetary Fund this year ungraded its GDP projections for Saudi Arabia, Kuwait and Qatar on the back of increased oil production and infrastructure spending plans. The MENA region has a combined GDP of $3,150bn, according to the IMF.
“There is a lot of money following around the system,” says Gandier. “We have good GDP growth so if all of that maintains itself and — and this is a big and — if the regional unrest is managed or maintained or people can see the way things are going to pan out in Syria and Egypt then I would say the secondary markets will pick up and these IPOs will come to the market.”
In the meantime many regional family-owned firms are preparing themselves for a listing if and when the Gulf’s market conditions improve.
“A few years ago there was a lot of liquidity, banks were under pressure to lend, they had massive deposits from all over so they had to lend that money and I just don’t think they did the amount of diligence back then that they are doing today,” says Gandier.
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Topaz Energy and Marine: Pulling the IPO plug
One of the region’s most high profile initial public offerings casualties so far this year has been that of Topaz Energy and Marine, the Dubai-based oilfield services unit of the Omani firm Renaissance Services. Topaz, one of the biggest firms of its kind in the Middle East, had planned to launch its $500m IPO with a price range of 170-230 pence per share. Shares were due to be listed on the London Stock Exchange.
The implied market value would have given the company a market value of $1.5-1.9bn, making it eligible for inclusion in the FTSE 250 Index.
Renaissance Services, which is listed on Muscat Securities Market, pulled the IPO amid valuation concerns and growing regional unrest. “Given the increasingly uncertain investment climate for new issues caused by international events, the board of Renaissance has decided, at this point, not to proceed... until market sentiment is more settled,” said Renaissance.
The firm, which had said it hoped to expand its operations in the Middle East, West Africa and Brazil, still has plans to list but it will be reviewed last this year, said Renaissance.
Renaissance bought Topaz, which it now its biggest revenue generator in its portfolio through a share swap deal in 2005.