Unprecedented turmoil in global markets at large, and in local markets specifically, over the past few weeks caused several firms to call off public offerings scheduled for the fourth quarter of 2008. Analysts agree that although the initial public offerings (IPO) market hasn’t been running at full throttle for the past five months, it has not been stuck in first gear either. The region’s IPO market fared better than its global counterparts, data shows. According to a report by Renaissance Capital, a UK- based financial firm, IPO activities in third quarter slowed in every region except the Middle East. However, the start of the fourth quarter shows substantial delays, rescheduling and reduction in the number of firms going public. The main culprit behind the slowdown of activity is the financial crisis that started in the United States and later spread across the globe.
The region’s markets have witnessed an unprecedented wave of selling leading to a 22% loss in the broad MSCI Arabian Market index for October, representing a loss of more than $255 billion in market capitalization. A report released by Rasmala Investments said panic selling was prevalent across all markets causing a loss of between 25 and 35% (with the exception of Lebanon, Tunisia, Morocco and Bahrain). And as of this writing, uncertainty over the extent of the region’s exposure to the global financial crisis and concerns over the state of the property sector continue to agonize investors.
Against the grain
So how is the IPO market holding up with all of the other plummeting markets and doom and gloom surrounding financial circles? Economics 101 teaches that a strong stock market is necessary to encourage companies to go public. However, going against the grain, the IPO market in the MENA region appears to have developed a stronger immune system than its global counterparts, and family businesses continue to jump on the IPO bandwagon.
Looking back at the region’s 9-months IPO market offerings, one will find that it was up by 90% when compared to the same period of 2007. According to figures from Zawya, so far the region has boasted 50 new IPOs with a total value of $13.12 billion compared to 54 IPOs with a total value of $6.88 billion for the same period in 2007. Renaissance said the number of global IPOs in the third quarter fell 82% year-over-year and the amount of proceeds raised declined 89% to $9.3 billion. The region raised $3.61 billion in the third quarter of 2008 from 12 IPOs, compared to $4.72 billion from 13 IPOs in the second quarter of 2008.
Renaissance Capital pointed out that 10 of the largest global deals during the third quarter, “four made public debuts in the Middle East, and another four did so in Asia.” Saudi Arabia was the biggest IPO player in the region accounting for 26% of the total number of deals and 74% of the total capital raised. The kingdom raised around $9.5 billion year-to-date. The most noteworthy is Saudi Arabia Mining Company which raised over $2.4 billion in proceeds.
Cooling sentiment
However, despite all the success in last nine months, data suggests that IPO market activity in the fourth quarter of 2008 is certain to slowdown as investors observe the global markets from the sidelines. The mood in the IPO market has significantly worsened against the second quarter of 2008. The primary markets, due to panic selling, negative psychology and speculation are showing signs of the financial crisis. But market experts say that the cooling of sentiment is noticeable only with regard to issuers and issuing companies, while the mood among investors has remained almost unchanged. Although the short-term outlook appears lackluster, companies in some of the market’s hottest sectors, such as oil, agriculture and telecoms, could keep the IPO market chugging along in the near term. Nevertheless, a few large deals are set to brave the tough IPO market in the coming weeks.
Braving the markets
But despite the current climate, plenty of companies are still looking to go public. November witnessed the announcement of five new IPOs all scheduled to be launched in the first quarter of 2009. Saudi Arabia, with the largest economy in the region, announced three IPOs. The agriculture and food firm, Al Akhawain, said that it will offer 30% of its shares to the public seeking to raise around $27 million. Herfy Food Services, a fast food unit of Savola Group, said that it will go public in the first quarter of 2009 by offering 30% of its shares. The company did not disclose the amount it wants to raise, but it’s offering around 3 million shares. Herfy has a paid-up capital of $27 million. The Dammam-based conglomerate, Aujan Industries, said it will also go public offering 30% of its shares. The offer size will range between $775 million and $1.04 billion.
Meanwhile, in Bahrain, mobile operator Zain Bahrain, a unit of Kuwait’s Zain Group, had announced in April of 2008 that it will go public, both on the Bahrain and the London Stock Exchange, but the IPO was delayed and rescheduled. However, Zain Bahrain has now confirmed that it will offer portions of its shares in the first quarter of 2009. Although it is not clear how much the company is looking to raise, media reports say that Zain Bahrain share offer on the LSE will be worth around $4 billion.
In Qatar, Al-Mazaya Holding Company said it will launch its IPO in November despite turmoil in financial markets, and will launch a $9.5 billion worth of projects in Dubai as it mitigates slow growth in Kuwait. Mazaya is seeking to raise around $137 million by offering 50%, or 50 million shares, priced at $2.75 to the public. Mazaya’s current capital stands at $138 million.
The bottom line
Without a consensus opinion among local analysts and business leaders, what will happen in the fourth quarter is not clear. But the good news for investors is that most great returns will be realized when the markets return to their pre-July days, because the quality of companies attempting to go public will be better and prices will be favorable as IPOs will need to be priced relatively low to attract investors. But one thing that has been clear in today’s turbulent MENA markets, the direct impact of the financial market upheaval on developing countries has been limited and global economic growth remains strong, the World Bank said in a report released in October. The bank pointed out that the region’s governments continue to implement “policies supporting economic resilience” and urged business leaders to be prudent in the way they deal with the volatility and uncertainty prevalent in today’s markets.
Furthermore, the appetite of local companies to raise capital will not stop; governments remain committed to distributing wealth through the public markets and the decline in the markets of developed countries will only help the region make it through these volatile financial times intact. Add on top of that the fact that almost 300 companies have shown or are now preparing to go public in 2009, the bottom line is the IPO market will remain “seriously” active for quite some time.
