The Initial Public Offering (IPO) market in 2008 was vibrant in the region before investor confidence was sapped by the global financial disaster. The Bahrain Tribune reported that after specific instructions from the Central Bank of Bahrain, an IPO that was tipped to be one of the country’s biggest, that of real estate and construction supervisor Naseej, was postponed due to the instability caused by the financial crisis. Other major IPOs have also been delayed due to the uncertain market conditions, including Vodafone Qatar and Gulf Capital. Last year Q4 saw 17 IPOs raise $7.54 billion but this year, at the end of October only three IPOs had occurred raising $22.4 million. This is further compounded by the announcement that in Saudi Arabia, 80 companies have postponed IPO plans. Nonetheless, the IPO news for 2008 was significant including for Q3, which bucked global trends. “Six of the largest 20 IPOs in the world took place in the Middle East in the third quarter of 2008,” said Phil Gandier, managing partner at Ernst and Young Middle East. “The largest IPO in the world in the third quarter was Ma’aden [raising $2.47 billion] that was listed in Saudi Arabia.”
Gandier is bullish about the prospects of IPOs in the region and even pointed to the postponement of the Naseej IPO as positive because it shows that “regulators are keen to maintain confidence in the capital markets in general and IPO transactions in particular. They do not want to see any IPOs fail because of poor investor sentiment, therefore regulators would not be keen to see IPOs take place in such turbulent times.”
Faisal Hasan, head of research at Global Investment House, also sees 2008 as a positive year for IPOs in the region, saying “IPO activity was high in the MENA region in the first nine months of 2008 with a record $13 billion raised in 50 IPOs, as compared to 54 IPOs worth $6.9 billion in the same period last year. The average oversubscription was 15.7x compared to 10.2x last year.” Nonetheless, the regulators’ precautions no doubt are also due to the saga of Dubai Port World (DP World) that was launched in November 2007 and had major consequences on the IPO market throughout 2008.
The DP World debacle
DP World was launched by pricing through a book-building process, the first time this had been done in the region, which allows a company to maximize their share price. Thus, when DP World was launched its share value was $1.30.
Ziad Maalouf, vice-president of MENA Capital, stated that DP World was the first example in the region of “how IPOs can do badly in the secondary market and the importance of pricing. Despite DP World having good fundamentals and having a good business structure the price was too high.” Maalouf believes that DP World was a wake-up call to investors. “What happened to DP World has made people more astute about the investments that they are making and a lot more research is being done now in making sure that the pricing of the IPO is correct and that the fundamentals are there,” he said.
However, the DP World saga shook investor confidence in IPOs fundamentally, stated Mahmoud Ezzedine, director of the private banking department at FIDUS. “IPOs did not have a positive environment in 2008 because DP World really hit confidence, I think we are passed this IPO craze,” he said. Maalouf disagreed, saying “The IPO market in the region has been very strong in 2008 [before the financial crisis] due to the real estate boom and the liquidity in the region. Investors have been encouraged to tap into capital markets and there have been many successful IPOs in 2008. There is great enthusiasm in the Gulf about IPOs and a well established IPO culture has now been set up.”
The IPO market had a good year in 2008, according to Gandier. “The number and value of IPOs in the Middle East has been growing steadily and there was a solid pipeline of announced and rumored IPOs … the challenges for those companies looking to do an IPO in 2009 will center around uncertainty and volatility regarding pricing and potential new capital market regulations,” he said.
Sentiment among analysts is the IPO market will pick up again in 2009 and those that prepared during the downturn will be the most successful on the upswing. Gandier explained the confidence the market will pick up is based on the fact that “all the strategic reasons why companies planned to embark on an IPO are still valid, i.e. institutionalize the business, enhance the brand and image, monetize part of the shareholders equity and provide finance.”