Companies, companies, everywhere, and nay a share for sale. The ancient mariner could have rhymed to no end about primary markets in 2009 and it looks as if not a line will need to be added to the eulogy of initial public stock offerings (IPOs) in the Middle East in the last six weeks of the year.
Given that the period from November until New Year’s Day in 2009 embraces the two important religious observations of Eid al-Adha and Christmas, everything points to a slow season for investment activities.
Barring a dramatic turnaround in new-issues activity in December, companies looking to go public have shelved their aspirations until after the New Year. All of this translates into another wait for the investment banks that underwrite new offerings and the IPO market in general.
As the economy chilled in 2009, the number of companies that went public froze. The volume of new issues is down sharply from 2008. The number of IPOs in the region reached 13 year-to-date, with an estimated $2.2 billion raised — a drop of 82 percent compared to $12.45 billion in the same period of last year.
In the third quarter of 2009, regional markets raised around $850 million in four IPOs, compared to $1.2 billion in seven IPOs in the second quarter of 2009.
Saudi Arabia, which accounted for about 48 percent of the total IPOs year-to-date, had the largest IPO in the third quarter, when National Petrochemical Company (Petrochem) successfully raised $640 million in July, the region’s second largest offering in 2009.
The fact that Petrochem is a young investment company in a leading Saudi industry and does not expect its main project (Saudi Polymers Company) to start production for another two years, makes its IPO an unrestrained play on future growth.
The region’s largest IPO came out of Qatar when telecommunications operator Vodafone Qatar was able to raise $929.3 million in April.
After these encouraging developments in the second and third quarters, the fourth quarter of 2009 started with nothing more than a drizzle of three initial public offerings on the Saudi Stock Exchange that added around $52 million to the year’s tally.
For November, the sole market with new primary issues was Syria, where Al Baraka Bank Syria offered $35 million in shares.
Earlier hints of two November insurance IPOs, in Saudi Arabia and Tunisia, remained unsubstantiated by November 20. And the year’s longest list in initial offerings is clearly that of companies — numbering at least 50 — that had previously announced plans for going public in 2009, but it can now be said, with almost certainty, that they will not offer subscriptions before the new year begins.
IPO performance (October 2008 — September 2009)
Most completed IPOs (third quarter 2009)
Share of deals by exchange in MENA (2009)
Share of deals by sector in MENA (2009)
Capital raised by exchange in MENA (2009)
Capital raised by sector in MENA (2009)
Glad to see you go
It is no secret that the regional IPO market had a slow start in 2009. The recession, investor skittishness and a challenging outlook for the Gulf Cooperation Council capital markets have decreased investor demand for new stock offerings.
Dubai, previously the region’s hottest and fasted growing economy, did not even witness one IPO in 2009. Analysts say this year will go down in history as the worst year for IPOs since the region’s first stock exchange opened its door for business.
Executives and bankers will be happy to put the year behind them. All indications show that investors will start spending again in 2010 if the opportunity is right.
Public offerings are expected to reemerge in the second quarter of 2010, but experts warn that investors will be especially cautious about putting money into unproven businesses when many blue-chip stocks are available at steep discounts.
“GCC investors are becoming more discerning, and demanding a robust offering with a good IPO story, growth momentum, and sensible pricing,” said the Chief Executive Officer of leading investment firm Gulf Capital, Karim El Solh, in November.
MENA IPOs by volume & number of deals (Jan-Sept 2009)
MENA & GCC IPO trends by quarter
MENA & GCC IPO activity
Jan-Sept 2009 versus Jan-Sept 2008 ($millions)
Signs of recovery
Regional capital markets had a mixed performance in 2009, but signs of a serious recovery can be seen everywhere. Experts are encouraged by new life in global markets and can also point to respectable performances of recently floated companies in the Middle East.
Six of the region’s eight newly listed stocks, which started trading in the second half of 2009, have achieved share price gains that were substantially above the gains of their respective benchmark indices for the same period.
Analysts point to the fact that subscription ratios in the Middle East and North Africa (MENA) region have been better than expected in many of the subscriptions undertaken in the past few months. The three Saudi insurance stocks that went public in the third quarter reported oversubscription demand, ranging from 7.5 to 11.6 times the available capital.
International investment banks such as the Royal Bank of Scotland (RBS), Bank of America Merrill Lynch, Ernst & Young Middle East and others, see confidence returning to the MENA markets as well.
Bank of America Merrill Lynch raised its 2010 growth forecast for the GCC from 3.2 percent to 3.7 percent, reflecting a growing level of confidence that the region would emerge from the economic downturn faster and stronger than it had previously expected.
“Our research shows that primary equity issuance conditions in the Middle East have improved substantially since the beginning of this year and should improve further as volatility continues to normalize,” said Durk van der Zee, head of equity capital markets Middle East, at RBS.
This prediction, however, was made prior to the Dubai World (DW) debt standstill request that shook the region’s bourses, and in particular those of the UAE. RBS was also one of the European banks whose balance sheet was exposed to DW’s outstanding debt.
MENA advisors ranking (Jan-Sept 2009)
Top countries (Jan-Sept 2009)
IPO tsunami
Investors on the buying side are searching and waiting for IPOs from good clean companies, with a clean balance sheet, a record of transparency and good valuations.
According to data compiled by Regional Press Network (RPN), there are at least 150 IPOs scheduled in 2010, many of them planned for the first half of the year. This number is expected to double in the event that the impact of the global financial crisis on the region’s capital markets dissipates.
Bankers say when the IPO market comes back and the flow is more steady, it will be driven by best-in-class, larger companies.
Analysts who spoke to RPN say some key drivers that will propel the IPO market in 2010 are high oil prices, stabilization in the real estate sector, regulatory reforms and the fact that MENA equity markets are undervalued.
“When oil exceeds $65 per barrel, which is our average budget breakeven forecast for the GCC, these countries start saving,” said Turker Hamzaoglu, an analyst for Bank of America Merrill Lynch in London.
Family-owned companies are expected to be on the top of the tsunamis’ crest, converting into public companies at a faster rate than in the past, analyst said.
Abdulaziz al-Zamel, head of capital markets at Saudi Hollandi Capital said he expected to see a rise of family-owned businesses going public over the next three years.
“[Family-owned businesses] will come to the market for three key reasons – to source funds, to ensure business continuity and to bring some degree of professionalism to their structures,” said Zamel.
Busy IPO New Year
Experts agree that even though conditions have thawed over recent months, the real rebound is on hold until 2010 when a number of high-quality companies are expected to hit the market.
“The future outlook remains bright,” said Samer Shaheen, a research analyst at Bloomberg in Dubai. “Continued economic growth and high oil prices will fuel the liquidity necessary to support future offerings, and investors will be seeking investments in new sectors and in attractive, well priced IPOs.”
