Middle East flotations bounce back in 2012

Asiacell’s $1.3bn share sale in January offers hope that momentum will continue in 2013. Published in MEED, 10 January 2013

The market for new share offerings in the Middle East started with a bang, when shares in Iraqi mobile telecoms firm Asiacell went on sale on 3 January. Between now and 2 February, when the subscription period ends, the company and its advisers are hoping to raise ID1.49 trillion ($1.3bn) by selling 67.5 billion shares at a price of ID22 each.

If all goes to plan, the shares, which represent 25 per cent of the company, should start trading on the Iraq Stock Exchange in Baghdad on 3 February. It is the largest ever initial public offering (IPO) by an Iraqi company and the biggest anywhere in the region since Saudi Arabian Mining Company (Maaden) raised $2.5bn in its stock market debut on the Saudi Stock Exchange (Tadawul) in 2008. It is also a sign that the boost to IPO activity seen over the past 12 months could continue for some time yet.

Listings rebound

After slumping in 2011, investor appetite for IPOs from the region picked up sharply over the past year, at least in terms of the amount of capital raised. According to statistics from Ernst & Young, a global professional services firm, $2bn was raised by companies from the Arab world in 2012 in 14 deals. That compares with $843.9m and 14 deals in 2011 and $2.65bn raised in 22 deals in 2010.

Corporates from the GCC led the way in 2012, with a total of 11 IPOs. Seven of them came from Saudi Arabia, the largest of which were Al-Tayyar Travel Group, which raised $365m in May, and Saudi Airlines Catering Company, which raised $354m in July.

There were also two each from the UAE and Oman. Both UAE firms chose to list on international exchanges rather than a local bourse. NMC Health listed its shares on the London Stock Exchange in April in a $206m deal, while Amira Nature Foods opted for the New York Stock Exchange for its $90m listing in October.

The only other regional deals were in North Africa, where two Tunisian companies and one Moroccan firm listed on their respective local markets in Tunis and Casablanca. These were small deals, however, with the capital being raised falling in a range of $1m for internet service provider Hexabyte to $6m for Ateliers Mecaniques du Sahel, a producer of stainless steel products.

Ernst & Young’s figures do not include any deals in the Iranian market, but there was also activity there in 2012 as the government continued with its long-term strategy of privatising many state-owned businesses. Among the largest IPOs on the Tehran Stock Exchange last year were the $235m raised by Parsian Oil & Gas Development Company in February and the $64m IPO of Bandar Abbas Oil Refining Company in June.

The sanctions currently in place against Iran mean that its IPO market is aimed at domestic investors. For international investors, the focus in the coming year is likely to remain on the main GCC economies, according to Phil Gandier, head of transaction advisory services for the Middle East & North Africa at Ernst & Young.

“Over the past two years, we have noticed a steady climb in the amount of funds being raised by IPOs,” he says. “We are confident that Saudi Arabia and the UAE will continue to be the regional hubs of IPO activity for investors in 2013.”

Few, if any, deals are likely to come close to the scale of the Asiacell IPO during the rest of the year, but at least two more companies are planning to list on the Tadawul in the coming weeks, supporting Gandier’s view of where the greatest volume of deals is likely to be seen.

The first of these is Northern Region Cement Company, which is planning to sell 90 million shares at SR10 ($3) each, with the subscription period due to close on 14 January. National Medical Care Company is also seeking a listing on the Riyadh bourse, with the offer period for its 13.5 million shares due to run from 4-10 February.

UAE market

Despite the increase in the value of deals over the past year, it is not all good news. On 18 December, the UAE’s Al-Habtoor Group announced it had decided to postpone its planned stock market debut in Dubai. Khalaf al-Habtoor, chairman of the group, said it had been valued by international accountancy firm Grant Thornton at AED22.1bn ($6bn), excluding some of its assets such as hotels in Beirut and Budapest and its stake in the construction joint venture Habtoor Leighton Group. Nonetheless, he decided to seek alternative routes to grow the business.

“After a thorough evaluation, I have decided to postpone the IPO,” he said in a statement released when the delay was announced. “It is a moral issue not taking the group public at this time. I will continue to focus on best practice and growing the company in a sustainable way.”

Had he gone ahead with listing his group, it would have provided a welcome boost to the UAE stock markets, which have not seen an IPO since Eshraq Properties listed shares on the Abu Dhabi Securities Exchange in May 2011.

Overall, IPO activity in the region over recent years has been concentrated in countries that have been the most politically stable. Understandably, companies and investors have decided it is too difficult or unwise to launch new share offerings in countries undergoing political upheaval. That helps to explain the lack of any new listings in Egypt since Amer Group’s $200m debut in November 2010, and in Syria where the last IPO was in January 2011, when the Middle East Exchange Company listed on the small Damascus Stock Exchange, raising $3m in the process.

The most active market over the past three years has been Saudi Arabia. Between 2010 and 2012, the Tadawul has seen 20 IPOs, raising a total of $2.85bn. As with the region as a whole, it saw a slump in activity in 2011, but bounced back strongly in 2012. The second-most active market has been Morocco, with six IPOs raising $218m in 2012, followed by Iran, where the five IPOs last year raised $342m.

Regulatory reforms

Whether the region’s return to form can be sustained throughout this year will depend on a variety of factors: among them, the amountof political instability in the region and the level of global economic turbulence, particularly for any company focused on export markets.

In addition, regulatory reforms could help to boost the interest of international investors in some of the region’s stock markets, which would, in turn, make them more attractive venues for firms looking to raise capital by listing their shares. In particular, Qatar and the UAE could be promoted from frontier to emerging market status by MSCI, one of the world’s main providers of indices for financial institutions. In June 2012, MSCI said both markets remain under review for possible reclassification, with a decision due in June 2013. Upgrades have, however, failed to happen on previous occasions.

Sticking points for the UAE reclassification relate to market accessibility issues around custody, clearing and settlement, which could be resolved this year if previously delayed reforms go ahead. The only thing preventing Qatar from being upgraded is the restrictions placed on foreign ownership, which MSCI regards as too low.

The Doha authorities have shown little interest in removing this limit to date, but MSCI has said that it might not necessarily be required to lift the restrictions across the board. Instead, Qatar could chose to open up access to less strategic industries as India has done. Or it could introduce new classes of shares for international investors, which would retain their economic rights but restrict their voting rights - something that has happened in Brazil, Mexico and Thailand, among other markets.

Downgrade risk

In the other direction, MSCI has also warned that Morocco may be reclassified from an emerging market to a frontier market in June, due to a significant decrease in liquidity since 2008.

Currently, Egypt is the only other Middle East stock exchange included in the emerging market category by MSCI. Others currently classified as frontier markets include Bahrain, Jordan, Kuwait, Lebanon, Oman and Tunisia. However, if Iraq’s market continues to grow with more new entrants following Asiacell’s debut next month, then perhaps it too could join them in the future. The country’s two other mobile networks, Zain Iraq and Korek Telecom, are both required to list 25 per cent of their shares as a condition of their licence. Zain Iraq is expected to finalise its IPO by the end of March, but it is not yet clear when Korek, which is part owned by France Telecom, will follow.