IPOs seem to be coming back in the Gulf. But what must be done to convince firms to list in their home markets rather than in London or elsewhere? Orlando Crowcroft reports.
Like london buses, you wait ages for an initial public offering (IPO) in the Gulf, then several come along at once.
Until the summer of 2013, you had to look as far back as 2009 for the last IPO in Dubai, when engineering giant Drake and Scull International went public. Now, analysts are predicting an IPO surge. Fast food chain Just Falafel is reportedly planning to list on the Nasdaq Dubai, while a unit of Qatar Petroleum is said to be aiming for an issue on the Qatar Exchange worth a reported $879 million. Things are looking up for the GCC’s capital markets.
The decision of index provider MSCI to upgrade the exchanges of the UAE and Qatar to emerging market status in May 2014 seems to have had an impact. Trading volumes have risen since the announcement and companies in the Gulf are feeling more optimistic as a result. An increasing number of local firms are planning to seek listings in the coming months, according a survey of 30 equity specialists in the GCC by consultancy Deloitte Middle East.
International investors will be among those seeking to participate in future IPOs, adds the Deloitte report, and are likely to target Mena companies that have fared better than their European and US counterparts during the financial crisis. However, there is still work to do.
“The challenge appears to be around the ability of exchanges to attract these corporates to list regionally and not seek IPOs on international markets, as some have chosen to do in the last 24 months,” says Adnan Fazli, equity capital markets leader at Deloitte Corporate Finance Mena region.
STICKING POINT
That point is the biggest obstacle. Qatar, the UAE and even Saudi Arabia may have benefited from their safe-haven status during the Arab spring – all three have seen relative economic stability – but, still, many major companies from the GCC favour listing overseas.
It doesn’t help that some overseas-listed firms have fared better than their peers who went local. Abu Dhabi-based healthcare chain NMC Health had its IPO on the London Stock Exchange in April 2012 and raised $118 million. In contrast, Dubai-based interiors contractor Depa listed at $1.55 a share on the Dubai International Financial Exchange in 2008 and now trades at a third of that price.
In the past, a lack of liquidity in Gulf markets has driven companies to choose London, New York or Frankfurt over their home markets. Not only are trading volumes in the GCC relatively low and volatile, but the markets lack depth, being dominated by government-backed companies. In the UAE, the top five firms account for 60% of total market capitalisation with development giant Emaar alone accounting for 20%.
In addition, mid-cap players in the Gulf tend to be smaller than their counterparts in Europe. Many are not ready to run the gauntlet of investor road-shows or face the scrutiny that accompanies an IPO.
“Many companies also tend › to be less sophisticated family-run affairs, which would rather maintain relationships with local banks than relinquish control to shareholders or expose their business to the scrutiny of the financial market,” says Farouk Soussa, chief Middle East economist at Citi.
A further problem is that expectations are high for Gulf companies coming to market, and often an IPO is abandoned because a firm realises its desired sale price is too ambitious.
“The mismatch of valuation expectation has been the most significant challenge experienced by equity practitioners. The concern has led to aborted processes and continues to have a dampening effect on issuers’ desire to list,” says Fazli of Deloitte.
On top of this, there is the issue that some firms value the prestige of listing in the US or Europe as opposed to Dubai, Qatar or Saudi Arabia. Some analysts say this tendency is a good thing, though, because it raises the profile of these companies overseas.
“It should be seen in a positive light,” argues Sachin Mohindra, portfolio manager at investment house Invest AD, speaking specifically of UAE firms, “as it gives these companies global recognition and exposure”.
CREDIBILITY
What must exchanges in the Gulf do to convince firms to list locally? Analysts point out that the process of listing in Europe or the US is often easier and quicker than in the Gulf, with clearer processes and tighter regulation, which puts international investors at ease and, as a result, attracts more capital.
“I wouldn’t say that [local markets push companies away] on purpose, but when you have an easier, more efficient way to list, then companies might prefer that. The only way to improve on that is to close the gap and improve regulations to motivate companies to consider listing locally first,” says Fadi Al Said, head of investments, ING Investment Management in the UAE.
The findings of Deloitte’s report support the claim that IPOs are easier to accomplish outside the Gulf. In Saudi Arabia, for example, more than 90% of respondents said the typical time frame for starting and ending an IPO is more than 12 months, while 23% put the wait at over two years. In London or New York the process might take a matter of months.
Perhaps the upgrades to emerging market status by MSCI will inject a sense of urgency in regulators in the UAE and Qatar. Some experts are predicting progress will come quickly after the upgrade deadline of May 2014. Another bonus is that the MSCI Emerging Market Index tracks bourses with a combined market capitalisation of $3.2 trillion; entry to this club could attract a significant amount of foreign investment.
“The recent rise in volumes and valuations in UAE equity markets is likely to spur interest on the part of corporates to consider these markets as an alternative source of capital – and the MSCI upgrade, insofar as it will improve volumes further, will only act to reinforce this,” says Souza.
Al Said agrees. The regulatory framework in local GCC markets will get better as more investors come into the fold, he says. This will persuade local companies to stay at home rather than list overseas. “I think as our local markets improve from different angles you will see more companies listing or IPO-ing locally. IPO activity is positively correlated with the performance of the market and liquidity so, as it is expected that MSCI inclusion might improve that, I would say it’s positive.”
More generally, firms may be pushed towards IPOs because the terms are more favourable than issuing debt. As a result, says Fazli, the future could see firms lining up to come to market. “The lack of any significant recent listings appears to have created a pent-up supply of issuers looking to enter the market and access relatively cheaper equity capital.”
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