Gulf investors bullish on IPO market revival
A RESURGENCE of stock market trading in the Gulf Arab region is raising hopes for a revival of initial public offers, more than three years after the global financial crisis brought share sales to a grinding halt.
Underlining the heightened hopes for the IPO market, two bankers said that Swiss lender Credit Suisse is advising Qatar First Investment Bank, a private equity firm, on a listing of all of its shares on the Doha bourse.
Traditionally a popular source of funding for companies in the region, IPO activity suffered a sharp drop during the global financial crisis as moribund equity markets and a lack of investor appetite deterred companies from trying to raise funds through that channel.
It still has not recovered.
Equity capital markets issuance in the Middle East, the vast majority of it in the Gulf Arab oil exporters, totalled a meagre $1 billion in the first quarter of 2012, a 21 percent decline from a year earlier, Thomson Reuters data shows.
The trend may be about to reverse, however, as a pick-up in regional stock markets, high oil prices and a rebound in economic growth give companies a strong incentive to tap public markets in order to expand.
The Saudi Arabian stock market has gained 18 percent so far this year, while Dubai is up 20 percent. That compares with a 12 percent rise in the MSCI emerging markets index. Just as importantly, stock trading turnover in the Gulf has expanded severalfold from last year’s levels, suggesting supplies of new shares could be absorbed more easily.
This appears to be forcing a rethink towards public offers at Gulf corporations across a range of sectors, from private equity firms to water bottling and construction companies. They are being encouraged by difficulties in obtaining other forms of financing. Bank loans are hard to get for many companies as the eurozone debt crisis prompts European banks to reduce their exposure in the Gulf. And while big companies with high credit ratings are issuing bonds heavily - Middle East debt issuance nearly doubled to $11 billion in the first quarter - this channel is not open to many smaller firms.
“What we are seeing is that a number of companies are interested in tapping the IPO route in the region,” said Jon Breach, Dubai-based chief executive of BDO Corporate Finance Middle East.
“Stock markets have had a steady start to the year and bank financing is still tight. IPOs are becoming a viable option and a source of development or acquisition capital for the right businesses.” The biggest potential magnet for IPOs is Saudi Arabia’s stock market, the largest in the Arab world, both because of its sheer size and because there is a large pipeline of companies which earlier suspended plans for IPOs. For example Saudi Fransi Capital, the brokerage arm of Banque Saudi Fransi, has six IPOs in the pipeline, including three that might launch in the first half of the year, its chief executive said in an interview in February.
In 2011, the bourse saw five IPOs, but values were tiny in comparison to big offers conducted a few years ago; telecommunications operator Zain Saudi’s 2008 debut raised 17.8 billion riyals ($4.7 billion).
“The rationale for doing an IPO in places like Saudi hasn’t changed. People who have been considering an IPO on the markets have not gone away,” said Phil Gandler, regional head of transaction advisory services at consultants Ernst & Young.