MENA IPOs Rebound As Market Improves

Initial public offerings (IPOs) are making a comeback as capital market conditions improve, private equity houses consider taking some of their portfolio companies public and listings in offshore exchanges become more popular.

The IPO market, which has been in a lull the past few years, could be re-energised by a series of expected listings. Britain’s Islamic lender Bank of London and the Middle East listed in October on Dubai’s international exchange, Nasdaq Dubai, which makes it the first listing in Dubai in more than four years.

Although there was only one IPO in the Middle East and North Africa (MENA) in the third quarter of this year, Ernst & Young (EY) expects more to come, based on the activity in the first half.

Total capital raised in IPOs in MENA in the first half of this year rose 52 per cent to $2.1 billion from the $1.4 billion raised in the first half of 2011, based on EY figures. The 2013 first half figure was the highest amount of capital raised in the past five years mainly due to Qatar telecom operator Ooredoo’s $1.3 billion IPO of its Iraqi unit Asiacell, according to EY.

“We do see an uptake in the number of Gulf and London IPO announcements and expect the IPO activity to increase significantly in 2014 and 2015. This potentially could be a result of the successful launch of the Al Noor Hospital IPO and other Gulf listings announced recently,” says Phil Gandier, MENA head of transaction advisory services, EY.

One of the larger listings in 2014 will be Kuwait Telecom operator Zain’s selling of shares in its Iraqi unit, which is expected to raise more than $1 billion.

But, most of the IPO activity is expected to be concentrated in the UAE and Saudi Arabia.

Al Tamimi & Company law firm has current mandates for four transactions with total capital expected to be raised close to Dhs5.5 billion, according to Ahmed Ibrahim, head of equity capital markets at the firm.

Three IPOs will be in the UAE and involve firms working in the healthcare, retail and education sectors and one firm in Saudi Arabia involved in the construction and contracting sector.

The introduction of company law in the UAE will help the IPO market because it will introduce the concept of strategic investors and underwriting activity, according to Ibrahim.

“We don’t have underwriting activity in the UAE, the new law will provide underwriting activity so banks can underwrite IPOs and this could enable the IPO market to flourish and attract leading global financial institutions to act as underwriters and develop the UAE capital market,” Ibrahim says.

“With the introduction of strategic investors (in the new company law), companies can increase their capital and allot new shares that will be issued in a capital increase to strategic investors, and existing shareholders will not have the right to subscribe in the capital increase.”

Qatar could also see some IPOs come to the market once the government starts selling stakes in big government-related entities as part of efforts to spread the wealth. A Qatari official said in May the government is planning to sell shares to the public in four companies owned by state-run Qatar Petroleum.

“In Saudi Arabia, Qatar, Bahrain and Kuwait, there are government stipulated IPOs that necessitate companies to go public. These IPOs are aimed at sharing the wealth with the wider public and also to promote better transparency in large private corporations,” says EY’s Gandier.

However, a government plan to raise $3 billion through the offering of Doha Global Investment, a $12 billion fund, was postponed, without any new timetable. The last IPO in Qatar was property developer Mazaya Qatar Real Estate Development in 2010.

“If a number of transactions get under way in the local market (in the Gulf), then there will be increasing interest in preparing for that kind of process. There is some skepticism about whether or not some of these transactions are going to be successful,” says Vikas Papriwal, a partner in transactions and restructuring, and Gregory Hughes, director of transaction services at KPMG Lower Gulf in Dubai.

“To really increase the breadth and depth of the market you actually need to see the momentum build up in the large caps.”

KPMG is working on several IPO projects ranging from $100 million to $2 billion in terms of market capitalisation, they added.

Private equity houses have helped increase IPO activity by brining their portfolio companies to the market. As these houses need to exit some of their investments, they are increasingly looking at IPOs, unlike the last few years when sales were a preferred option.

“A lot of the IPO planning is being driven by private equity groups that have restrictions on length of ownership for certain assets, which is always the case when you have to look for an exit when you approach the end of a fund life,” says the KPMG officials.

The upgrade of the UAE and Qatar to ‘emerging market’ status from ‘frontier markets’ by Index Compiler MSCI, which will take effect next year, could also encourage firms to list in the two countries as the market becomes more liquid.

“The investment mandates for investment managers are more likely to include investment in emerging markets,” says Tamimi’s Ibrahim.

“This in turn is likely to lead to greater liquidity and turnover in these markets. This will create the perception of strong liquid markets. This means that a company thinking of doing an IPO will be encouraged to do the IPO, and investors will be encouraged to participate because it will be easier for participants to exit their positions because the markets are more liquid.”

Several Gulf exchanges are benefitting from their safe haven status amid the Arab Spring, which has impacted the economies of countries such as Egypt, that were expected to attract regional and international investors.

But investors are now looking at Gulf countries, which have seen an influx of expatriates from these same troubled countries, helping the population to grow and enabling firms in certain sectors to expand and potentially sell shares to the public.

“Due to the increase of population in the region because of the Arab Spring, you can see Syrians, Egyptians, Tunisians and Libyans now moving to the Gulf in general and the UAE in particular. Health and education are two industries directly related to the size of the population,” says Tamimi’s Ibrahim.

Besides local offerings, firms are looking to list shares internationally, particularly in London, following the successful listing of two UAE healthcare firms. Private equity house Ithmar Capital listed Al Noor Hospitals Group, an Abu Dhabi-based provider of healthcare service, in London in June. NMC Health, another Abu Dhabi provider of healthcare services, listed its shares in London last year.

“There have been some success stories with private equity groups bringing their portfolio companies to the market,” says the KPMG officials.

“As a result of that, other private equity groups in the region are considering similar kinds of transactions, but at the same time they are keeping their options open. Planning for an IPO takes anything from up to 12 to 18 months, at the same time lots of our clients are considering multiple options during that period.”