Feeding the frenzy

Latest figures show that 134 companies in the Gulf are preparing for stock market listings. But is it the best way to raise cash? And just how big can the rewards be? Alexandra Dubsky finds out.

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By  Alexandra Dubsky Published  October 29, 2006

Latest figures show that 134 companies in the Gulf are preparing for stock market listings. But is it the best way to raise cash? And just how big can the rewards be? Alexandra Dubsky finds out.

Sir Richard Branson did it. The British computer tycoon Sir Alan Sugar did it twice. And Google founders Larry Page and Sergey Brin did it large.

Now though, the trend for IPOs is sweeping the Gulf. Cashing in on big ideas, and the potential for big profits on stock markets that are otherwise indifferent, is the latest craze - just 17 IPOs have raised over US$6.2bn in the first nine months of this year alone.

In the GCC, markets have seen an increase of 45% compared to the same period the previous year, and are forecast to reach US$8bn until December, according to figures released by Gulf Capital, a UAE-based investment firm.

Meanwhile, some 134 companies are preparing to launch an IPO - and 57 of those have appointed managers to oversee the sale of shares. Another 77 have announced plans to go public, but they have yet to meet the legal requirements.

“Now is the perfect time for firms to go public - there is a strong investor demand for IPOs, and the market is very liquid and offers large buy-outs,” says Aabed Al Zeera, CEO, International Investment Bank in Bahrain.

Al Zeera is merely promoting what companies in the West have been promoting for decades, particularly during the dot.com boom of the late nineties. With financial centres in Dubai, Bahrain and Qatar attempting to outdo each other for the title of “financial capital of the Middle East,” businesses of all shapes and sizes are preparing themselves for flotation.

“It’s something we have been working towards since the day I took over two years ago,” says Alex Andarakis, CEO of drinks giant Aujan. His company has seen sales double to US$360m in the past two years, and its debut on the Saudi stock market next year should put a billion-dollar valuation on the company.

Other firms are just as eager to join the rush, even with likely valuations of no more than US$200m.

Yet more and more gulf companies are keen to go public - the accumulated value of all IPO launches is expected to reach a staggering US$31bn within the next three years, and so outperform the highly volatile equity market. All this despite the region’s stock markets falling by an average of 35% since the turn of the year.

Regional firms are moreover valued at a very strong Price Earning (PE) figure of 25 and more, since most of them show convincing financial results and a profound company history.

“Due to the regional high liquidity in the gulf, the governments increased funding and pumped lots of money into the economy, and therefore helped to push up financial results. Also, investors are relocating their assets from the West and have two options: real estate or equity. The latter has proved to be shaky, and IPOs are an ideal alternative,” says Al Zeera.

“The PE varies according to the specific industry of the company, and often firms have hidden values such as a good reputation or an excellent management team,” he says. “The success of an IPO however purely depends on the individual company, those with an established name and promising track record will probably go public successfully,” he adds.

Going public also offers great exit opportunities for regional firms, since most of the larger companies in the Gulf are 2nd or 3rd generation family businesses. Via IPOs owners can cash out and balance family interests without giving up control completely.

“For many of these businesses that were started by two brothers some generations ago it makes sense to sell out now. They know its time to let go, and this is the best way to do it. The owners get a new managing director but keep the majority stake, and they of course get a nice chunk of money as a cash-out. This reduces the conflict between the brothers, but they can still oversee the operations on board level,” says Al Zeera.

Aujan is a prime example of this, having been family run for over 100 years. Alex Andarakis explains: “Basically the owner has decided he wants to take the company to the next phase of growth. That means he becomes an investor rather than an owner, but the rewards are that we can raise considerable amounts of money for expansion.”

Saudi Arabia, the largest economy in the region, is also the biggest IPO market in the gulf, followed by the UAE and Qatar, which are the most competitive and attract the largest share of investments.

Saudi Arabia topped the markets with US$2.3bn raised in the first nine months of 2006, followed by the UAE with US$1.4bn and Qatar with US$1.3bn, respectively.

The Bahrain market raised a surprising US$1bn, compared to US$6m in the previous year, due to the IPOs of three Islamic Banks that focus on the Saudi Arabian market.

Abe Saad, Managing Director at Shuaa Partners, says: “The number of publicly listed companies is still relatively small compared to more developed markets. When companies, especially in the finance and telecom sector, go public the response is usually high. All sectors are interesting, but the most successful IPOs are of firms that lead within their segment, and of course brands.”

The largest launch this year was the Al Rayan Bank in Qatar with a total of US$1.2bn, followed by Emaar’s Economic City (EEC) with US$680m and Sipchen with US$660m. The EEC and Sipchen together with Gulf Navigation of the UAE and the Saudi Red Housing Services raised US$1.7bn in the third quarter of this year.

The public offerings also gained in size, – with an average of US$363m, up 27.8%, in the first month of this year, compared to US$284m in 2005; a figure that might rise to US$515m in December, doubling last year’s average of US$262m.

“People rush to new IPOs, and demand still outstands supply by far. The trend could backfire sometime, however, like in Europe and the US in the 1990s when everybody invested in IPOs and then eventually lost money,” Saad adds.

“Most IPOs have done well here, and most of the family businesses want to go public now. Companies are keener to launch an IPO than to go into private equity since they get a higher and instant cash out,” he explains.

Although the successful launch of an IPO is more company than industry specific some sectors are still outperforming others. “Manufacturing, retail, real estate and oil and gas are usually strong, less so is, for example, technology in the Gulf region. One can generally say that the more traditional sectors are more popular in the region. Islamic banking is also at an all-time high,” he says.

Al Zeera views the real estate and the banking sectors as especially promising. “Contrary to common belief you can still make money left and right with property in the Gulf. For many years now I heard the bubble theory, and it theoretically makes sense but in reality the demand continues to rise throughout the region. Hot spots such as projects on Sheikh Zayed Road in Dubai or commercial spaces will always sell, no matter how much you build. Also in Sharjah and Abu Dhabi there is still much potential,” he says.

“In the financial sector institutes that offer Islamic finance are also booming," according to Al Zeera.

“Banks have been doing well for some time now, but Islamic banking is really taking off these days. Since they entered the scene 10 years ago they have conquered the market, and demand for them continues to grow. The same applies for Islamic insurers, actually anyone offering Islamic finance.”

He adds “Most of these Islamic financers however need to get more established. If they have a track record of just three years or so they are still very young and have less market credibility.”

Companies that seek to go public usually consult an investment banker to support them. They then seek the approval of the local authorities, release a memo about the managerial and financial structure and the company history, and finally launch the IPO with strong publicity to spark investors’ interest.

Saad says, however, that some governments in the Middle East are now limiting the approvals for new IPO launches, since the new IPOs and their massive oversubscriptions were partly responsible for this spring’s stock market crash.

“Many investors sold their shares to raise money for new IPOs, which naturally reflected on the equities. The ministry now regulates this more tightly,” he says. “The oversubscription will however continue, especially in Saudi Arabia and the UAE, but not to the same extent as last year.”

In 2005 the market witnessed both overvalued stocks and IPOs, with firms often being oversubscribed by many hundred times. “This trend is unlikely to continue”, says Head of Research and Strategy at Gulf Capital, Imad Ghandor.

“An IPO today might be ten or twenty times oversubscribed - and it will probably stay at this rate. This is still more than the global average, but yet not as exorbitant as last year,” he says. “Investors used to put their money into anything available, equity and public offerings. I guess investors will act more wisely and less emotionally in coming years.”

“Additionally, banks were offering very convenient credit facilities - often too convenient," Al Zeera argues. “The banks gave credit to everyone. The central banks should put a leash on that, but I think they have already tightened the requirements. Yet some commercial banks stick to their credit policies.”

So what should investors finally consider when joining the IPO euphoria?

“People must not rush into any investment, but carefully study the track record of the company in question. Most importantly, they should familiarize themselves with the management of the firm, since this can make or break an organisation,” Al Zeera says.

Saad agrees, saying: “The most important thing is the firm’s market fundamentals. And, of course, the management team. Investors need to look at every company individually and must not follow rumours, and must avoid being misled by a famous name. The big companies in Saudi Arabia will be interesting, but investors will again need to do their homework.”

IPOs aren’t, of course, always plane sailing. In the eighties, airline tycoon Sir Richard Branson decided to put his group on the London Stock Exchange, and at one stage saw it hit a US$1bn valuation. But it was a bitter experience, with Branson eventually being forced to buy back his own company and take it private again.

He tells Arabian Business: “It was a long time ago and at the time it seemed a great way to raise money and put a strong value on the business. But what some people forget is that once you do that, you lose control of the company. You are accountable to people in the City, and to your shareholders. They call the shots. So what you might know and think is a very good idea is actually, as far as they are concerned, a very bad idea.”

He adds: “There are some great things to be said about doing an IPO and I would guess in the Arab world right now there are many positive reasons. Certainly there seems to be no problem raising funds. But the key aspect is what kind of business you run. If it is something that depends on creativity, then an IPO may not turn out to be the best idea.”

Three months ago, fashion guru Tommy Hilfiger admitted to Arabian Business that floating his own company on the US stock market was a mistake. He said: “When I look back it just wasn’t the right thing to do. I was being controlled by people who looked at the share price every day, and all they wanted was short-term growth and short-term profits. They couldn’t see the bigger picture. The impact on my company was very negative.”

In Britain, one of the most successful “floaters” has been computer tycoon Sir Alan Sugar. He turned Amstrad into a billion dollar company, years later doing the same with Viglen Technology.

He says: “There is absolutely no question that the greatest way to realise the wealth in your company is to take it to the stock market. Whatever issues there are about answering to other people, it is not only the most sensible thing to do but the only thing to do.”

Which, it would seem, is now what just about every company in the Arab world wants to do. With the likes of Damac Securities now actively pursuing venture-capital investments, with flotation as the exit strategy, the trend can only continue.

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