Thursday, 21 March 2019

Bookbuilding IPOs struggle to take hold

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Bookbuilt IPOs are yet to take off in the Gulf region. Their complex nature is said to deter retail investors, who favour the fixed price option to the more complex and often unpredictable bookbuilding process. By Hafsa Kara.

Furthermore, local exchanges, once expected to become the region’s leading financial hubs, are still struggling. From low liquidity to poor performing stock, the Gulf region’s exchanges and Dubai’s in particular are yet to fulfil their once grandiose ambitions.

Although common across more developed markets, bookbuilding is still relatively new in the Middle East region. In the Gulf, UAE and Saudi exchanges have resorted to bookbuilt IPOs but the standard practice is to float a company at a fixed price. The price will usually be based on the company’s balance sheet, including assets and forecast profitability. Then the regulator, which will be very much involved in the process, will review all the given data and determine or approve the final price.

With the fixed price method, the valuation of the company is divided into numbers of shares at an agreed nominal price such as US$10 or SR10 per share. This, ECM bankers say, allows issuers to cast the net wider and attract retail investors who are not familiar with the complexities of the markets.

“Complex pricing deters smaller investors, which in turn means the IPO will not attract as many smaller investors as the company hopes,” said a locally based banker.

Fixed-priced IPOs are therefore beneficial to investors from a broader section of society. Asked whether this method was confined to smaller family-run companies looking to go public, one banker said that it was more dependent on the issuer’s rationale.

He explained that while large privatisations would be attractive to international investors, the aim of the listing was often to include a broader investor base and ensure investors on lower incomes would benefit from successful IPOs. He added that in the current febrile climate across the Middle East, ensuring that lower income investors benefit from privatisations had been high on some governments agendas.

With large companies coming to market, prices usually surge upon listing, making smaller investors more likely to engage in future transactions. The bookbuilding method, however, has often been difficult given the nature of companies going public. Until recently, a majority of public offerings were of greenfield companies, which made adding a premium on the IPO price problematic.

Bankers involved in prior deals say the fixed price method is very much a cultural phenomenon that remains popular because of the straightforward nature of the transaction, which makes it more attractive to potential backers with little knowledge of the mechanics of listing.

No changes for the next two years

With a bookbuild process increasingly the norm across markets, should we expect to see more in the near future? Not necessarily, local bankers argue, it may have become obvious across Western markets that fixed price IPOs discouraged many companies that aspired to get a fair value for their shares to go public, but in the Middle East that is still not the case. The reasons for public offerings are often different in the region and therefore there is no such incentive other than to ensure more liquidity in the bourse and simply engage investors in the principle of buying into a listed entity.

Other bankers point to the small number of offerings that simply don’t warrant a change in approach. They say that large companies looking to attract international investors will inevitably opt for a bookbuilt IPO as the transparency this process offers is likely to reassure non-regional backers. However, this would not apply to the Saudi exchange, where IPOs are only open to Saudi nationals or residents of the GCC.

From an issuer’s point of view, bookbuilding would mean finding a fair price in the market that would attract enough investors for the stocks to be floated, which in turn would mean the price at which supply and demand are balanced, meaning there is no contained demand that would lead to a surge in the price simply in the immediate aftermath of the listing. 

In effect, it would mean the bookbuilding would ensure the price reached would reflect the true value of the company. In this case, investors would know before the first day of trading how much they would get for their stock. However, given the fluctuations observed throughout the subscription period retail investors tend to stay away, which in turn affects the composition of the book.

Saudi Arabia, the Gulf Cooperation Council’s largest market, has in recent years opted for quasi-bookbuilding, which is halfway between a regular bookbuilding process and fixed price.

Historically however, with the local regulators having such a pivotal role in the process it remains unclear how the change from fixed price to bookbuilding would occur without changing drastically the rules governing public offerings. The regulator would have to monitor market practices without setting or approving the final IPO price. The price would be determined by investor appetite and not by the regulator, which will have to take a back seat in the transaction process.

Despite the arguments in favour of bookbuilt IPOs, examples in the region have not been very encouraging. Oman’s Nawras in 2010 goes some way in explaining why the process still struggles to take off. Despite pricing in the end, the process was said to be rather “chaotic” by local bankers not involved in the deal.

Bookbuilding had to be extended by an extra fifth week; this was blamed on international institutions waiting until late in the process to participate in the transaction. The concern over this first bookbuilt IPO was not quelled by persistent rumours from the local market that the Omani mobile telecoms operator had failed to secure much interest from retail, with demand for only 5%–10% of the deal, against a retail tranche of 40%.

“Nawras worked well in the end, even if we had to reduce the price towards the end of the bookbuilding period, but that is standard practice in a bookbuild process,” said one banker connected to the deal.

According to some market observers, the bookbuilding made it hard to secure retail orders, as investors had to pre-fund and they are price takers, especially when retail is a price taker. Order flow did increase towards the end once investors were advised that pricing would come at OR0.702–OR0.802. The IPO was eventually priced at the lower end of the range at OR0.702.

It may have been an ambitious attempt, especially in one of the region’s less sophisticated markets, but this IPO, with Morgan Stanley and Bank Muscat joint books, revealed the region’s lack of preparation in bookbuilding. Experts argue that a change in regulation is essential, coupled with comprehensive media campaigns designed to inform retail investors how to adapt to international norms.

UAE exchanges fail to take off

Gulf-based bankers complained for years about the lack of liquidity on their respective exchanges. In order to attract trading interest, which had been limited in the past, local authorities launched the biggest IPO in the Middle East. DP World went public in November 2007, raising in the process US$4.22bn. 

The deal, which was 15 times oversubscribed, attracted a wide array of investors and was expected to make the Dubai International Financial Exchange (DIFX) now Nasdaq Dubai the exchange of choice for large firms with interest in both Asia or Europe as well as regional stalwarts.

The aim, said one locally based banker, was to hyphenate the two continents with the UAE.  “A well structured exchange would become key to future large transactions, or at least that was the idea,” he added.

Four years on from that historic bookbuilt IPO and little has changed on the UAE’s equities markets. Undoubtedly, timing proved detrimental to the exchange’s ambition. The global financial crisis seriously dented the region’s overall financial plans with public offerings still few and far between.

This is largely down to the nature of the companies that are listed locally. The bulk of the firms, excluding financial services, are in the construction or real estate sectors. Dubai’s property heavyweights continue to lose out as bearish investors sell their positions, extending in the process the index’ losing run. 

In Dubai, Emaar Properties, the developer of Burj Khalifa, the world’s tallest building, lost around 37% in the past year alone, with its shares currently trading at around Dh2.50, down from Dh4.00 in October 2010. This has done little for investor appetite. 

Losses across global markets and softening oil prices have also seriously impacted regional markets, prompting investors to sit on their positions. Another notable IPO from Dubai in 2007, Deyaar Properties, has failed to impress, trading well below its original issue price of Dh1 today. The stock opened on Friday October 7 at Dh0.25 and has been trading below Dh0.50 for the best part of the year.

This, said another banker, was why the bourses are yet to recover: their best assets are not doing well, which does not bode well for other potential issuers. With the region still relatively cash-rich, many firms are resorting to more traditional forms of funding and shunning the capital markets as a result.

Respite from Saudi Arabia

Khalid Al-Ghamdi, head of capital markets GIB Capital, however, was confident that while the UAE might still be experiencing an ongoing downturn, Saudi Arabia, the GCC’s largest market was the exception. 

“Despite the current climate, many Saudi firms are ready to go public and some are even contemplating bookbuild IPOs,” he said – a process that is yet to take off in the region. Al-Ghamdi pointed to the vast infrastructure programmes launched by the government that are ready to be privatised, as well as family-run companies that want to go public.

Tadawul’s index appears to back this up. The Tadawul All-Share Index (TASI) closed 0.07% higher in the first week of October with stock market turnover exceeding SR4.71bn on the first day of the trading week, despite a dip in the petrochemical index of 0.15%. With oil and gas related businesses constituting the back bone of the Saudi economy, any downward trend can cause concern, however the fact that the financial services index was also up, as well as the construction sector, which rose by an extra 1.38%, indicates Saudi Arabia’s strength in the region.

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