ECM 2005 - New markets
The Middle East has held the potential to offer emerging market bankers significant deal flow for a number of years, but a lack of momentum has meant that deals have been patchy and many mandates have lapsed before a transaction has launched. However, a resurgence in privatisations and the creation of the Dubai International Financial Exchange have led to renewed interest in the region for bankers. Owen Wild reports.
The whole of 2004 saw ECM volumes of US$1.89bn from the Middle East, much of that the result of accelerated bookbuilds and block trades for listed companies. That total put the region somewhere between Portugal and Greece in ECM volumes.
There have been IPOs led by European banks, but these have been limited and some have involved the listing of companies in London as opposed to on local markets, for example, the listing of Israeli firm Frutarom through UBS. In hand with listings in London and increased domestic listings, volumes are up substantially, with around US$2.87bn from the region by the end of August 2005.
The prospect of markets continuing to open up and the beginning of trading on the Dubai International Financial Exchange (DIFX) have led to increasing moves to improve coverage of the region as deal flow increases.
Middle Eastern markets have traditionally been closed to investors outside of the Gulf Co-operation Council countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates). However, markets have gradually opened across the region, leaving just the Saudi Arabia and UAE exchanges closed to foreign investors. Privatisation flows are increasing in the emirates, and with both countries increasingly oil rich, equity is expected to gain prominence. With that the markets are expected to develop, including allowing international investors greater stock ownership.
The rising price of oil is a significant factor in the region and is driving economic growth. With that growth there has been an increased interest in diversifying assets, although few options are available.
“The problem in the Middle East is that there are just two asset classes,” said Chris Laing, co-head of Eastern Europe / Middle East ECM at Deutsche Bank. “Investors are limited to domestic equity and domestic property.”
That situation has ensured that equities have performed strongly in recent years as oil cash has been directed into equities. Exchanges in the region currently operate on a national basis but the amount of wealth and so liquidity available is encouraging these to open up to neighbouring markets. Saudi Arabia is expected to be the next nation to follow suit, allowing investors from across the GCC to participate on Tadawul, the Saudi stock exchange.
However, the most significant move to open the region to international investors is the new DIFX that opens on September 26.
The DIFX will not have any limits on international ownership, will operate on internationally-recognised systems and processes and will have international regulation. As a result companies listing on the exchange will have access to global capital without having to rely on local investors sensitive to their respective national economies. Institutional money is seen to be stable during downturns while retail appetite quickly disappears.
The pipeline for deals in the region is unclear but banks claim to be preparing companies for IPOs on DIFX in the near term, with one banker claiming his client was keen to be the first to list on the exchange. However, the bank is keen to avoid being the guinea pig, so the offer is not likely to come to market until December 2005 or the start of 2006. The exchange itself says that it expects to see 10–15 IPOs by the end of 2006.
Elsewhere across the region a number of privatisation mandates have been revived. The IPO of Telecom Egypt has seen some activity after a previous failed attempt, and the mandate has also been awarded for the follow-on sale of part of the Jordanian government’s stake in Jordan Telecom. Both deals are expected to include sizeable international tranches although the majority of the stock will probably go to domestic investors.
CSFB has been appointed to lead the IPO of Telecom Egypt working alongside local investment bank EFG-Hermes. The offer is expected to cover at least 20% of the company when it takes place in late 2005 as the government reduces its 100% holding, a move that it failed to complete in late 2000. The revival of the offer shows the growing interest in the region as the deal had not been seriously expected to return at any time prior to this year.
Also highlighting changing times is the sale of an undecided stake in Jordan Telecom. This secondary sale by the government will significantly reduce the state's 42% stake in the company and provides Goldman Sachs with a high profile mandate. The US bank has not completed any significant ECM EEMEA business in the past three years aside from the IPO of Israeli firm Shopping.com in October 2004.
There are also two significant private company mandates that are held by US and European banks. HSBC and Citigroup are to be joint bookrunners on the IPO of Investcom, the Lebanese mobile operator, and Morgan Stanley and Goldman Sachs are joint books for the IPO of Kuwaiti television company Showtime Arabia. Both are due to take place later this year and may include listings in London or on the DIFX.
The opening up of markets has led to several recent moves by banks to build their local presence. ABN AMRO is developing a Middle Eastern presence at its regional headquarters in Dubai on the basis of increasing prospects of privatisation work and the formation of the DIFX. Goldman Sachs has built an emerging markets team, while others are partnering or have part ownership of local houses.
HSBC has a significant presence in the market through its 40% stake in Saudi British Bank. The bank is well established ensuring that HSBC has already completed the SR2.3bn (US$613m) IPO of Almarai in Saudi Arabia and will lead the US$700m-equivalent IPO of Dana Gas on the Abu Dhabi Securities Market in October.
Elsewhere Deutsche Bank has formed a joint venture with Al Azizia Commercial Investment Company in Saudi Arabia to get into such a culturally different environment. This has been important as bankers have found it something of a culture shock to be accompanied by bodyguards from the minute they arrive in the country to the time they are ensconced on the plane for their return flight. Equally some readjustment of personnel has been required to take account of the role of women in much of Middle Eastern society, which would prohibit them from pitching for business.
While the prospects for future business are sufficient to encourage banks to establish or expand their local presence, the idea that privatisation will be a driver is thought to be misplaced. Steffen Schubert, chief executive of the DIFX, said that while the exchange had met with state-owned enterprises, they had only a long-term interest in looking at the exchange, as the current high oil price means that they do not need to raise funds.
“Given budget surpluses, the primary rationale for privatisation right now is diversification,” said Deutsche’s Laing.
The attraction of the Middle East from an ECM perspective has increased so dramatically because of the steps being made towards internationalisation of deals, procedures and the investor base. This is not an entirely smooth process however, as efforts to complete offers through bookbuilds have shown.
The Ministry of Commerce is responsible for the supervision of companies, including capital increases, while the Capital Markets Authority deals with securities offerings, including IPOs. This separation of functions causes problems for bankers handling IPOs that include primary stock. This has meant that deals can take longer to receive approval. In addition, the CMA has not given authority for one attempted bookbuild.
In fact, two offers were set to use bookbuilds in Saudi Arabia, though only one did. The IPO of dairy companies Saudia Dairy & Foodstuff (SADAFCO) and Almarai were both underwritten and therefore were to include a bookbuild element. For SADAFCO there was an institutional tranche of 10% that was completed as a bookbuild to provide a price for the retail tranche which made up the remaining 90% of the offer. Almarai was expected to follow a similar pattern, but the CMA did not approve the institutional offer so the whole deal was completed at a fixed price. This is expected to lead to a mix of deals that are underwritten and those that are not for some time to come, as the regulators become used to the methodology behind it.
Irrespective of whether progress is made on making deals more attractive to international accounts, there continues to be huge appetite locally for equities.
“Twenty years ago there was very little investment opportunity,” said DIFX’s Schubert. “GDP growth has been rapid in that time as Dubai is developing incredibly quickly. As a result Dubai will attract a great deal of local liquidity.”
Equally Oscar Silva, head of corporate and structured finance at National Commercial Bank in Saudi Arabia said: “Markets are still hot. There was a 15% correction in the market in July, but it came back almost straight away.” The market was already trading ahead of where it had been at its peak in July by mid-August, suggesting there is plenty more room for further growth.