Saudi IPOs slowdown
At the start of 2009 expectations were high that Saudi Arabia would sustain the momentum of last year in terms of new equity issuance from the Gulf region. By Chris Vellacott.
At the start of the year, bankers were concerned that activity on Middle Eastern equity capital markets would not live up to the inflated expectations of 2008. With many leading institutions having recently expanded operations in the GCC in readiness for a boom, concerns mounted that newly expanded, Dubai-based ECM teams would stand idle.
Saudi Arabia, the region's largest and most mature economy, seemed to provide an answer. Its economy is more diversified than those of neighbouring Emirates and it boasts a cash-rich investor base. It also had a robust pipeline of privatisations that the government wanted to use as a means to redistribute wealth to ordinary Saudis. Potential issuers were also plentiful among non-state firms in a range of sectors such as oil, property and infrastructure.
But after a promising start to the year with an early, high-profile IPO, the deal flow dried up. Mobile telecoms firm Etihad Atheeb launched its sale of 30% of the company, raising SR300m (US$80m) in January with the offer 3.5 times covered. The CEO of Saudi Hollandi Capital, joint leads on the deal with NCB Capital, declared the transaction's success as indicative of the resilience of the Saudi economy. This view was shared well beyond the Kingdom's borders and banks with international ECM franchises started to engage in a scramble for market share in Saudi Arabia.
The best established of the foreign banks in Saudi Arabia is arguably HSBC, though US rivals such as JP Morgan and Morgan Stanley have made considerable headway in carving out their own niches. The country presents some unique challenges, however, including severe restrictions on foreign ownership of assets (which limits ECM deals to the domestic market) and a high level of competition.
This in turn puts pressure on fees and international institutions seeking to establish a presence in the Kingdom often balk at the knock-down rates accepted by their local rivals. What compensates in the eyes of bankers, however, is the sheer volume of equity issuance.
In 2008, the country saw half as many listings as in the previous year, but double the volume thanks to a run of big ticket issues. Among the highest profile deals last year were a SR2bn (US$534m) rights issue in November from telecoms company Mobily, which was 230% covered. This followed on from Mobily's SR5.5bn (US$1.5bn) secondary offer in March.
Other deals included the SR6.59bn (US$1.76bn) IPO by industrial group Mohammad Al-Mojil and the SR4.6bn offer by petrochemicals group PetroRabigh, both led by HSBC. Mining company Ma'aden carried out a SR9.2bn (US$2.47bn) privatisation IPO in July that was twice covered and the government exercised a clawback option reducing the institutional tranche to 15% from 37% following strong retail demand.
The market is now conspicuously quieter and many bankers do not expect to see activity resume until well into next year. The need to raise capital in sectors such as oil and real estate, which would struggle with investor demand in the current economic climate, is now widely expected to be met through private placements. But the IPO market is not entirely lifeless. Last month saw the completion of offers from four local insurance firms, which some analysts hope will lift sentiment in the broader market.
Individually, the IPOs were minuscule but the impact may add up to more than the sum of their parts, especially considering that the offers were many times covered. Al Rajhi Company for Cooperative Insurance was nearly 900% subscribed on its SR60m (US$16m) offer while AXA Cooperative Insurance saw 670% coverage on its SR80m sale. Al Rajhi Company for Cooperative Insurance was more than 700% subscribed on a SR60m sale, while Wiqaya Takaful was twice covered on a SR80m IPO. Some analysts are also suggesting that the successful completion of a large deal outside the Kingdom, in Qatar, may also prove to be a shot in the arm for Saudi ECM.
The sale of 40% of Vodafone's Qatari subsidiary worth around US$1bn was fully covered in a tight market. Ostensibly, the deal bodes well for Saudi Arabian companies hoping to tap the equity market. As in Saudi Arabia, Qatari deals are only open to local citizens, or at best nationals of neighbouring countries, so the tiny Emirate is commonly regarded as a comparable proxy.
Sceptics note, however, that Qatar is too small to be relevant to a mature economy such as Saudi Arabia's. Furthermore, the Vodafone deal struggled to attract as much demand among retail investors as was hoped. This, the critics argue, is particularly worrying because Saudi deals also depend heavily on retail demand to underpin transactions.
Also, the Vodafone sale proceeded on a regulatory technicality rather than on the back of market sentiment. A local listing was a condition attached to the award to Vodafone of an operating licence by Qatari authorities. Without this requirement, a deal would have been harder to push through because amid weak equity markets, the seller would be too concerned about achieving a fair valuation on the shares.
Nevertheless, while the year has proved more sluggish than expected so far, a number of big name deals are still in the pipeline. In particular the IPO of the Tadawul stock exchange is broadly expected after failing to take place in 2008 – it was first talked about in 2007. Meanwhile, Mawarid Holding Company has appointed Saudi Hollandi Capital as lead manager for the sale of its MEED Trading Company retail subsidiary. The offer is scheduled for the fourth quarter and awaits regulatory clearance. MEED runs convenience stores across Saudi Arabia and will be restructured prior to the sale to hold a majority stake in seven other Mawarid group companies.
Elsewhere, Knowledge Economic City Company, an investment vehicle to finance property development, is set to launch a 30% IPO in coming weeks, raising around SR1.02bn (US$271.5m). The list of planned transactions is likely to lengthen as a significant upswing in Saudi stock values filters through to sentiment and a willingness by issuers to sell. The main TASI index is nearly 25% higher on the year to-date, reversing some of the heavy losses seen in 2008.
"Markets have started to stabilise and people are feeling a lot more optimistic. There are a lot of potential (ECM) deals and we should start to see more activity before the year is out," said Christopher Laing, co-head of CEMEA at Deutsche Bank. Nevertheless, when equity issuance in Saudi Arabia picks up again, many expect the rules of the game to have changed.
Few expect a return to the heady days when privatisation IPOs would be many times covered and share values would subsequently multiply in the aftermarket.
"As the market recovers we expect to see deals more sensibly priced with demand and subscription more in line with other emerging markets," said Evans Haji-Touma, head of CEEMEA equity capital markets at HSBC.
"Investors in the Saudi market have historically had a wider choice in terms of investment opportunities relative to other Gulf markets. This trend is most likely to continue over the coming years, allowing for a more sensible 'stock picking' approach," he added. This new pragmatism in part reflects the market correction of recent months. It is also a consequence, however, of the growing sophistication of Saudi investors.
Retail investors are an essential element of Saudi IPOs because the government prioritises them for political reasons and on account of the relative underdevelopment of the local asset management sector. This is likely to change, however, following a proliferation of new equity funds and a growth in the number of institutional investors.
There is also likely to be more interest from foreigners as new ways are established to circumvent the prohibition of non-Saudi ownership of assets. One reform on the horizon is the development of London listings of global depository receipts (GDRs).
This is a well established method among emerging markets companies to list in London as a means to attract a greater audience of investors and overcome the problem of illiquid local markets. The company issues GDRs in London, each of which represents a set number of locally listed shares.
"There has not been any real movement on foreign ownership of [Saudi] assets but our belief is that [financial regulator] the CMA will allow companies to issue GDRs in the near future," said Laing. Sectors most likely to provoke investor interest are those in which Saudi Arabia can claim a competitive advantage.
Therefore, petrochemical, telecoms and financial companies are likely to be among the first issuers, both locally and through the GDR format if this structure becomes available. Sentiment remains fragile, however, so while more cyclical sectors such as consumer goods and real estate are traditional strengths in corporate Saudi Arabia, companies are likely to be more reticent in coming to market.
One potential barrier to the popularity of Saudi GDRs among international investors is the Kingdom's exclusion from leading emerging markets equity indices. This presents a challenge to liquidity as it means index-linked funds would not take automatic allocations.
Nevertheless, along with Egypt, Saudi Arabia is the Middle East's most sophisticated economy and demand is likely to be sustained once access to foreigners does become a possibility.