By Aparajita Mukherjee, The Edge Magazine
Throughout 2014, equity research analysts have pointed out that, compared with 2013, as an asset and investment class, equity (both primary listings and secondary trading) had picked up, both in terms of volume and numbers in the Middle East and North Africa (MENA) region. As per the latest data issued by Thomson Reuters, equity-related issuance during the first nine months of 2014 totalled USD5.1 billion (QAR18.6 billion), a 43 percent increase in activity from the same period in 2013 amounting to USD3.6 billion (QAR13.1 billion).
Experts tell The Edge that a comparable momentum can be expected for the first quarter of 2015, though volumes cannot be predicted at this stage.
In July 2014, EY had said in their MENA IPO Update: Q2
2014 that Middle East and North Africa (MENA) initial
public offering (IPO) proceeds had seen a jump of 129
percent in the second quarter of 2014. In Q2 2014, there
were 11 IPOs raising USD1.1 billion (QAR4 billion), a rise
of 22 percent compared to the same period in 2013 by deal
numbers. According to EY, there were a total of 16 deals
raising USD2.4 billion (QAR8.74 billion) in the first six
months of the year, an increase of 14 percent for both
volume and proceeds compared with the same period in 2013
and the highest amount of capital raised in the first half
since 2008.
Gulf Cooperation Council (GCC) IPOs represented 90 percent
of all MENA IPOs in the first half of the year, with 10
GCC IPOs raising USD2.26 billion (QAR8.23 billion). Saudi
Arabia led the GCC activity in the first half of the year
with four IPOs, followed by the United Arab Emirates (UAE)
with three, Oman with two and Qatar with one.
In late October, Thomson Reuters, in their quarterly
investment banking analysis for the Middle East region,
reported that Middle Eastern equity and equity-related
issuance during the first nine months of 2014 totalled
USD5.1 billion (QAR18.6 billion), a 43 percent increase in
activity from the same period in 2013 amounting to USD3.6
billion (QAR13.1 billion).
Equity capital markets underwriting fees totalled USD134.5
million (QAR489.6 billion), up 183 percent from the same
period last year, which reached USD47.5 million (QAR172.9
billion).
Given these trends in the regional capital markets, The
Edge spoke to experts on the IPO climate for H2 2014.
Until mid-October 2014, USD3.7 billion (QAR13.47 billion)
was raised by GCC-based companies, across a number of
sectors such as real estate, petrochemical, marine
services, e-commerce, cement, travel services and power,
among others.
Commenting on the prospects of IPOs in the GCC in H2 2014,
Sanjay Bhatia, managing director of Alpen Capital
Investment Bank (Qatar) LLC, says that the GCC region
dominates the MENA IPO market. Bhatia continues, “The
largest IPO so far in 2014 was Emaar Malls, which listed
on the Dubai Financial Market and raised USD1.57 billion
(QAR5.71 billion). The IPO was oversubscribed 30 times.
Another large listing was Mesaieed Petrochemical Holding
Company (MPHC) on the Qatar Stock Exchange (QSE), which
raised USD887 million (QAR3.23 billion) and was
oversubscribed five times.”
In terms of number of IPOs, the UAE and Saudi Arabia each
had four listings, with USD2.1 billion (QAR7.6 billion)
and USD500 million (QAR1.8 billion) raised, respectively,
says Bhatia. “Stock markets which are expected to
experience high activity levels in the last quarter of
2014 are Saudi Arabia and the UAE,” according to Bhatia, a
sentiment Steven Drake, PwC’s Capital Markets partner,
agrees with. Drake mentions that the signs are that the
Saudi Arabia market will continue to be strong, though it
was relatively quiet in H1 of 2014, mostly because a
number of companies that were in the listing process had
still not received regulatory clearance. “The UAE market
is also strong with a number of prospective IPOs slated
for H2, though most likely many of these will spill over
to Q1 of 2015,” says Drake.
In the opinion of Abdulaziz Al Emadi,director of the
listing department at QSE, regional capital raising is
still coming off a low base and therefore a small number
of large deals can distort the picture.
“However,” Al Emadi adds, “the GCC has clearly seen an
increase in activity which may continue and is likely to
account for a significant portion of overall MENA
activity.”
“The UAE currently look the most promising for IPO
activity in the GCC during the remainder of 2014, with
Qatar and Saudi Arabia following closely behind. All
three, however, are driven by different dynamics,” says
Michael Katounas, deputy CEO and head of investment
banking at QInvest.
“The UAE,” according to Katounas, “banks on Dubai, which
benefits from significant local and regional demand as
well as international liquidity. This drives companies
with bigger market capitalisations to seek a public
listing in the UAE.”
In Saudi, the fundamentals are very attractive. It is a
bigger economy, with encouraging growth prospects.
However, the demand will be predominantly from local
investors rather than international, where there will only
be marginal interest, says Katounas.
Commenting on Qatar, Katounas says, “We see a healthy
supply of companies looking to list and there is
significant investor demand to support these listings.
While historically the procedural hurdles have made a
listing in Qatar more difficult, there are a number of
initiatives currently underway which we believe, once
fully introduced, will accelerate the Qatari IPO
process.”
H2 prognosis
Q2 of 2014 has seen more successful IPOs in the GCC,
compared to Q1. What does it portend for H2 IPOs, in terms
of volume?
Bhatia of Alpen Capital Investment Bank (Qatar) LLC feels
that successful listings during the first nine months of
2014 have encouraged other companies to refresh previous
IPO plans, and other companies are considering this fund
raising route as well. He continues, “As a result, many
IPOs are now being planned during the remaining months of
2014.
The bigger ones expected by the end of this year include
National Commercial Bank (Saudi Arabia), Saudi Airlines
Cargo (Saudi Arabia), Gulf Capital (UAE) and Amanat
Holdings (UAE).”
“There would appear to be a regional pipeline of potential
IPOs that exceeds what we have seen to date. That said,
provided the equity markets continue to perform well, then
the IPO window should remain open.
The head winds we are seeing in other markets and the
continuing economic backdrop of slower growth from some
key countries and potential interest rate rises need
careful monitoring for those seeking to list,” says Declan
Hayes, managing director, transaction services,
Deloitte.
The GCC IPO activity is expected to continue to rise in H2
of 2014, with market valuations returning to somewhere
near pre-crisis levels, according to Phil Gandier, MENA
transaction advisory services leader, EY.
Gandier says that Q3 2014 had only one IPO, with the third
quarter historically being the slowest of the year.
“However,” he continues, “activity is expected to pick up
in Q4. Many companies from the MENA region have announced
plans for going public by the end of the year, with
companies in the financial services and real estate
sectors dominating the pipeline.”
In the opinion of Al Emadi of QSE, it is widely
acknowledged that improved conditions in the underlying
equity markets are beneficial for IPOs. “Higher stock
prices in general allow for more favourable pricing from
owners, and greater liquidity encourages investor
participation. It is also the case that launching an IPO
requires a ‘window’ which can be over a month long to take
account of the subscription period and the immediate
aftermarket, and so all other things being equal, the
currently improved market conditions are supportive of
more IPOs,” says Al Emadi.
Stock exchange upgrades
Last June, Morgan Stanley Composite Index (MSCI) upgraded
the Qatar and UAE exchanges to ‘Emerging Market’ status,
which was followed by the S&P Dow Jones upgrade for
QSE in September 2014. Do these mean better prospects for
IPOs in these two markets?
Bhatia of Alpen Capital says that this is expected to
improve market liquidity and position the exchanges for
long-term investments. “In addition,” mentions Bhatia,
“the Saudi stock exchange is in the process of formulating
regulations for international investors to invest, which
is expected to be finalised by early 2015. These measures
are expected to draw fresh liquidity to the region.”
Hayes of Deloitte is of the opinion that these upgrades
ensure that large international funds now have to consider
investing in regional markets, adding, “This potential
liquidity supply means in theory there should be a bigger
pool of investors to invest in IPOs.”
“The MSCI upgrade of the UAE and Qatar to the emerging
markets status will go a long way toward changing
investors’ perceptions that regional markets are weakly
regulated and have poor disclosure,” says Gandier of EY.
He adds that passive funds which track emerging markets
will now need to change their portfolio allocations to
include the UAE and Qatar, which is expected improve
liquidity in these markets.
Katounas of QInvest agrees saying that the upgrades make
both countries’ equities increasingly relevant and
attractive to international investors, and a core
component of global asset allocation. He specifies that
the upgrades should have a positive impact on the
prospects for IPOs in both Qatar and the UAE as it will
increase liquidity, which will be beneficial across both
markets.
Debt and private equity
In late October, Thomson Reuters, in their quarterly
investment banking analysis for the Middle East region,
mentioned that Middle Eastern debt issuance reached USD6.3
billion (QAR22.9 billion) during the third quarter of
2014, down 68 percent from the record-breaking second
quarter total of USD19.7 billion (QAR71.71 billion).
Boosted by the strong second quarter, bonds issued so far
during 2014 increased five percent from the same period
last year, to USD32.8 billion (QAR119.4 billion).
What do these figures reflect, in the experts’ views? If
IPOs do well in this region, what impact will that have on
debt or private equity as capital raising mechanisms?
Bhatia feels that the success of IPOs in the region will
positively influence debt and private equity transactions,
and will increase overall financial activity. For IPOs
where the end-use of funds raised is to enhance growth,
equity funds raised is likely to be paired with debt in
order to optimally structure a project’s capital
structure. “Further,” in Bhatia’s opinion, “IPOs provide a
viable exit option for private equity investors to
consider and provide the required comfort for them to
realise anticipated returns.”
The impact will depend on various factors, says Gandier of
EY, since not all companies are suitable for IPO, which
means that they would need to look at other means to raise
capital. He explains, “Companies that don’t want to dilute
their shareholdings will look at debt to raise capital to
maintain control. With sufficient levels of liquidity in
the market to raise capital through IPO, private equity or
debt, positive competitive tension could help to raise
sentiment in the market.”
Both Gandier and Steven Drake PwC’s Capital Markets
partner agree that private equity firms can also consider
using IPOs as an exit route for their portfolio, which has
already been happening in other markets internationally.
Al Emadi of QSE says, “The debt and equity capital markets
in the region remain ‘young’ in relevant terms.
However, confidence plays a major part in the capital
markets and that is true both for issuers and investors.
Landmark IPOs, for example MPHC in Qatar, will no doubt
act as catalysts for future IPOs.”
What to expect by end -2014
End of the year usually sees heightened activity in the
regional capital markets and if plans are anything to rely
on, experts agree that the month of December 2014 also
represents the latest date by which corporates expect to
publicly list.
Gandier of EY says that the growing number of planned IPOs
indicates that investor confidence is on the rise. He
adds, “The improved economy and regulatory initiatives are
expected to bring liquidity to the market. Government
spending on infrastructure and diversification of oilbased
economies have created more opportunities in the private
sector. These continued developments will encourage more
companies to raise capital from the market.”
For Al Emadi of QSE, IPO activity is always volatile given
the long lead times involved and the need for consistent
market conditions when IPOs are being distributed. He says
that a number of countries have talked publicly about a
pipeline for the remainder of 2014 and market participants
in particular will be keen to close deals before the
year-end if at all possible.
As contributing factors, Al Emadi cites improved liquidity
and generally strong share performances, which will help
GCC issuers and bankers to be pushing to bring companies
to the capital market if the necessary preparation and
approvals can be secured.