AMMAN, 23 February 2004 — Several privately owned Arab companies are considering raising equity on the region's stock exchanges through Initial Public Offerings (IPOs) of shares. Very few IPOs were floated last year despite the stellar performance of the region's stock markets, which recorded a yearly increase ranging from 101 percent for Kuwait, 76 percent for Saudi Arabia, 69 percent for Qatar, 53 percent for Jordan, 42 percent for Oman and 29 percent for UAE.
The lack of IPO activity is certainly not due to the absence of candidates. On the contrary, there are several privately owned companies who are profitable and need additional capital to expand. Such a requirement is usually served by issuing shares on the local stock market through IPOs. We expect the IPO activity on the region's stock exchanges to pick up momentum as increasingly more private companies decide to tap this source of capital.
Four main issues have restricted the growth of the IPO market in the region: a) the lack of a capital market culture among private companies, the majority of whom still depend on commercial borrowing from banks and their internal sources of funds for capital expansion; b) the lackluster performance of Arab stock markets during the period 1999-2002 which limited investors' interest in new IPO issues; c) the absence of Arab investment banks capable of pricing and underwriting an IPO before placing it in the market; and d) cumbersome rules and regulations that impede the transformation of private companies to publicly traded ones. Most of these constraints have now been relaxed, laying the ground for a surge in IPO activities in 2004 and the years ahead.
Private companies and family businesses are opening up to the prospects of a public listing. Increasingly more of them are converting from limited partnership companies to private shareholding companies. Increasingly more private companies are abiding by more stringent requirements of disclosure and transparency which make it easier for them to go public in the future. IPOs have become a feasible option for family owned businesses who want to realize the value of their companies, either partly or fully, or to raise additional capital. Instead of having 100 percent ownership, listing on the local stock exchange will allow them to share the risk with other smaller investors, without necessarily losing the identity of the firm and get the benefit of enhancing the profile of the company in the country and the market place. The additional capital raised will allow the firm to expand while maintaining the "optimal" financial structure in terms of debt to equity ratio.
Local investment banks play an important role in the IPO process. They bring to the table a wealth of knowledge and experience of the domestic economy, the local stock market, the potential investment community and above all ability to evaluate the company and come up with the "right" price and offer size of the IPO. They are also expected to devise a timetable for the process and public disclosures that meet local requirements. The offer could be executed either on a fully underwritten basis, whereby the investment bank would be committed to give the issuer the capital needed irrespective of how successful the IPO is in the market place. Or it could be executed on a "best effort basis" where the success of the offer would depend on market conditions and the response of the investment community. The commission that investment banks charge for underwriting the IPO depends on the size of the issue, but it usually ranges between 3 percent and 7 percent. The fees are lower if the IPO is executed on a best effort basis.
The investment bank will complete the due diligence process, which includes valuation, preparation of all the required disclosures, and a price range for floated shares. The investment bank will also devise concrete guidelines for notifying the public, for launching the offer, and for registering it with the respective securities exchange commission. The registration varies from one Arab country to another but it usually requires the submission of an application letter to the controller of companies accompanied by a prospectus (to be prepared in Arabic) which contains detailed information on financial, commercial, technical and legal issues, including the company's business plan on which the valuation and the price per share will be based.
Few IPOs came to the region's stock markets last year. The floatation of 10 percent of Jordan Telecom in late 2002 was followed by the massive IPO of 20 percent of Saudi Telecom Company (STC) and few other IPOs from Saudi Arabia, Qatar and Kuwait. In the UAE, two relatively small IPOs were floated by the newly established Islamic insurance companies Aman and Takaful. With the exception of Jordan Telecom, the post-listing performance of the IPOs has been very good, both due to the strong performance of the region's stock markets and the attractive pricing of the issues. By the end of 2003 the two largest IPOs, STC and Industries Qatar, had gained 147 percent and 257 percent respectively.
A larger number of IPOs are expected in 2004. The key market event so far this year has been the IPO of Amlak Finance, the property finance subsidiary of Emmar Properties. Among the major new issues expected this year are Oman Telecom and the National Commercial Bank, the largest bank in Saudi Arabia. Other candidates could come from the region's thriving hospitality sector, which remains without representation on local equity markets. The burgeoning petrochemicals sectors in Abu Dhabi, Kuwait, Oman and Qatar may privatize part of their equity through the local stock markets. The construction and building materials sector in the region will also provide IPO candidates, as do the real estate, primary industries and transportation sectors. Many companies in these sectors are in expansion stage and require access to substantial capital that could be met through IPOs.
Also auguring well for the future of the region's IPO market is the emergence of reports suggesting that a law is close to being finalized permitting companies operating in Dubai's free zones to list on the Dubai Financial Market. Some 4,000 firms operate in the emirate's nine free zones. With the new capital market law in Saudi Arabia, the introduction of Bahrain's Financial Harbor and Dubai Financial Market, we are optimistic that the region's capital markets will become more developed and the IPO activities could receive a substantial boost.
To conclude, we believe the strong performance of the Arab stock markets last year and so far this year boosted investors' confidence in the domestic stock market and increased their appetite for listed shares including new issues. The leading investment banks in the region have the expertise needed to evaluate companies, prepare prospectuses and successfully execute an IPO transaction. Private companies are looking for new sources of capital to help them expand and reduce the debt/equity ratios in their balance sheet. All this suggests that the domestic stock market should warm up to new IPOs in 2004 and the years ahead.
(Henry T. Azzam is chief executive officer at Jordinvest.)
