Where did all the IPOs go?

Uta Harnischfeger

• Last Updated: March 22. 2009 9:39PM UAE / March 22. 2009 5:39PM GMT

There were no flowers, no colourful fruit cocktails and not much of an atmosphere. Drake and Scull banners reading “Innovation” decked the walls and little company flags hung forlornly on coffee tables. When Majed al Ghurair, the chairman of Drake and Scull, quietly rang the opening bell, the brokers gearing up for another working day barely lifted their heads. In the background, Drake and Scull employees hovered over trading screens and uttered sighs of relief when the first price read Dh0.85; this from a share that listed at Dh1.

One week later and Drake and Scull is trading near Dh0.70, hardly making a case for other companies to follow suit and list on the Dubai Financial Market (DFM). Doomsayers already predict that Drake and Scull will enter the history books as the only DFM listing for this year.

Even in the Gulf region there is little on the horizon besides Vodafone Qatar, which will offer 40 per cent of its shares in an initial public offering worth 3.38 billion Qatari rials (Dh3.4bn) from April 12. This week’s listing of Green Crescent on the Abu Dhabi Securities Exchange (ADX) is mandatory, as are the three planned IPOs of insurance companies in Saudi Arabia. None of these firms can operate without selling shares to the public.

So far this year, the region has seen only one IPO, that of Etihab Atheeb Telecommunications which listed 30 per cent of its stock early last month on the Saudi exchange, raising 300 million riyals (Dh293.8m) with substantial backing from Saudi investors. Its shares rose by almost 60 per cent on their debut on Saturday before slipping slightly to close at 14.45 riyals.

The firm’s IPO was Saudi Arabia’s first since August after regulators froze fresh listings because of the impact of the global financial crisis on markets. There were 12 listings on the DFM last year, many of them secondary listings of Kuwait-based companies, and 16 listings of securities in 2007, most of which were UAE-based companies.

“There are certainly many issuers preparing and exploring,” says Gerhard Hametner, the director at MAC Capital, an investment bank. “Once the market is ripe to go, many will go.”

At present, there are few incentives to list. “This is a buyer’s market and prices would be very, very low.”

Investment bankers say many companies which had considered a listing until a few months ago are now pulling back.

“It is right to say that a couple of listings have been postponed because of the market,” says Declan Hegarty, the co-head of coverage for the Middle East and North Africa for HSBC. “Current valuations will make people think twice whether to come out into the market or not.”

But fear of failure, expressed in low valuations, is only one reason for companies to shy away from listings. The other is the general dearth of funds. Banks and brokers have clamped down on lending to those seeking to invest in the stock market and few people have spare cash.

However, the negative experiences in the UAE in recent years with short-term money inflows may eventually trigger a listing renaissance.

“Given their experiences they will look at new sources of capital,” says Mr Hametner, referring mainly to local banks and contractors which were burnt by their dependency on the flood of cheap foreign money that was available, then suddenly pulled out of their company coffers last summer.

Mr Hametner expects the market to recover in six to 12 months, when “funding begins to defrost”. Also, companies will have learnt their lessons from depending too much on bank funding and will explore new ways of corporate financing.

Many companies waiting to list are in the property and building sectors and some are family companies, says Khalid Madi, the managing director for investment banking at Al Mal Capital.

“There is no doubt that they will only come to the market if the sentiment turns,” says Mr Madi, adding that deleveraging has had a more severe impact on Dubai markets than others. The UAE’s construction sector has been particularly hard hit by the outflows of foreign money and a severe downturn in prices, forcing many contractors to cancel or delay projects and lay off staff.

Other market watchers see large family conglomerates as the most likely candidates to be the first to return to the markets. Some of these operations have often been involved in widespread activities ranging from logistics and retail to airlines and shipping, but the economic and financial crisis has forced them to focus more time and funds on a few areas rather than spreading their resources too thinly.

“Until now, these families may have been able to grow with their own capital resources and easy access to bank funding, but that may no longer be the case and they may now be interested to rationalise their non-core holdings,” says Mr Hametner.

In addition, there is talk of amending the UAE Companies Act and possibly lowering the percentage of shares a company must offer to the public. This would certainly encourage families to list, even those who are reluctant to hand over control. There are increasing examples of companies listing 35 per cent and even as little as 20 per cent in an IPO.

However, the pessimists continue to rule the day.

“Anyone who had started to consider a listing would be thinking long and hard about listing in this market. New listings will be subdued for a while,” says Mr Hegarty.
Given that kind of gloom, Drake and Scull actually did quite well.

“All things considered, this is reasonable and acceptable,” says Mr Madi, adding that the price has to be compared with stock market levels in July, when Drake and Scull sold 55 per cent of its shares at Dh1 per share.

“Since then the market has come off 90 per cent and Drake and Skull had lost a mere quarter of its initial price.”

As with the IPO market as a whole, nervousness prevailed throughout Drake and Scull’s first trading day and the symbolism was strong until the end. Visitors were given sun shades for their cars as if to keep visibility to a minimum, and offered a chocolate date for the journey home. At least there was something sweet.

uharnischfeger@thenational.ae