Axiom Telecom, the mobile phone retailer that this week launched the country's first share sale in two years, faces a debt load of more than Dh1 billion (US$272.2 million) that it hopes to halve with proceeds from the sale, according to offering documents obtained by The National.
Those factors and many others will be scrutinised closely by potential investors as Axiom pitches itself as a regional leader in mobile phone sales with solid prospects for growth.
The company plans to list up to 35 per cent of its shares on the NASDAQ Dubai next month.
Axiom booked more than Dh5bn of revenues in each of the past two years and says it is the Middle East's largest retailer of mobile phones, with 4.1 million devices sold last year including two thirds of all handsets in the UAE, the documents say. Yet despite strong revenues, the papers also reveal Axiom made just Dh1.3m of profits in 2007, followed by a loss of Dh408m in 2008 and a Dh17.9m profit last year.
Deutsche Bank, the global co-ordinator of the offering, expects the company will be able to hone its capital structure and begin to reap much greater profits in the years ahead. It expects profits this year to rise to Dh158m and almost double to Dh345m next year.
"The reaction [to the listing] is very positive," said Makram Kubeisy, the head of investment banking at SHUAA Capital, one of three underwriters of the offering. "It's early and we need a couple more days but the reception is good."
Still, Axiom's low margins, volatile profits and big upcoming debts are likely to be among some of the investors' main concerns as the process of selling shares for the listing begins. Mobile phone sales in the Middle East have also tapered off somewhat in recent years, analysts say, potentially posing challenges for the company's growth.
"Two to three years ago, with mobile sales rallying, it was a more exciting sector," said Sally Gerges, a telecoms analyst at the investment bank Beltone in Egypt. "Now the growth story is almost over."
Dubai Holding, which is restructuring a large portion of debts estimated at more than $9bn, owns 40 per cent of Axiom through TECOM Investments and will earn between $76.6m and $110.1m from the public offering.
Axiom has maintained that Dubai Holding's debt issues have had no bearing on its decision to sell shares to the public. Company executives could not be reached for comment yesterday.
Axiom has managed to grow quickly since its inception in 1997, grabbing the majority of the market share for mobile sales in the UAE and a sizeable chunk in Saudi Arabia.
In 2008, however, it was hit hard by the global financial crisis. Wholesalers across Asia and Europe began dumping their inventories into the market, which hurt sales in the Gulf.
As the UAE plunged headlong into its own financial problems in late 2008, Axiom needed assistance from its shareholders.
The prospectus reveals that Axiom's main shareholders, the al Bannai and al Zarooni families, transferred property in Dubai worth Dh500m on to the company's balance sheet at the end of 2008 and handed over another Dh66.8m worth of property the following year to act as collateral for borrowings and to shore up its finances.
Axiom transferred the property back to the shareholders just a week ago in a move to clear the balance sheets of assets unrelated to the telecoms business and raise additional cash, according to a source familiar with the transaction.
"Nobody wants to buy a real estate company at the moment, so it was decided to take it off the books," the source said. "The company investors want to buy is very much a mobile phone retailer and wholesaler. The land was a distraction."
An Axiom spokeswoman declined to comment.
Al Bannai and al Zarooni have paid Axiom Dh202m for the property - less than its original value because of lower prices caused by the downturn - with a loan from banks that they will pay back with proceeds from the public offering.
With that Dh202m and an expected $100m from the public offering, Axiom expects to cut its more than Dh1bn of short-term debt in half and position itself for growth.
Axiom's debt consists of a $350m loan originally taken out in 2008 to finance its expansion and a Dh100m credit line from Noor Islamic Bank. The company has received two extensions on repayment of the $350m, which is now due next September.
Yet while the property move gave Axiom cash to pay down debt, it also resulted in a change in accounting that forced the company to write off the original Dh500m property investment in 2008, turning a Dh92m profit that year into its Dh408m loss. Writing off the Dh66.8m property transfer from last year lowered profits to Dh18m from Dh85m.
The major challenge for Axiom now will be to grow its retail business, which is more profitable than wholesaling. Jumbo Electronics and Sharaf DG are its biggest competitors in the UAE in this sector. Axiom achieved a coup earlier this year with a contract to buy BlackBerry phones directly from the Canadian manufacturer Research In Motion. Previously, it had to buy them from an intermediary at a higher price.
But it had to shut down its Egypt operations last year after failing to grow its business there and sold off part of its operations in Oman at a loss.