Drake & Scull IPO oversold

Drake & Scull, the Dubai-based engineering company, announced yesterday that its initial public offering (IPO) was 101-times oversubscribed on the back of demand by investors seeking to buy nearly Dh102 billion (US$38bn) in company shares. The company had sought to raise only Dh1.19bn, or 55 per cent of its value, however the oversubscription ended up setting a record for the Middle East and North Africa region since October of last year. The company almost matched the Moroccan Compagnie d'Assurances et de Réassurance Atlanta, which notched up a 103-times oversubscription, according to Zawya Dow Jones data. Drake & Scull, classed as an "MEP", or mechanical, electrical and plumbing firm, has installed plumbing, electrical and duct work on prominent developments in the UAE, including Wafi City, Jumeirah Beach Hotel and Dubai Internet City. "Investors clearly see the opportunity for Drake & Scull to benefit from MEP and civil contracting services growth across the region," said Khaldoun Rashid Tabari, the chief executive. Drake & Scull announced its intention to list earlier this month, offering almost 1.2 billion shares at Dh1 (US$0.27) each, representing 55 per cent of its value. The offering, which closed on Thursday, came amid a flurry of summer listings in the GCC. Of the 22 companies that sold shares to the public in the region this year, 15 have listed since May. Most have performed well since going public, led by Methaq Islamic Insurance company, which has gained more than 600 per cent since shares began trading in May on the Abu Dhabi Securities Exchange (ADX). In an IPO, investors are asked to reserve shares - or "subscribe" to the offering - during a limited period. If more shares are reserved than the company is offering, as was the case with Drake & Scull, it is oversubscribed. In that case, shares are typically awarded to investors as a percentage of the amount requested or, in some cases, by lottery. Many observers in the region believe IPO activity is key to the development of capital markets in the GCC, and the Drake & Scull oversubscription is a clear indicator of healthy interest in a local company with strong growth prospects. Revenues climbed by 16.7 per cent last year in spite of rapid inflation in construction materials. But while oversubscription is usually a positive sign, interest on the scale of the Drake & Scull IPO can create problems once shares are listed. Typically, prices go up in a volatile spurt just after listing because of pent-up demand, leading speculators to pile in. Because of the way IPOs in the region have traditionally been priced, coupled with the significant cash that is available in the wake of high oil prices, oversubscription is almost inevitable in offerings like Drake & Scull's. "Like any IPO coming into the market, we are dealing with a lot of liquidity," said an official at one of the banks that arranged the Drake & Scull deal. "Ajman Bank was also oversubscribed, as others have been." Ajman Bank's IPO in March was 85 times oversubscribed, and its share price has increased by over 200 per cent since it listed last month. Still, another banker who was involved in the deal said the level of interest in Drake & Scull was astounding. "We thought Ajman bank made sense because it was a bank, but we did not expect this," she said. "This kind of market is a magic market." Drake & Scull planned to use the proceeds from its IPO to finance regional expansion, a spokesman said. So far all but one of the company's projects have been in the UAE, but it has been considering expanding into Saudi Arabia, Kuwait and Qatar. Drake & Scull is working on 32 contracts worth an estimated Dh2.4 billion. The company's highest-profile projects underway are on the trunk of the Palm Jumeirah in Dubai: the Golden Mile, the Fairmont Palm Hotel & Resort, the Fairmont Palm Residences and the Tiara Residence. afitch@thenational.ae