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IPO Stalemate to Continue, Investors to Wait for More Reassuring Signals

DUBAI — Nervous investors are likely to shy away from initial public offerings (IPOs) in the UAE in the first half of 2009 as they wait for more reassuring signals the credit-freeze-stifling global growth is thawing.

“It will be a struggle year for IPOs during 2009. The reasoning is simple. IPOs need a vibrant positive capital market to thrive. And year 2009 promises to be far from it,” said M.R. Raghu, senior vice-president for research of Kuwait Financial Centre S.A.K or “Markaz.”

The IPO market in the Middle East was stuck in the doldrums in the last two months of 2008, with many companies deciding either to postpone or shelve plans to raise capital by offering company shares to the public.

“I believe that companies which were planning to have an IPO are having second thoughts due to the prevailing harsh market conditions,” said Vineet Gupta of Arqaam Capital.

Gupta cited the supposed listing of Drake & Scull at the Dubai Financial Market last September that was put off and no date has been set so far.

A report by Ernest & Young showed IPO activity in the region plunged in October and November of last year with the total $22.4 million raised from the IPO exercise, a pittance compared to the $6 billion raised from 10 IPOs during the same period in 2007.

In 2008, Saudi Arabia, the UAE and Egypt emerged as the top three markets in terms of capital raised, accounting for 78 percent, 10.3 percent and 4.7 percent, respectively.

In the first three quarters of last year, money raised through 55 IPOs in the region totalled $13.4 billion, which was 4.6 per cent higher than the $12.8 billion raised from 52 offerings in all of 2007.

UAE outranked Saudi Arabia in 2007, accounting for $6.5 billion of total IPO money raised. Saudi Arabia raised $3.9 billion, while Egypt generated $1.04 billion.

Globally, the picture was not anybetter in 2008. IPO activity has dropped more than 50 per cent last year. From January to November, a total of 745 IPOs worldwide raised $95.3 billion compared to 1,790 IPOs during the same period in 2007, which raked in $256.9 billion.

IPO activity also fell in emerging markets — Brazil, Russia, India and China which recorded 163 IPOs, raising $28 billion in the first 11 months compared to $106.8 billion from 365 IPOS in 2007.

IPOsare far from checking out this year, but economists pointed out that initial public offerings are time-consuming and theyrequire a lot of meticulous planning and depend largely on stable markets with loads of liquidity.

Global markets, though, have been on a year-long roller coaster with emotions dictating much of the bourses’ tempo amid the global economic meltdown. This makes it difficult to determine fair market prices, and for that matter, attract investors who are wary of being burned all over again, economists said.

“Given the state of affairs of the capital market as well as the mood of investors sitting with huge losses, companies will definitely think twice about venturing into IPOs,” said Raghu.

Markaz Research said that the Gulf Cooperation Council market lost a whopping 56 per cent in 2008, which is in line with emerging markets’ losses of 55 per cent.

Dubai emerged as the worst performing market, shaving 72.4 per cent of its value. Saudi Arabia followed with a lost of 58 per cent, Abu Dhabi shed 50 per cent, Oman 44 per cent, Kuwait 38 per cent, Bahrain 33 per cent and Qatar 30 per cent.

“I think due to prevailing market sentiment, the IPO window is closed for the moment. However, six or nine months is a long time in capital markets especially these days,” said Ali Khan, executive director of Arqaam Capital.

In the UAE for instance, the key catalyst for the Dubai bourse is the real estate market “and hence, the primary deal-flow window, would be for investors to really understand the levels of possible corrections to come in the housing market,” said Khan.

“Once there is a better understanding on pricing trends, stock markets may rally well before house prices actually reach a bottom, as investors will take a 12 to 18-month view ahead.”

Khan said investors will be able to better predict what the trends will be in the next three to four months.

“Assuming the trend is within revised expectations, then markets in UAE could start to recover quite significantly by the third or fourth quarter of 2009,” stressed Khan. According to EFG-Hermes, there are about 40 prospective IPOs in the UAE that are facing further delays. These include Nakheel, Dubai Bank and Emirates Airline.

“With liquidity constraints and market volatility, we expect IPO activity to remain weak during the first half of 2009, with potential for improvement emerging in the second half. Even here, we would need to see markets stabilise and valuations become richer for companies (especially family-owned businesses) to consider equity raising as a

financing option,” said EFG-Hermes in its report.

A resurgence of IPO activity will take a while since it wouldbe tough changing investors’ mindsets given the grim economic outlook and the dire conditions in the financial markets, said Matthew Wakeman, managing director of cash and equity linked trading at EFG-Hermes.

“I would say that in order to return to an active IPO environment in the region, we would first need to see a prolonged period of market stability to revive local investor sentiment.”

Fund managers though have enormous faith that investors are always keen on IPOs and are just waiting for the smoke to clear.

Despite the gamble, IPOs, they said, have this lure of potentially netting big returns, a risk that some investors may be willing to take.

The current economic woes are temporary and the Middle East governments will continue to urge local companies down the IPO route, said Ernest & Young in its report.

It said the Middle East has a strong IPO pipeline of high-quality blue-chip companies, such as big family conglomerates.

It is difficult to predict when IPO activity will recover, but “smart companies will use the current time to fully prepare for the turnaround in investor sentiment,” said Azhar Zafar, head of mergers and acquisitions of Ernst & Young Middle East. “Regional capital markets need to stabilise in order to rebuild confidence and in order for IPO opportunities to re-emerge.”

“There here is always appetite for the right deal at the right price but finding that balance in the current environment has become harder,” said Wakeman.

· rocel@khaleejtimes.com