22 May 2006
The trend for IPOs and the rise of the Middle East financial markets look set to continue with the announcement that a new Saudi Arabian Financial Exchange (SAFX) is to be established along with the new King Abdullah Financial District in Saudi Arabia.
The development will rival those of other Gulf states and aims to match the standards of major global financial centres. Once operational, the SAFX will prompt further IPOs and, in the meantime, Saudi banks are planning for the IPO of the consortium developing the district itself, under the name Emaar Saudi.
It has been reported that a total of 255-million shares will be offered to the public later this month in a two-week subscription period. The offering will be one of the largest of its kind in the kingdom's history. IPOs are gaining in popularity in the Middle East and the Emaar Saudi IPO is being publicised on the internet through marketing messages and on cash machines.
Along with Saudi Arabia, the United Arab Emirates' (UAE) capital market is dominating the Middle East markets. The Dubai International Financial Exchange (DIFX) is concentrating on targeting multinationals and growth beyond local ownership, and aims to be the foremost international exchange in the Middle East. The DIFX is acting as a catalyst for the growth of the primary and secondary markets in the Gulf and local issuers are benefiting from exposure and interest from pan-regional and international investors attracted by the prospects the Middle East currently offers. The SAFX may well add to this effect.
This is significant change, particularly given the cultural influences that cannot be overlooked when doing business in the Middle East. A large number of Middle East companies are controlled by influential local merchant families in the Gulf. These families are still very much subject to patriarchal control. In many instances they are also owned or controlled by members of royal or leading political families.
There is a reluctance to relinquish ownership to outsiders, and this is one of the reasons that there is still a heavy reliance in the Middle East on commercial borrowing from banks rather than IPOs or bond issues. However, the markets are starting to mature and new generations of young Arabs are becoming active in the family businesses.
There is an increasing awareness that an IPO can provide a much-needed injection of funds necessary to give a company a makeover and allow it to push ahead into competitive sectors. IPOs, such as that of the Saudi Arabian Mining Company planned for later this year, are also forming part of the core privatisation programme in the Middle East.
While some businesses, such as Arkan Building Materials Company, based in Abu Dhabi (and which is state-owned), are offering shares through an IPO only to nationals within a Gulf state, there is also a noticeable flow of cross-border investment. This is particularly the case for the growing number of Middle East companies that are being pushed forward under new, aggressive board leadership. IPOs are an integral part of the business plans of such companies.
Bahrain, as well as Qatar and other Gulf states, is also working hard to develop financial centres. Earlier this month, the Bahrain Stock Exchange (BSE) announced a new IPO market at the BSE. This is just part of a number of initiatives the Bahrain government is rolling out to try to encourage family-owned companies to go public. Educational efforts regarding the benefits of IPOs have resulted in an increased number of listings, especially in the construction industry.
There is a risk that drops in the Middle East stock markets may prompt companies to list abroad rather than on domestic exchanges in the Gulf. Companies will also be keen to attract robust institutional investors from Europe and elsewhere in place of Gulf investors. Kingdom Hotel Investments, a Saudi luxury hotel group, floated on the London Stock Exchange, and there have been several Middle East companies listed on AIM in recent months. However, dual listings in London as well as on the DIFX or another local exchange are not uncommon and, as the regulation of Gulf exchanges tightens up and with increased transparency, there will be more local incentives.
Enhanced regulation will also ensure that global investors start to look towards the Middle East and that is exactly what the Gulf states are aiming for in their effort to stimulate income from finance and tourism to decrease their reliance on oil. Local regulators will need to strive to ensure that misconceptions about doing business in the Middle East are dispelled and that foreign investment restrictions are relaxed if they are to be successful.
Infrastructure to support business and transactions is developing and Dubai and other states are attracting large numbers of professionals from Europe and elsewhere in the world, who are bringing in outside expertise to the Gulf while pursuing an offshore lifestyle.
Notwithstanding the susceptibility to market conditions and the potential loss of control, Middle East companies are gradually being encouraged towards IPOs.
As the regulatory infrastructure in the Gulf is developed to support companies and protect investors, the trend will continue. It will also stimulate local market growth to reach new heights.
James Robertson is a partner and Mustafa Hussain is a solicitor at Taylor Wessing