Over 2014, there has been a welcome recovery of initial public offering (IPO) activity in the GCC region. According to PwC, 16 GCC companies went to regional markets, raising a total of $10.8bn. The tail end of the year proved to be a particularly fruitful time, accounting for $7.3bn of the total and raising hopes that 2015 would see the continuation of the IPO rebound that investors have been waiting for since the dust settled on the global economic crisis of 2008.
The Road to Recovery
Saudi Arabia played a major role in the 2014 market recovery. The local bourse saw six offerings for a total value of SR25.23bn ($6.72bn) – the largest total volume since 2008. Just as the flotation of Alinma Bank underpinned gains in 2008, another financial institution propelled the Kingdom to the top of the regional IPO league table in 2014.
The $6bn offering of the National Commercial Bank (NCB) staged in November 2014 was not only the largest in the region for the year, but also the largest ever to be held in the Middle East and the second-largest in the world, behind the $25bn IPO of China’s Alibaba Group Holding. The NCB offering shone a spotlight on the potential of the Saudi Stock Exchange as both an investment centre and a source of funding.
The success of the offering, which was oversubscribed by more than 23 times despite an initial controversy regarding the sharia-compliance of the bank’s operations, is easy to explain. As well as the improved market sentiment seen since 2013, NCB is the nation’s largest lender by assets and its offering was the first for a bank since 2008. The quasi-social agenda behind the IPO added further interest to it from the point of view of individual investors: the offering was made available to Saudi retail investors only – with the exception of a 10% allocation to the Public Pensions Agency – at an attractive price of SR45 ($11.99) per share. The decision to offer the shares at a discount follows a frequently used model by which the Saudi government distributes wealth among its citizens, and therefore it was little surprise that the price of NCB shares leapt to hit its upper fluctuation limit of 10% on the first day of trading. Despite the strong interest, the lack of independent price discovery in the NCB deal means that its use as a bellwether of true market appetite is limited. The 1.26m Saudi subscribers were fewer in number than the 10m who applied for shares in the IPO of Emaar, The Economic City in 2006. In addition, NCB is the last local bank to go to the market and has sufficient cachet to offset market concerns that would negatively affect the reception of lesser institutions.
With the recent decline in oil prices and the Tadawul All Share Index entering a downward trend in the fourth quarter of 2014, the year started with a question mark over the sustained recovery of the IPO pipeline in 2015. The offering of 30% of the Saudi Company for Tools and Hardware in April 2015 has gone a ways to answering these concerns. A total of 992,657 investors subscribed to the 2.88m shares offered for retail subscription in a deal that was around six times oversubscribed.
The region’s largest and most diverse stock exchange is proving itself a useful source of funding for Saudi companies wishing to expand their operations. Against this backdrop of public investment and a promise of a rise in market liquidity from foreign investors, the success of the Saudi Stock Exchange is likely to continue.
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