Gulf IPOs Are Booming But Follow-Ons Are Still Hard to Do

Follow-on share sales have yet to gain traction in the Persian Gulf even as the region has stood out as a rare pocket of activity for initial public offerings for much of the past two years.

(Bloomberg) — Follow-on share sales have yet to gain traction in the Persian Gulf even as the region has stood out as a rare pocket of activity for initial public offerings for much of the past two years.

While bankers have been trying to develop the market for secondary offerings as a way to boost liquidity on local bourses, the fallout from the Israel-Hamas war is likely to further hamper appetite in the short term. Global investors are on edge that the conflict might spread in the Middle East and affect oil supplies, with regional markets falling 0.8% since Hamas’s Oct. 7 attack on Israel.

Investors have been resistant partly because they are unaccustomed to secondary offerings and also because of a pricing mismatch with sellers. There have been no follow-on sales in Gulf Cooperation Council nations this year, compared with $53 billion of deals in Europe, data compiled by Bloomberg show. That will change eventually, given that sellers such as sovereign wealth funds have blocks they want to sell. 

“It’s only a matter of time before we start seeing accelerated bookbuilds and fully marketed offerings,” said Rudy Saadi, head of Middle East and North Africa equity capital markets at Citigroup Inc. “The IPO wave is critical to the success of GCC capital markets because you are promoting the local exchanges, increasing liquidity, and diversifying into new sectors, but the next step is follow-on offerings.”  

Read more: Citigroup Sees Muted Impact on Gulf Deals If War Stays Contained

Secondary share sales are an important part of equity capital markets activity everywhere from Europe to the US and India, as shareholders pare down stakes or companies themselves raise fresh capital after going public. In the Middle East, the last such deal was a sale of $610 million of shares in Saudi Arabia’s stock exchange operator by the kingdom’s sovereign wealth fund last November. That hardly set a good precedent.

Even though stock in Saudi Tadawul Group Holding was offered at a 9% discount to its previous closing price, it plunged well below the sale price and investors who bought into the sale were sitting on a loss of 28% about a month after the deal. The shares only recovered above the offering price of 191 riyals in June and have struggled to stay above that level.

Lackluster Demand

Before the conflict between Hamas and Israel broke out, the Public Investment Fund held informal talks about raising as much as $800 million from a placement of its 17.5% stake in Power and Water Utility Co. for Jubail and Yanbu, known as Marafiq, Bloomberg News reported on Oct. 2. However it delayed the offering after lackluster demand from investors, people familiar with the matter said.

“The international investor market is well informed on the nuances of the accelerated bookbuild structure while the local market needs more precedents of successful transactions to build that confidence,” said Gokul Mani, JPMorgan Chase & Co.’s head of equity capital markets for Central and Eastern Europe, the Middle East and Africa.

“A core component of what makes an accelerated bookbuild work is the stock’s liquidity. Volumes need to increase in the local markets to solve for this key ingredient,” Mani said, adding there could be three or four such deals in 2024. 

The Middle East has almost matched Europe’s IPO haul of $35 billion since the start of 2022 with $30 billion of listings in the same period, data compiled by Bloomberg show.

The region’s IPO boom is one reason secondary offerings have so far struggled to take off, with those deals so highly oversubscribed and performing so strongly that appetite for untested follow-ons is limited. The sharp share price gains of newly listed stocks also mean potential sellers may struggle to find buyers at such elevated levels.

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