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Middle East Report 2009| pfi| 31

Retail investors are an essential element of Saudi IPOs

was more than 700% subscribed on a SR60m sale, while Wiqaya Takaful was twice covered on a SR80m IPO. Some analysts are also suggesting that the successful com- pletion of a large deal outside the Kingdom, in Qatar, may also prove to be a shot in the arm for Saudi ECM. The sale of 40% of Vodafone's Qatari subsidiary worth around US$1bn was fully covered in a tight market. Ostensibly, the deal bodes well for Saudi Arabian com- panies hoping to tap the equity market. As in Saudi Ara- bia, Qatari deals are only open to local citizens, or at best nationals of neighbouring countries, so the tiny Emirate is commonly regarded as a comparable proxy. Sceptics note, however, that Qatar is too small to be rel- evant to a mature economy such as Saudi Arabia's. Fur- thermore, the Vodafone deal struggled to attract as much demand among retail investors as was hoped. This, the critics argue, is particularly worrying because Saudi deals also depend heavily on retail demand to underpin transactions. Also, the Vodafone sale proceeded on a regulatory technicality rather than on the back of market sentiment. A local listing was a condition attached to the award to Vodafone of an operating licence by Qatari authorities. Without this requirement, a deal would have been hard- er to push through because amid weak equity markets, the seller would be too concerned about achieving a fair valuation on the shares.

Nevertheless, while the year has proved more sluggish than expected so far, a number of big name deals are still in the pipeline. In particular the IPO of the Tadawul stock exchange is broadly expected after failing to take place in 2008 – it was first talked about in 2007. Meanwhile, Mawarid Holding Company has appointed Saudi Hollandi Capital as lead manager for the sale of its MEED Trading Company retail subsidiary. The offer is scheduled for the fourth quarter and awaits regulatory clearance. MEED runs convenience stores across Saudi Arabia and will be restructured prior to the sale to hold a majority stake in seven other Mawarid group companies. Elsewhere, Knowledge Economic City Company, an

investment vehicle to finance property development, is set to launch a 30% IPO in coming weeks, raising around SR1.02bn (US$271.5m). The list of planned transactions is likely to lengthen as a significant upswing in Saudi stock values filters through to sentiment and a willingness by issuers to sell. The main TASI index is nearly 25% high- er on the year to-date, reversing some of the heavy loss- es seen in 2008. "Markets have started to stabilise and people are feel- ing a lot more optimistic. There are a lot of potential (ECM) deals and we should start to see more activity before the year is out," said Christopher Laing, co-head of CEMEA at Deutsche Bank. Nevertheless, when equity issuance in Saudi Arabia picks up again, many expect the rules of the game to have changed.

Markets have started to stabilise and people are feeling a lot more optimistic.

Few expect a return to the heady days when privati- sation IPOs would be many times covered and share val- ues would subsequently multiply in the aftermarket. "As the market recovers we expect to see deals more sensibly priced with demand and subscription more in line with other emerging markets," said Evans Haji- Touma, head of CEEMEA equity capital markets at HSBC. "Investors in the Saudi market have historically had a wider choice in terms of investment opportunities rela- tive to other Gulf markets. This trend is most likely to continue over the coming years, allowing for a more sen- sible 'stock picking' approach," he added. This new prag- matism in part reflects the market correction of recent months. It is also a consequence, however, of the grow- ing sophistication of Saudi investors. Retail investors are an essential element of Saudi IPOs because the government prioritises them for political rea- sons and on account of the relative underdevelopment of the local asset management sector. This is likely to change, however, following a proliferation of new equity funds and a growth in the number of institutional investors. There is also likely to be more interest from foreign- ers as new ways are established to circumvent the pro- hibition of non-Saudi ownership of assets. One reform on the horizon is the development of London listings of glob- al depository receipts (GDRs).

This is a well established method among emerging mar- kets companies to list in London as a means to attract a greater audience of investors and overcome the problem of illiquid local markets. The company issues GDRs in Lon- don, each of which represents a set number of locally list- ed shares.

"There has not been any real movement on foreign ownership of [Saudi] assets but our belief is that [finan- cial regulator] the CMA will allow companies to issue GDRs in the near future," said Laing. Sectors most likely to provoke investor interest are those in which Saudi Ara- bia can claim a competitive advantage.

Therefore, petrochemical, telecoms and financial com- panies are likely to be among the first issuers, both locally and through the GDR format if this structure becomes available. Sentiment remains fragile, however, so while more cyclical sectors such as consumer goods and real estate are traditional strengths in corporate Saudi Arabia, companies are likely to be more reticent in coming to market.

One potential barrier to the popularity of Saudi GDRs among international investors is the Kingdom's exclusion from leading emerging markets equity indices. This presents a challenge to liquidity as it means index-linked funds would not take automatic allocations. Nevertheless, along with Egypt, Saudi Arabia is the Mid- dle East's most sophisticated economy and demand is like- ly to be sustained once access to foreigners does become a possibility.

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