Dubai: Debt financing continues to be the preferred mode of raising cash for companies in the Middle East and North Africa region as share issues remain few and far between.
The region saw $177 million (Dh650 million) raised from initial public offerings (IPOs) in the third quarter, 79.7 per cent less than in the same period in 2009, with no signs of improvement expected in the rest of the year, Ernst & Young said on Tuesday.
"IPO markets continue to demonstrate a flat trend. This is not expected to significantly improve in the remainder of this year, but companies that have plans for an IPO continue to prepare themselves," Phil Gandier, managing partner for transaction advisory services at Ernst & Young Mena, said in the consulting firm's quarterly IPO update.
"Conventional bank fin-ancing, bonds and sukuk are likely to be the preferred mode of raising funds for regional corporations until the profitability of issuers and investor sentiment improves.
"The IPO markets normally recover after the secondary markets and we have been seeing a gradual recovery in the stock markets around the region," Gandier said.
The report comes a day after UAE-based Axiom Telecom announced that it had cancelled its IPO to offload a 35 per cent stake. It cited "widespread concerns about market conditions and liquidity".
Axiom's would have been the first IPO in the UAE in almost two years. Analysts regard the withdrawal as a setback for the market.
"The decision shows prudent strategic planning on the part of the company - a crucial element in sustainable business practices. Secondly, this is an opportunity for the service provider to re-evaluate its strategy and perhaps reconsider its expressed plan of eventually assuming the role of an Mobile Virtual Network Operator (MVNO)," Lindsey McDonald, Consultant, Information and Communication Technologies Practice, MENA, Frost & Sullivan, told Gulf News in an e-mailed note.
"It would make sense that Axiom revisits the idea of an IPO once market circumstances are better. An alternative might be to list in another territory in which it has operational presence, if the market conditions are more conducive to success," she said.
Only two IPOs came to market in the third quarter of this year in the Mena region, Ernst & Young data showed.
Saudi Arabia's Al Jouf Cement and Syria's Becco Exchange raised $173.3 million and $3.7 million, respectively.
"Companies in Saudi Arabia and Syria have consistently shown the willingness to go in for initial offerings as they have been relatively sheltered from the impact of the negative investor sentiment seen elsewhere in the region," Gandier said.
"In addition to mandatory listing regulations, companies have been taking advantage of the low cost of capital secured through the market route. Companies in other countries are wary of the level of pricing and of investor demand if they decide to list.
"This is due to a combination of depressed earnings of the issuing company, negative investor sentiment and low volumes of trade we see on a daily basis," he said.
Given the depressed valuations in the Mena markets, the region offers "great value to investors", even when compared to economic powerhouses India and China, according to Mark Mobius, Executive Chairman of Templeton Emerging Markets Group.
Mobius told a gathering organised by Riyadh-based private-equity firm Amwal Al Khaleej that he is "bullish on valuations" in the region as the market is still in the process of a correction and is currently under-allocated from the perspective of global investors, especially in light of its economic weight.
The Mena region collectively represents 13.1 per cent of the global nominal gross domestic product and 11.6 per cent of the world's land mass whilst only representing 7 per cent of the global market capitalisation.
Mobius said the overall macro-economic indicators for the Mena region remain strong, with dividend yields averaging 4.5 per cent in October 2010, compared to 2.1 per cent in the emerging markets, including China and India.
Global fund-raising from sales of new shares picked up in the third quarter of this year despite market volatility and fewer deals launched.
In the three months to September 30, global IPOs raised $52.7 billion from 286 share issues compared to $46.8 billion from 311 listings in the previous quarter. However, 84 per cent of these were priced within their initial filing range as investors grew more cautious amidst the economic uncertainty.
The $152.7 billion raised globally in the first three quarters of 2010 has already exceeded total 2009 fund-raising of $112.6 billion.
Asian issuers accounted for 83 per cent of dollar volume, with Chinese issuers alone making up over three-quarters (76 per cent) of global fundraising. The emerging markets accounted for half of the top 20 IPOs. All of these deals were from Asia.
Gregory K. Ericksen, Global Vice Chair for Strategic Growth Markets for Ernst & Young said: "There are still numerous growth-seeking companies going public. After two years of waiting for the window of IPO opportunity to open, companies are accepting less aggressive valuations, expecting to return to the market at a later date and raise more capital through follow-on offerings."
