Going public: Market conditions have slowed IPO activity

The slow rate of recovery seen in GCC equity markets has resulted in a diminished initial public offering (IPO) pipeline. Companies across the region have placed their flotation plans on hold as they wait for more favourable economic conditions. This trend has not bypassed Kuwait, where a number of firms have either slowed or reversed their IPO plans.

IPO PLANS: Kuwait Energy Company (KEC), for example, announced in 2010 that it would target an IPO on the London and Kuwait stock markets by the end of 2012. At the time, its decision was broadly welcomed as the next logical step in the company’s expansion, given its new oil discoveries in Egypt and its partnership with Turkey’s state-owned petroleum group TPAO and South Korean gas and power company, Kogas, to develop two gas projects in Iraq. The Iraq developments lie behind the company’s need for additional capital, but in 2011 KEC announced that it may be forced to delay its planned IPO – a development that illustrates the uninviting conditions that currently prevail. “We’ve always said our IPO will be subject to market conditions and we know the market conditions aren’t ideal as far as the Middle East region is concerned,” Paul Ditchburn, the vice-president of planning and portfolio management at KEC, told the local press when the announcement was made. Instead, the company may opt for the credit route as, according to Ditchburn, it carries “minimal” debt and can access a $58m loan facility.

WAIT & SEE: Raising debt rather than seeking capital through equity offerings will remain an attractive alternative for companies with good credit lines for the short to medium term, which partly explains the current dearth of announced IPOs on the Kuwait Stock Exchange (KSE). A number of likely candidates, such as Gulf Holding Company, which has appointed CapCorp Investment Company as consultant for a listing on the KSE, and Sahaab Leasing, with a $206.1m offering in the pipeline, are apparently waiting for a more propitious moment to enter the market. Meanwhile, developments in 2011 suggested that the long-anticipated privatisation of the state airline could provide an opportunity for investors looking for IPO opportunities. The government had announced its desire to sell off an 80% share in Kuwait Airways (KAC) as far back as 2007, outlining plans for an IPO and private investment. The plan was approved by parliament in 2008, and by June 2009 a valuation of the company was completed.

It then took until August 2011 for the government to invite bids from local and international investors to buy a 35% stake in the airline, a process that was open only to specialised international companies and those listed on the KSE. The privatisation plan also called for 40% of KAC to be made available to the public through an IPO at a later date, with employees granted 5% and the government-owned Kuwait Investment Authority the final 20%. However, in October 2011, a committee formed for the privatisation of the airline released a statement saying it was delaying plans to privatise the carrier as it was going to address operational and structural issues prior to an IPO or acting on the expressions of interest it received from investors.

TRADE VOLUME: The modest trading volumes currently exhibited on the exchange are a major inhibitor to IPO activity. “If you’re going to make an IPO, major concerns are valuation and liquidity; valuations are depressed and trade volumes are very low in Kuwait at the moment,” Rani Selwanes, the director of investment banking at NBK Capital, told OBG.

While regional and global risk continues to depress the market, trading volumes should benefit from the gradually improving macroeconomic conditions and the positive momentum seen in oil prices in the longer term. Similarly, although the implementation of a new regulatory framework for the markets has acted as inhibitors to trading in the short term, the increased transparency and corporate governance these reforms promise to deliver is expected to have a beneficial long-term effect on trading on the bourse. Firms waiting for better market conditions to launch an IPO will thus be keeping a close eye on the new regulator’s progress.