The oil price decline that began in the second half of 2014 has dampened enthusiasm for initial public offerings (IPOs) across the MENA region. The mechanics of this trend are straightforward: oil sales account for the bulk of government revenues in the majority of the region’s hydrocarbon-rich economies, and, as allocation of these revenues is the principal engine of growth in many cases, market sentiment is closely allied to the direction of spot and future prices. This effect is further exacerbated by the response of governments to the possibility of a new era of sustained low oil prices.
Faced with the prospect of structural fiscal deficits, finance ministries across the MENA region are re-thinking their spending programmes and slashing subsidies in an effort to balance their budgets, thereby constricting two of the traditional channels of economic expansion. The effect of this has been a heightening of investor uncertainty as indices in the region begin to head south.
Standing Tall
Egypt, however, has emerged as one of two markets that have bucked this negative trend to produce a steady flow of IPOs, all of which have brought welcome liquidity to the market and gone some way to mitigating the negative sentiment that has persisted in the region since the value of oil took its precipitous dip. Egypt and Saudi Arabia had the highest number of IPOs in the MENA region in 2015, according to global professional services firm EY, and into 2016 the two countries maintained their position as IPO generators for an otherwise quiescent regional market.
While in Saudi Arabia’s case the positive trend was largely the result of a significant legislative change – the opening up of the market for the first time to qualified foreign investors – the attractiveness of the Egyptian Exchange (EGX) as a fundraising platform was based on more fundamental concerns. Unlike many of its regional neighbours, Egypt is a net energy importer rather than exporter, and therefore has much more to gain from the current low-energy-price environment. Investors were also encouraged in 2015 by increasing political stability, by a perception at the time that the government was addressing the nation’s economic challenges, as well as by an incipient recovery business confidence – all of which combined to lift the mood sufficiently for an uptick in IPO activity.
Recent Highlights
Orascom Hotels and Development floated 33m shares valued at LE506m (equivalent to $26.8m as of December 2016) on the EGX in January 2014, in an offering that was oversubscribed four times, according to a January 2015 report by local media. The first 10% tranche of the company’s value was offered to qualified investors through a private placement, with a minimum ticket size of LE5m ($265,000).
A second round saw 5% of the company floated in a public offering at LE15.20 ($0.81) per share – which was a 50% discount from the midpoint of the independent financial adviser valuation of LE29. 60-31.20 ($1.57-1.65) per share. In March 2015, another arm of the Orascom stable, Orascom Construction, went to the market, this time opting for a dual listing on the EGX and NASDAQ Dubai. Reuters reported in March 2015 that a total of 11% of the businesses’ shares were released to the Egyptian bourse, raising in excess of LE1.4bn ($74.2m).
In April 2015 Edita, the snack business established by the Berzi family in 1996 and which has introduced Egypt to popular brands as Molto, Bake Rolz, Twinkies, Hohos and Todo, floated around 30% of its shares at LE18.50 ($0.98) each. The deal was comprised of both a private placement component and a public offering, which were oversubscribed by 13.4 times and 4.5 times, respectively, according to August 2015 reports by local media. The company’s stock rose by around 15-16% on the first day of trading, and Edita is now the biggest independent snack food business in North Africa.
In May 2015 it was the turn of Integrated Diagnostic Holdings to go to the market. The company offers more than 1000 diagnostic services, from glucose testing to DNA tests, at 288 labs across the MENA region. In 2014 it performed 22.3m tests for 5.6m patients. However, Egypt’s largest private sector diagnostics service provider looked beyond its home market for its IPO, choosing to raise $290m on the London Stock Exchange. The enthusiastic reception of the deal, which was 11 times oversubscribed, demonstrated the investor appetite for businesses in a region where growth prospects are closely linked to population growth.
The biggest offer of the year came in June 2015, when Emaar Misr, the local arm of the UAE-based property developer, launched an IPO that was widely seen as the largest flotation on the EGX since 2007. The deal saw the firm offload 600m shares, around 13% of the company, at a value of LE3.80 ($0.20) per share, thereby raising LE2.28bn ($120.8m) to fund its ongoing commercial developments in the country. The offer proved to be popular with investors, and the first tranche of 510m shares allocated to institutional investors was 11 times oversubscribed, while the remaining 90m certificates in the second tranche was snapped up by retail investors and was 36 times oversubscribed.
Mixed Message
By the start of 2016 the market was exhibiting a mix of messages, with cause for both confidence and concern. For example, the IPO pipeline of 2015 had demonstrated a welcome robustness during a challenging period. Among the new listings, the exchange also saw the return of Orascom, which was once the biggest blue-chip stock on the EGX, but effectively left the bourse during the height of uncertainty following the 2011 revolution via a buyout from an affiliated company, the Amsterdam-listed OCI NV. With a new government in place and the resolution of outstanding tax issues, the restoration of Orascom is a welcome vote of confidence in the recovering economy.
However, there have been red flags as well. For example, the Emaar Misr flotation of June 2015, while oversubscribed at LE3.80 ($0.20) per share, had by July 7 fallen to LE3.55 ($0.19), and just over a month later slid further to LE3.09 ($0.16). By January 2016 the stock was trading close to LE2 ($0.11), a drop significant enough to raise fears that it would have a damaging effect on future IPOs. Encouragingly, the effect of that on broader sentiment appeared to be muted. The Arabian Food Industries Company (Domty) offered around 49% of its total shares in March 2016, and reported strong demand for its stock, priced at LE9.20 ($0.49) apiece. Reuters reported that the private offering was covered 5.5 times, while the public offering was oversubscribed by 10.7 times. Domty raised a total of LE1.13bn ($59.9m) from the sales, with which it intends to add yoghurt and milk production to its cheese and juice lines. The deal was one of only two IPOs in the MENA region during the first quarter of 2016, which meant that Egypt started the year by retaining its status as a regional IPO generator.
Looking Ahead
There is no shortage of prospective candidates for offerings over the coming year. As of mid-2016 companies planning or in the process of undergoing a public issue included Raya Contact Centre, Smart Villages Development and Management Company, Wadi Group, Misr Italia, Al Ahly Sporting Club, Beta Egypt, Food Industries Holding Company and Rooya Group, among others. Adding to the sense of momentum is a significant policy shift on the part of the government, revealed in a January 2016 announcement by Alaa Youssef, spokesperson of the presidency. As a means to energise the EGX and the wider economy, the government is preparing to offer “parts of the capital of successful Egyptian companies and banks on the bourse.”
While details of the privatisation programme have yet to be revealed, the announcement is a significant one given the sizeable role that the government plays in the economy through its ownership of three of the nation’s largest banks – National Bank of Egypt, Banque du Caire and the United Bank of Egypt – as well as large swathes of the oil, construction and real estate sectors. The most recent listings of state companies on the EGX were in 2005, when shares of Telecom Egypt and downstream energy sector assets Sidi Kerir Petrochemicals and AMOC were floated. The concept of privatisation suffered reputational damage in the intervening years, and the government is likely to face challenges to its divestment of state assets. Nevertheless, the continued appetite for IPOs in the Egyptian market, along with the prospect of government-owned entities going to the bourse, means that Egypt is well positioned to maintain its position as a bright point of IPO activity in an otherwise sluggish MENA region.
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