Gulf IPOs: what companies must do to go public

• Build a ‘compelling narrative’
• Clear business plan in place
• Ensure management team is strong

Owners of private Gulf companies mulling going public should ensure their businesses have a compelling narrative to tell investors and clear separation between shareholders and management, according to the chief financial officer of Dubai-based retailer Spinneys.

In May the supermarket chain became the first company registered in the offshore Dubai International Finance Centre (DIFC) to complete an initial public offering and list on the onshore Dubai Financial Market.

Spinneys sold 900 million shares, or 25 percent of its stock, at AED1.53 per share, raising AED1.38 billion ($375 million). Dubai’s Albwardy Investment through subsidiary Al Seer Group owns the remaining 75 percent.

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“Before investing in an IPO, prospective institutional investors would expect the company’s management to present its equity story and give guidance on the business plan for the next five years so they can make an informed decision,” says Mukesh Agarwal, who became Spinneys’ CFO last September.

Previously Agarwal was a partner at EY, working as an auditor for nearly two decades.

Deciding whether a company’s principal narrative is as a growth or dividend stock is crucial, he says.

Spinneys

“Spinneys is a growth story – we’re expanding our store network and entering Saudi Arabia,” says Agarwal.

“That required a lot of investor education, because the focus generally among regional investors is on dividend yield. We need to emphasise the total return to investors, highlighting the importance of balancing growth with dividend payouts.”

Many Gulf family conglomerates are reportedly considering IPOs. Listing the entire holding company would be overly complex and a tough sell to investors, so such groups should identify a particular unit “that is profitable and has a clear strategy and competitive business model which can be presented to investors”, says Agarwal.

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“Having a business that operates as a standalone company independent of the family conglomerate really enhances corporate governance,” he says.

“Within the family the shareholders can change as new generations inherit stakes, but the company continues regardless.”

Prospective IPO investors also want an “enhanced separation” between ownership and management of the company.

“Owners should not be directly involved in the day-to-day running of the company, rather there should be a board also consisting of independent directors to oversee the functioning of management,” Agarwal says.

The investor’s view

Doha’s Al Rayan Investment subscribes to some Gulf flotations.

“What we look for in an IPO is not dissimilar to a company already listed – but a company yet to go public will obviously not have a long earnings track record,” says Akber Khan, Al Rayan Investment’s acting chief executive officer.

“As a medium-term investor, management quality and corporate governance are absolutely critical for us.”

As part of its investment decision-making process, Khan’s team examines many aspects.

These include the macroeconomic outlook of the geographies in which a company operates, potential exposure to volatile currencies and the competitive and regulatory environment of sectors in which it has businesses.

Al Rayan Investment

“We spend considerable time on understanding the sources and drivers of a company’s expected revenues,” says Khan.

“Beyond that would be questions on the supply chain and cost base. How much potential volatility is there in future pricing and input costs? What are the expansion plans and growth strategies? Is this based on revenue, or through margin expansion? How realistic are these plans?”

Further considerations include the strength of a company’s balance sheet, its indebtedness, expected cash generation and dividend policy.

“There are numerous factors which help us determine if an IPO is attractive, and some relate to the stock market environment itself, not just the company,” adds Khan.

“In terms of deal breakers, the most obvious potential one is the issue price.”