Regional IPOs, the ‘cannibal’ factor and irrational exuberance

Reuters/Marcus Brandt/DPA

On March 13 shares in Adnoc Gas will debut on the Abu Dhabi Securities Exchange in an initial public offering described by one expert as “the biggest and most strategic” IPO the UAE has undertaken in recent years.

In what is becoming the norm for Gulf IPOs, the issuer recently upsized the number of shares on offer on the back of heavy demand from investors wanting a slice of the booming markets and economies of the region.

With a valuation above $50 billion, just the gas arm of Abu Dhabi’s energy flagship, on its own, will be worth as much as Occidental of the US, one of the best-performing shares in US markets over the past year. How much could the UAE capital pull in if it floated its much bigger oil business?

• Adnoc Gas completes record-breaking $2.5bn ADX IPO
• Adnoc to up stake sale in gas business IPO to 5%
• Saudi Arabia has 23 IPOs in the pipeline as it builds on busy year

The Adnoc Gas listing underlines the extraordinary strength of the regional IPO market. Last year, as investors in the rest of the world kept their hands in their pockets for new offers, the Mena region enjoyed its best listings year ever, with 51 IPOs raising $22 billion of new money, a 143 percent rise.

Although there was a surge in new listings business across the region, by far the lion’s share were in Saudi Arabia and the UAE – the biggest and most sophisticated of the Middle East markets.

And that trend is set to accelerate. At recent investor forums in Riyadh, Abu Dhabi and Dubai, market professionals forecast around 45 IPOs in those three markets, split fairly evenly between the kingdom and the Emirates.

But sceptics are questioning whether the IPO boom will run out of steam. Some of the new stocks from last year have struggled to match their IPO price.

“It can’t last, so get in while you can,” was the recent reaction of one investment professional.

Whether the new listings market falls victim to “irrational exuberance” is a valid question, the answer to which depends largely on the outlook for Gulf oil markets, and regional economies.

Most experts think global oil markets – a key determinant for investor sentiment across the region – are likely to run at current relatively high levels for the next six months, after which increased demand could lead to upside pressure on crude.

Economic growth rates in Saudi Arabia and the UAE this year will not match the stellar performances of 2022, but will still be among the world’s healthiest.

Geopolitical stress – always a relevant factor in the region – has the potential to throw all commercial and economic calculations out of kilter, of course.

Competition or collaboration?

A more intriguing question is whether there is enough IPO business to go round, or whether the big three – the Saudi Tadawul, Dubai Financial Market and Abu Dhabi Securities Exchange – will end up cannibalising each other in their efforts to attract more and more listings.

Officials at these stock exchanges do not like to think of themselves in competition with one another, however conveniently that narrative suits some media commentators.

“They like to think we are at each others’ throats, but that is far from the truth,” one senior Emirati markets policymaker recently told me. He went on the point out the unique characteristics of Saudi and UAE markets that made it unlikely they could compete with each other.

Saudi Arabia is much bigger than the two UAE markets combined, in terms of market capitalisation, liquidity, number of stocks traded, and diversity of constituent companies. It is more likely to attract international emerging markets portfolio funds to most IPOs – though a jewel like Adnoc Gas will certainly have big foreign appeal.

The nature of the IPOs so far also shows a difference of investment approach that argues against fungibility between Saudi and UAE markets. Most of the listings in Dubai and Abu Dhabi have been of government-related entities, while in Saudi, private sector and family businesses make up a far higher proportion.

So the notion of “IPO wars” breaking out between the kingdom and the Emirates seems far-fetched.

In fact, the trend seems to be the opposite. Last year Americana, the foods and restaurants brands business, became the first company with a dual listing on the Abu Dhabi and Riyadh markets, and more could follow.

Frank Kane is a communications consultant focused on Saudi Arabia and the UAE