By Prof dr m s s el namaki, Dean, School of Management, Victoria University, Switzerland
I – The problem
Going to market through an IPO, an Initial Public Offering, is one way of enhancing capital base and providing businesses with sought capital. The practice is, it goes without saying, common but drew great attention when the size and recognition of the corporations involved reached global dimensions. Agricultural Bank of China or ABC ($ 22.0 Billion), Industry and Construction Bank of China or ICBC ($ 19.1 Billion) , Facebook ($16.00 Billion) and General Motors ( $ 15.00 Billion) all belong to what we may term “global” IPO’s that broke many records (Reuter, 2015). Shares in those companies were, as a result, traded in an open market and were subjected to monitoring and control by assigned government and institutional agencies. Global IPO’s outcome did, in those and other cases, add low cost capital to the investment base, rewarded entrepreneurs for their entrepreneurial zeal, opened the door for many to acquire solid assets and, probably more importantly, allowed the corporations in question to explore new investment opportunities
Given those obvious advantages one may wonder whether the global IPO route could provide an answer to Egypt s investment capital market woes. And whether a global IPO for some of Egypt’s State business entities may provide an opportunity for capital asset enhancement and a solution to State enterprise underperformance.
The following articles explores this issue.
The article starts with an identification of the framework and distinct features of global IPOs. It, then, proceeds to answer the question: why Egypt? This is discussed in terms of need, process, candidates and possible outcome. . The article concludes with an assessment of the potential and the probable outcome of the process.
The article is novel in terms of contribution to Egypt’s capital market strategies and investment framework. It could provide a premise for policy decisions within the State enterprise as well as the investment promotion domains.
The article also draws the attention to global IPO’s as vehicles for capital market maturity in some emerging economies.
II – Why a global IPO?
A global IPO is an Initial Public Offering conducted across two or more nations within an international business framework. It fulfills, next to standard common IPO criteria, some or all of the following conditions:
- Floated within one or more foreign investment markets.
- Addresses a foreign investor segment.
- Managed by an internationally recognized underwriter or underwriters.
- Denominated in an internationally recognized reserve currency.
- Launched within a recognized international IPO market
- Supported by promotional material written for foreign investors
- Subject to regulatory frameworks of the country or market where it is launched.
As commonly advocated, IPOs deliver advantage in terms of low cost of capital, diversification of equity base, relative ease of investor reach, enhanced recognition of the launcher and, finally, better management performance . Global IPO provide the added advantage of a capital denominated into a global reserve currency, a scale that allows greater investment volume, a scope that would allow wider investor reach, an underwriting that enhances investor confidence , an exposure that increases player recognition and last but certainly not least, a malleable price range.
Strategic criteria dictate the choice of a location of the global IPO. As seen in recent global IPOs as Alibaba’s, a choice of a location is influenced by many issues including investment reach, ease of listing and price outlook. Cross listing belongs also to the possibilities. Listing in the USA, for example, brings with it certain advantages in terms of regulatory environment, US $ denomination and liquidity access. Criteria for listing could also differ for foreign listers from domestic ones. New York Stock Exchange, NYSE, for example, require foreign companies to abide by internal control requirements but excludes them from certain rules and regulations that apply to publicly listed US companies.
Shifting location preferences have led to a change in ranking of stock markets. The United States was prior to 2009, the leading issuer, by value, of domestic and global IPOs but China has taken over this place (Shanghai, Shenzhen and Hong Kong). Figure (1) features the picture in 2016 and how Hong Kong and Shanghai took the lead while New York and London were relegated to the third and seventh place respectively (Reuters, 2015).
Global IPO procedures are governed by different laws in different countries. In the United States, IPOs are regulated by the United States Securities and Exchange Commission under the Securities Act of 1933. In the United Kingdom, the UK Listing Authority reviews and approves prospectuses and operates the listing regime. China operates with a registration-based IPO system that puts the ultimate offering decision in the hands of the Public Offering Review Committee under the CSRC.
Record subscriptions were achieved in many recent or fairly recent IPOs. Alibaba went public on September, 2014 and ended up with a total IPO of $25 billion. ABC went public on July, 2010 and achieved a near $22 billion. Number of global IPOs fluctuates, however, according to economic and political events. Volume and value of global IPO’s has fallen, for instance, on a global scale by about a third in 2016 compared to the same period of 2015. Turbulence, both political and economic, has undermined the attractiveness of new listings and discouraged new equity investor’s entry. (Financial Times, Oct 2016). UK decline amounted to 60 per cent as companies shied away from coming to the market before the EU referendum. Europe and the US demonstrated a similar decline with volumes contracting by close to 45 per cent.
Figure – Global IPO markets 2017
|Market share||Number of issues|
Source: Reuter, Global equity capital markets review, 2015.
III – Why Egypt?
State of the capital market
Egypt’s capital market is modest in scale and scope. Egypt’s stock market or Exchange (EGX) had, in April 2016, 261 companies listed with a market capitalization of about LE 500 billion (about $ 70 Million at pre devaluation exchange rates). This is modest compared to other emerging economies as, for example, Thailand (584 listed companies with a combined market capitalization of 15,030 billion baht or 460 billion USD in 2015). FDI inflow into Egypt averaged 2.35 USD Billion between 2002 and 2016 but amounted to $ 6.885 Billion in 2015 (compared to $ 10.844 Billion for Thailand $ 11.8 Billion for Vietnam in the same year (IMF, 2016). Total investment, measured as a percentage of gross capital formation in GDP, was 14.2 percent in 2015, compared to 19.5 percent in 2010. The country’s benchmark index, the EGX 30 has been erratic with a downward trend all through 2016. Egypt’s June 2015 national budget deficit amounted to 11.5% of GDP.
Laws conducive to foreign investment flows do not seem to have had a significant long term stimulatory impact on capital market scale and scope. Laws as the Capital Market Law granting foreigners full access to capital markets and authorizing the establishment of Egyptian and foreign companies to provide underwriting , brokerage, mutual funds management, security transactions, and venture capital are all there but their impact seems to be mild if compared to other emerging economies . A Supreme Council for Investment, chaired by the President, was recently established in order to supervise state’s investment policies.
Declared intentions to go market have been repeatedly made but actual fulfillment failed to materialize. Yet this seems to be the only effective road to capital market enhancement and capital asset growth stimulation.
What does the process imply?
The conduct of a global IPO for a State asset in Egypt will present the decision makers with an opportunity as much as a delicate and complex problem. The idea is frowned upon by many and policy makers will have to do some serious selling to the non-believers. They may have to deal with the misgivings of past privatizations and, possibly, go a long way explaining the difference between the two. Global IPO candidates in Egypt could include nationally treasured assets and the debate could revive strong feelings, let alone fears, of a repeat e of yesteryear events. One has only to observe the ongoing domestic and international political currents surrounding KSA contemplated Aramco IPO to feel the intricacy of the process. Similar processes, elsewhere, opened the door for delicate probe of sovereign rights, foreign political intervention, government loss of control and what constitutes a genuine capital market gain.
Identifying global IPO candidates will also provide a challenge given vested interests and power struggles within the administration. This may explain objections expressed by the Ministry of Public Enterprise, who controls 125 State enterprises, against the IPO-like views expressed by the Ministry of Investment. The specter was raised by the ministry of investment of selling stakes in a number of government companies as a mean of increasing investment, energizing the stock market and help plugging the budget deficit (The National, June 1, 2016). Yet those views were not shared by the Ministry of Public Enterprise.
Objections aside, one may consider several industries, and strategic business units (SBUs) located within those industries, appropriate targets for foreign investment. They could also prove to be conducive to the ultimate goal of enhancing Egypt’s capital market and investment. Those could include:
- The oil and gas industry
- The air travel industry
- The Suez economic cluster
- Telecommunication industry
- The banking industry
- The pharmaceutical industry
Each of those industries represent a cluster with a multiple of strategic business units (SBU) located within. Suez economic cluster could, for example, include a management SBU, a physical asset SBU, a supply chain SBU and a transportation SBU. The oil and gas industry cluster could include extraction SBU and a marketing SBU. The air travel industry cluster could include a carrier SBU and a ground services SBU. Each and every SBU could represent a target for a global IPO.
- Preparatory measures and actual launch.
Seldom is a business unit ready for a global IPO without a measure of restructuring. Egyptian State assets may require even more restructuring than others given their history and the evolving State environment. The process is elaborate and requires familiarity with foreign investor expectations and the very process of marketing equity within a foreign investment market. Issues demanding immediate attention would include:
- Capital structure especially liquidity, debt and retained earnings.
- Management team performance and possible shifts within a restructured ownership profile.
- Strategies pursued in the past and strategies contemplated for the future.
- State of plant technology and need for technology shift or upgrade.
- Company and country credit rating both historical and perspective.
This type of restructuring requires careful planning and tight implementation. Actual launch of the global IPO could become dependent on the completion of the reconfiguration process.
The final launch, on the other hand, would involve the selection of a recognized global investment bank of syndicate of banks as Morgan Stanley (MS) and JP Morgan (JPM) in the United States, who would undertake to approach investors and allocate (sell) the shares to retail clients or institutional investors or both. A critical element here is the price setting as well as the promotional effort.
IV – What could Egypt gain?
Egypt is bound to achieve considerable gains from a global IPO or IPOs within the framework described above. Those IPO candidates represent considerable volume of assets and a strong capital potential. Egypt s gain could, in the final analysis, depend on the ultimate market value of the business unit, the slice that Egyptian administration wants to offer to international investors, investor’s interest and the way the price setting is managed. An independent analysis is to be conducted in order to establish the possible volume of this gain.
V – Summary and conclusions
Going to market through an IPO, an Initial Public Offering, is one way of enhancing capital base and providing businesses with sought capital. The practice is, it goes without saying, common but drew great attention when the size and recognition of the corporations involved reached global dimensions. Agricultural Bank of China or ABC ($ 22.0 Billion), Industry and Construction Bank of China or ICBC ($ 19.1 Billion) , Facebook ($16.00 Billion) and General Motors ( $ 15.00 Billion) all belong to what we may term “global” IPO’s that broke many records. . Global IPO’s outcome did, in those and other cases, add low cost capital to the investment base, rewarded entrepreneurs for their entrepreneurial zeal, opened the door for many to acquire solid assets and, probably more importantly, allowed the corporations in question to explore new investment opportunities
Given those obvious advantages one may wonder whether the global IPO route could provide an answer to Egypt s investment capital needs. And whether a global IPO for some of Egypt s existing business entities may provide an opportunity and a solution. Those could include strategic business units within the Suez Canal entity, the banking industry, the telecommunication industry, the pharmaceutical industry and last but not least, the air transportation industry.
The article starts with an identification of the framework and distinct features of global IPOs. It, then, proceeds to answer the question: why Egypt? This is discussed in terms of need, process, candidates and possible outcome.
The article is novel in terms of contribution to Egypt’s capital market strategies and investment framework.
- Global IPOs fall by a third, amid volatility and uncertainty, Financial Times, Oct 2016
- Stock Exchange of Thailand, 15 February 2012, Management Discussion and Analysis, 2011.
- Global equity capital markets review,, Reuters, 2015
- Egypt plans to sell shares in state-owned companies, Reuters, Jan 19, 2016
- Top 10 Largest Global IPOs Of All Time |, Investopediahttp://www.investopedia.com/articles/investing/011215/top-10-largest-global-ipos-all-time.asp#ixzz4baxYLBM9
- State-owned firms of Egypt are not going to market, The National, June 1, 2016
About the author
Prof dr m s s el namaki is the Dean, School of Management at Victoria University, Switzerland. Previously, he was Dean, Maastricht School of Management, MSM, And The Netherlands. He can be reached at Dr.firstname.lastname@example.org.