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Would a global IPO enhance Egypt’s investment capitalbase?9 HOURS AGO

BUSINESS WORLD (HTTP://INBUSINESS.AE/CATEGORY/BUSINESS-WORLD/), FEATURED (HTTP://INBUSINESS.AE/CATEGORY/FEATURED/)

 

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 identi�cation 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

ful�lls, 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, diversi�cation of equity base, relative ease of

investor reach,  enhanced recognition of the launcher  and, �nally, 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 con�dence , 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 in�uenced 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

(https://www.revolvy.com/topic/Shanghai%20Stock%20Exchange&item_type=topic), Shenzhen

(https://www.revolvy.com/topic/Shenzhen%20Stock%20Exchange&item_type=topic) and Hong Kong

(https://www.revolvy.com/topic/Hong%20Kong%20Stock%20Exchange&item_type=topic)). 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

(https://www.revolvy.com/topic/United%20States%20Securities%20and%20Exchange%20Commission&item_type=topic) under

the Securities Act of 1933 (https://www.revolvy.com/topic/Securities%20Act%20of%201933&item_type=topic).  In the United

Kingdom, the UK Listing Authority (https://www.revolvy.com/topic/UK%20Listing%20Authority&item_type=topic) 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 �uctuates,

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

2016 proceeds

$ Billion

 

Market shareNumber ofissues

HK 24.35 18 71

Shanghai 16.01 12 110

New York 11.87 8.8 33

Nasdaq 7.45 5.5 74

Tokyo 5.91 4.4 8

Copenhagen 5.90 4.4 3

London 5.72 4.3 15

Frankfort 5.46 4.1 7

Australia 5.17 3.8 66

Shenzhen 3.99 3.0 81

Source: Reuter, Global equity capital markets review, 2015.

III – Why Egypt?

State of the capital market

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

(https://en.wikipedia.org/wiki/Market_capitalization) of 15,030 billion baht (https://en.wikipedia.org/wiki/Thai_baht) or 460

billion USD in 2015).    FDI in�ow 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

de�cit amounted to 11.5% of GDP.

 

Laws conducive to foreign investment �ows do not seem to have had a signi�cant 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 ful�llment 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 de�cit (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 pro�le.

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 recon�guration process.

The �nal launch,  on the other hand,  would involve the selection of a recognized global investment bank of syndicate of banks as

Morgan Stanley (https://en.wikipedia.org/wiki/Morgan_Stanley) (MS) and JP Morgan

(https://en.wikipedia.org/wiki/JPMorgan_Chase) (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 �nal 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 identi�cation 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.

 

 

 

 

References

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(http://www.set.or.th/en/about/annual/昇les/MD_A_En2011.pdf).

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 (http://www.investopedia.com/articles/investing/011215/top-10-largest-global-ipos-all-time.asp#ixzz4baxYLBM9)

State-owned 昇rms of Egypt are not going to market, The National, June 1, 2016

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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.el.namaki@gmail.com.

 

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