Middle East unlikely to 'go public' in 2012

The Facebook listing is likely to be a rare bright spot in what is otherwise expected to be another gloomy year for IPOs and mergers and acquisitions

Saudi Arabia, the biggest and most stable among Gulf economies, will be the brightest spot for initial public offerings this year. Above, a Saudi trader monitors stock movements in Riyadh. Hassan AmmaShow more

Put together by college friends in the hallowed halls of Harvard University just eight years ago, Facebook has become a global phenomenon.

It now boasts more than 800 million users and had revenue of US$4.27 billion (Dh15.68bn) in 2011.

This year the social network site will grab more headlines if, as expected, it goes ahead with its plan to float on the Nasdaq. The initial public offering (IPO) will probably be worth about $100bn.

But the Facebook IPO is likely to be a rare highlight in what is otherwise predicted to be another gloomy year for IPOs and mergers and acquisitions (M&A) in the region and globally.

"The outlook remains heavily dependent upon a stabilisation in Europe, accelerated growth in the US and improved investor confidence in Asia," says Jeff Bunder, a global private-equity leader at the advisory services company Ernst & Young.

Last year, global IPO fund-raising fell by 45 per cent to $155.8bn, according to Ernst & Young, while M&A activity dropped 14 per cent in the final quarter. So what will this year bring? Here, The National asks experts for their views.

How is IPO activity this year likely to compare with last year?

Phil Gandier, the transaction advisory services leader for the Middle East and North Africa at Ernst & Young:

Last year was a really bad one, and I don't expect the first half of 2012 to be materially better. It will start to improve later on, but it won't go back to the glory days of 2007 to 2008. The one bright spot will be Saudi Arabia. We still had some lingering effects from the financial crisis last year. As we started to recover, the Arab Spring hit, and investors don't like uncertainty and not being able to gauge the future. So, there were lots of cases where investors cancelled the transaction as they were uncertain about the outlook, and the euro-zone problems didn't help.

Why will Saudi Arabia be a bright spot?

Mr Gandier: It's the biggest and most stable economy and it is expected to do well [this] year. The government has announced a big expansionary budget, which will help, and a lot of companies here have put off going public until conditions improve. Now, the stock markets are recovering pretty well. People are positive on Saudi Arabia as there's a large population and growing middle class that supports consumer products and health care. Construction is another value chain that should do well as the government has a construction programme it is pushing ahead with. The UAE will lag behind Saudi Arabia. Abu Dhabi has a spending slowdown and investors are increasingly looking to the large population of Saudi.

What is the attraction of going public for a company?

Mr Gandier: Across the region there's a lot of good, solid companies, and many will eventually need to transform for either succession or financial reasons. There are many companies that want to go public. But unlike the rest of the world, a lot of them are family-owned and are listing not for financial reasons but for institutional concerns. As a result, they have been putting it on the back burner until conditions improve. Firms are starting to realise that as a public company you are more attractive for investors and talent. We have a growing list of candidates, but they don't need to do it here. That's why IPO activity has not dropped off so much elsewhere, as firms in other parts of the world still need financing.

What is the outlook for M&A activity in the region over the coming year?

Jon Breach, the chief executive in the Middle East for BDO Corporate Finance:

A key driver of M&A activity regionally will be the return of banks to the market. The constraints on M&A activity over the last two or three years have been linked to the reduction in availability of bank finance. International banks have been very important in providing finance for the transactions, and clearly they have had issues of their own to focus on - globally, not just regionally. They are focusing on their home markets, so there's an opportunity for regional banks to step into that gap. The other key driver is the valuation expectation. It has taken some time for vendors to adjust their valuations on any transaction to market levels. Companies seeking to do M&A activity need to position themselves to be attractive to finance providers. That means making sure they have robust financial information and making sure the business is transparent.

Which hot spots in terms of sectors are likely to be the most attractive?

Mr Breach: The consumer sector is clearly interesting, driven by the demographics in the region, expanding populations, availability of disposable incomes. If you are buying a brand, there's some certainty about what you are getting. The other is health care. Investment in healthcare providers - hospitals, clinics, diagnostic laboratories and pharmaceuticals - [is] fuelled by the needs of the growing population. Historically, there's been a lot of health care provided for people here from outside the region, so there's a strong business rationale for building facilities here such as specialist hospitals. Health care will continue to be an interesting sector for private equity and institutional investors.

What impact will regional geopolitical issues have on activity?

Mr Breach: International banks will approach the region with caution and will focus more on their home markets. So that's why consumer and health care, which to a large degree are protected from the geopolitical situation, make for attractive investment destinations. Regional private-equity funds and family groups have a closer understanding of the political dynamics and are keen to invest. I would see an increased proportion of investment activity coming from groups within the region.