Euromoney: What Zain Bahrain’s Modest Debut Says About Bahrain

Euromoney, November 2014

These are supposed to be good times for Gulf IPOs. In October Emaar Malls raised $1.58 billion in a Dubai float that booked $43 billion of orders and shot up as much as 21% on its first day of trading. Emaar is also planning to list its hospitality arm, and then an Egyptian development subsidiary, Emaar Misr. National Commercial Bank in Saudi Arabia is amid a $6 billion offering which is likely to be the biggest IPO worldwide all year bar Alibaba. And the pipeline is filling for new issues from across the Middle East.

So what happened to Zain Bahrain? Why did the growing momentum in Gulf equity markets stop at the King Fahd Causeway?

Kuwait-based telco Zain set about a listing of its Bahraini arm in September, the first IPO in the country since 2010. It set about listing 15% of the company at an offer price of BHD0.19 per share, to raise BD9.1 million, or US$24.1 million.

It sounds a modest amount, but the deal swiftly ran in to trouble. The initial offer period, from September 2 to 16, was extended for two weeks, but to little effect. In early October, Zain Bahrain announced the subscription results and allotment of shares: just 34.8% of the shares went to retail or institutional subscribers in the sale, well under US$10 million, leaving the underwriter carrying 65.2% of the deal. The shares were allotted on October 9.

So what went wrong? Talk in the region raises a number of theories.

One is that a sole underwriter, Gulf International Bank, may not have been a good idea for what was, despite its size, something of a landmark: the first deal for four years from a country that has been beset with uncharacteristic unrest. Only one other bank, NBK Capital (through Watani Investment Company), appeared on the deal, and that was as a co-manager, joint financial advisor and joint books, but with no underwriting responsibility.

But it’s more likely that the arranging banks weren’t the problem, so much as Bahrain itself. The country is a shadow of its former self, when it was an established entrepot for foreign enterprises seeking to do business with Saudi Arabia and Kuwait. Unrest hit the country’s reputation for peaceful and efficient stability hard, and among other things, liquidity in the stock exchange has never recovered. Year to date, Bahrain has the lowest level of trading activity in the Gulf. This is a key reason IPOs have not materialised since Bahrain’s security situation declined; nobody seems to want to buy or trade them. Deutsche Bank’s periodical report on MENA equity flows no longer even mentions Bahrain – yet covers Oman.

Zain’s management are not stupid – it has become a regional telecommunications success story – so why would they do such a thing, knowing the difficulty the issue would likely face? Euromoney understands that Zain was obliged to list part of its operations in Bahrain as a condition to continue to operate the business in the country, under the terms of a long-standing licence agreement. It first attempted the deal in 2008 before being hit by the global financial crisis, and would probably have waited indefinitely had it not been ordered to complete the sale by the end of 2013 by Bahrain’s Telecommunication Regulatory Authority (a deadline it missed anyway).

It won’t matter particularly to Zain, which said it will use the money to fund upgrades of its network infrastructure and expand its 4G offering in Bahrain; the proceeds are inconsequential compared to the Zain group’s overall finances. “You shouldn’t read too much into the fact that they chose to list in Bahrain,” says one regional capital markets banker. “They did so because they had to in order to keep their business. Otherwise, there’s just no reason to have contemplated it.” In which case, the question becomes: did GIB realize it could get saddled with two thirds of the deal when it took on the mandate? Neither GIB nor Zain Bahrain responded to written queries from Euromoney.

It’s a sign of the times that Zain is likely to raise perhaps 40 times as much when it lists its Iraqi unit, which is expected to raise over $1 billion when the political and security climate permits. And the struggles of Zain Bahrain’s listing highlight the sense that Bahrain has become irretrievably marginalised through the Arab spring. Its role as a regional financial services hub has been undermined by Dubai and Qatar, it has none of the sovereign wealth attraction of Kuwait or Abu Dhabi (or Qatar again, for that matter), and its role as an entry point for Saudi Arabia is likely to be diluted by plans for that country’s capital markets to open up to foreign access. Gulf markets are polarizing, with reasons for optimism in Saudi and newly MSCI-minted Qatar and the UAE, but little sense of momentum elsewhere. Economic growth in Bahrain is expected to slow to around 3% this year, from 5.5% in 2013, according to Rabobank; the financial sector grew by only 1.5% year on year in 2013, the bank says, and may have become still more sluggish since.

On the plus side, it still has hydrocarbons from its Abu Saafa oilfield, a respected central bank offering sound monetary policy, and its status as the Middle East’s leading voice for Islamic finance, hosting key institutions such as the Accounting and Auditing Organization for Islamic Financial Institutions. So the country’s in decent enough shape to get by, but that’s not enough to prompt any revival in the country’s capital markets. All the financial activity is happening elsewhere.