Scan the mainstream western media for stories about the Middle East and it’s nigh on impossible to find coverage on anything but the fragile Arab-Israeli peace process. But in the world of international equities an entirely different story is unfolding: one of growth, global investment and global depositary receipts.
While the regional economy has picked itself up from past troubles, the local capital markets have largely failed to keep pace. According to Gamal Moharam, chief representative of the Bank of New York in Cairo, many large companies cannot finance their growth plans through local markets. ‘More foreign investment is needed in the emerging markets and depositary receipts are the best vehicle for companies from this region,’ he opines.
After a painfully lean 1999, when poor local capital market performance slowed DR issues, the market is set to flourish, says Camille Abousleiman, partner at international law firm Dewey Ballantine. ‘Almost every country in this region has been liberalizing and privatizing. This has lead to a real boom in GDRs in the Middle East,’ he says. The Bank of New York predicts that new DR issues in the region will reach the $1 bn mark this year.
There are currently a total of 31 Middle Eastern depositary receipt programs, with the majority listed on the London Stock Exchange. The bulk are level one GDRs, with Egyptian and Turkish companies providing the largest number of issuers. Companies from the banking, insurance and finance sectors comprise the majority of issues, but according to Moharam, this will change as government privatization programs get into full swing. ‘The market will broaden,’ he says. ‘I expect the privatized electricity and telecoms companies to become more involved.’ It appears that in common with equity markets around the world, telecoms companies are leading capital market growth.
Broader base
One such company is Qatar Telecom, which saw the first stage of its privatization process completed in late 1998 and issued a rule 144 GDR through the Bank of New York on the London Stock Exchange in May 1999. The decision was prompted by a need to broaden Qatar Telecom’s international shareholder base and develop more international partnerships, explains Waleed Al-Sayed, public and investor relations manager.
He heads up one of the few investor relations departments in the Gulf region, with his merged PR/IR facility employing 15 people from its base in Doha, Qatar.
Since joining the company in August last year Al-Sayed has gone on the roadshow trail, developed the company web site, established a regular newsletter and kept in frequent contact with key investors. But one problem he has found difficult to overcome has been challenging established western perceptions of the Middle East and the Gulf in particular. ‘It is quite difficult to gain proper recognition and develop a good understanding in the market when you operate in a small, less well-known nation like Qatar,’ he says.
Visibility, it seems, is a problem for many companies operating in the small Sultanates and Emirates of the Middle East. This is less of a problem in Egypt, says Sahar El-Sallab, head of investor relations at Cairo-based Commercial International Bank (CIB). ‘Egypt is much better known than other countries,’ she says, ‘although there is a general lack of knowledge of the wider economic picture,’ she adds. Shawkat Tawfik, business development manager at Egyptian chemicals giant Pachin, sympathizes with the problems experienced by Qatar Telecom. ‘The success of our GDR program is very sensitive to the Egyptian national situation,’ he says. He expects more companies in the Middle East to launch their own GDRs, though he concedes that much depends on government policy toward both the capital markets and privatization.
Repeat pattern
This pattern is repeated throughout the region. The success of depositary receipt programs can depend upon external factors beyond the control of the average investor relations officer or chief executive. State-led privatizations are credited with driving the growth in DRs, but this progress could easily be stymied by renewed political tensions. All around the world, regulators are preaching the gospel of good corporate governance. But in the Middle East, good political and economic governance by the politicians can be as much the key to a healthy share price as decisions made in the boardroom.
Take the Banque Internationale Arabe de Tunisie (Biat). According to CFO Abderrazek Lahiani, Tunisia is well perceived by the global financial community. ‘The fact that we are a well-governed country definitely helped our global depositary receipt issue, as country perception is key,’ he suggests.
Biat’s GDR was launched in February 1998 as the first Tunisian depositary receipt program, though meeting the listing requirements proved to be a challenge, Lahiani explains. Under existing GDR regulations, Biat’s accounts were only required to meet local laws, but Lahiani found that the company needed to reach international standards. ‘It had to be done so that investors in the US and Europe could fully understand and support the issue,’ he explains.
This problem is one that is recognized by Gamal Moharam: ‘Many firms in this region need to do a lot of work to reach international accounting standards before they issue GDRs,’ he says.
But not all new listings encounter these problems. Pachin enjoyed a fairly smooth passage onto the London Stock Exchange, claims Tawfik. ‘We obeyed the exchange’s rules and had no problems,’ he says. But for Abousleiman, the transition from being a family-run firm to an internationally-listed public company is a pretty major one. ‘Companies must be well organized before they start a depositary program,’ he adds.
And being well organized includes developing a comprehensive investor relations program to support the depositary receipt issue. A cautionary tale is told by Sahar El-Sallab of CIB Bank. Its GDR program was the first by an Egyptian company, launched in 1996. Despite staging a successful roadshow campaign, the bank saw its GDR price fall. After consulting with analysts in London, she was told the bank had failed to back up the issue with sufficient investor relations and after-sales activities. With boardroom backing, El-Sallab set about boosting CIB’s investor relations program and developing stronger ties with both investors and analysts. Site visits were organized, the web site was upgraded and transparency at the bank was improved.
The results were startling. Analysts improved their rating of CIB and the depositary receipt price rose by 70 percent in a year. ‘Investor relations in the Arab nations is rare,’ El-Sallab concludes, ‘and people in the west respond to investor relations much better than those in the Middle East.’ El-Sallab expects investor relations to grow as privatizations and deregulation in the economies of the Middle East continue.
See the light
Gamal Moharam believes that some Middle Eastern companies don’t recognize the importance of an investor relations program when issuing new equity: ‘Investor relations is often seen as a junior role,’ he adds. But some companies in the region have developed very active investor relations programs, not least Qatar Telecom, where Waleed Al-Sayed is countering the problem of visibility and poor recognition by intensifying the company’s investor relations activities. He has already brought analysts to Qatar on site visits and will be increasing the number of roadshows and one-to-one meetings, all in an effort to broaden the company’s shareholder base.
For Abderrazek Lahiani of Biat, the greatest impact the GDR program has made has been to improve corporate governance at the Tunisian bank. ‘Before we did the GDR, transparency at this company was absent. This exercise has taught the bank that transparency and good communications with investors support both the share price and the bank more widely,’ he enthuses. He remarks that most of the benefits gained from the GDR program have been intangible, for Biat has seen little liquidity advantage. Despite this, Lahiani remains positive: ‘We are happy that we have done a GDR program.’
Liquidity has also been a problem for Qatar Telecom, as Al-Sayed concedes that his company’s GDR has not yet performed up to expectations. ‘We have a large number of shares and there is only a small market,’ he says. These headaches seem to be little deterrent to companies that are considering launching a global depositary receipt of their own, such as Oman Cement. Chairman Qahtan Al-Busiadi believes that issuing depositary receipts will allow the company to break free from its limited domestic market.
The firm is currently 63 percent government owned, although this figure is likely to fall significantly as the Oman government continues its privatization program. According to Al-Busiadi, education of both investors and companies is key to generating further depositary receipt growth in the region. ‘A need exists to educate the local market and local companies about the advantages of depositary receipts,’ he says.
Better education may be needed to broaden the appeal of depositary receipts for more sectors. Meanwhile, greater guidance would help to prepare issuers for listing and maintain investor confidence and share price through better corporate governance and better investor relations activities.
No regrets
When measured against raw financial data, depositary receipts in the Middle East may not appear to be the outstanding success story that many companies would hope for. Yet, of the companies that have taken the plunge, few seem to ultimately regret it. The benefits often come not in the form of a large liquidity boost or improved share price. Rather the process has helped companies prepare themselves for the demands of the global economy. Interaction with markets and investors in Europe and the US has brought the investor relations and corporate governance efforts of some firms up to western standards.
Those companies which have established depositary receipt programs could well become torchbearers for a new generation of Middle Eastern enterprises that are ready to establish themselves outside of the confines of their local capital markets. As the region emerges from past troubles, more and more ambitious companies will seek to issue depositary receipts.
The question is whether western investors will have the appetite for more DR issuance from the region. Maintaining liquidity and attracting investors may prove to be the greatest challenge that lies ahead for issuers from the Middle East.
