Sunday, October 02, 2005

UAE needs clear and efficient methods to launch IPOs :: GN

Tens of thousands of Saudis with no bank accounts in the UAE approached exchange houses and banks for cheques or drafts in the last few days to subscribe to shares in Dana Gas.

"I don't think exchange houses can issue cheques or drafts based on existing rules but many exchange houses have merrily issued them regardless, accepting cash from GCC nationals and charging an exorbitant fee," an Abu Dhabi-based financial analyst said.

"We know some banks have made enormous gains issuing up to 1,000 cheques per day and charging anything between Dh300 and Dh1,000 for one cheque or draft. Saudi nationals particularly were willing to pay any amount to get a cheque and pay for the shares of Dana Gas."

Bankers were divided on whether it was proper to accept cheques issued by exchange houses.
. . .
Mass confusion also surrounded exchange houses and the UAE Exchange Centre's branches in Deira and Bur Dubai found it necessary to call the police to control the crowds.

"It is high time some clear rules and regulations are put in place for IPOs. Otherwise, the mad frenzy of thousands queuing up and the ensuing confusion will continue. What the UAE needs is clear, modern and efficient methods of launching IPOs," said the analyst.
On the small point of raising the price for a check, what's the problem? The buyer preferred that to the alternative of queuing. Instead of the inefficient waste of time in line we have the check issuer gaining some of the return that would have gone to Dana if it had charged more for the IPO. The interesting question is why did Dana set the IPO price so much lower than buyers were willing to pay?

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Blogger waterboy said...

I'm being dense here, but I don't follow your pricing argument.

market cap. = no of shares x price of shares

Currently IPOs must be launched at Dh1 per share according to the company law, so Dana has issued a volume of shares commensurate with its self-valuation - 2.06 billion shares, to be precise. And that represents only 34.33% of the company's capital, so they actually value themselves at closer to Dh6bn, which is, what, US$1.6bn?

For a gas transport company that was only incorporated at the beginning of September and whose anchor contract is rumoured to be insecure, that seems to be a very bullish valuation already.

From the perspective of investors, does it really make any difference whether they buy 1 share worth Dh7500 or 7500 shares worth Dh1? To my mind you're still gambling Dh7500 on a company, and if you think you can make money off the gamble you're going to invest the Dh7500 whatever form that investment takes.

I'm beginning to think that the main thing feeding the 'riot factor' is the pro rata mechanism for allocating shares. There is an incentive for investors to leverage themselves to the limit of their abilities because their ultimate share allocation will be determined by how much money they were willing to put up front. They're essentially paying a premium for the right to get the shares in the first place, rather than paying what they think is the actual market value of the shares. And the reason that they are willing to pay that premium is because they anticipate that, with markets as febrile as they are and of course the 'riot factor', the value of the share will increase significantly on the first day of trading.

How much money they make off the IPO is the difference between how high the price rises on the first day and how much their leveraging cost to actually get the shares in the first place.

Look at the share price of Taqa - it spiked at Dh8 on the first day of trading and barring one brief rally has fallen pretty constantly. It's now trading at just over Dh6. That, to me, looks like quite a few people cashed out during the first days of trading.

What the prices that we're left with after the cashing-out period reflect I don't know. Taqa is different because it's taking on existing business units that do actually generate cash, so it's possible to extrapolate future earning potential by looking at the assets its acquiring. Though the 6x increase in value doesn't really mesh with a conservative, slow'n'steady growth uts company to my mind.

As for Dana and Aabar - with no earnings with which to formulate a p/e ratio, vague and opaque IPO prospectuses and very little activity by which to judge their future strategies, any gamble on their future prospects is pretty much a gamble on the names of the people involved in the company. That's not a basis I'd be prepared to gamble on, given I still remember BCCI. Names do not provide protection from bad business models - and with so little do go on, it's impossible to tell whether their business models are good or bad.

4:22 PM  

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