Complex Made Simple

After valuing Arabian Centres at $3.3bn via US IPO, its share offering to start tomorrow

How will Arabian centres spend its money once its shares are floated tomorrow?

This was one of the biggest IPOs in Saudi Arabia since National Commercial Bank raised $6 billion in 2014 Foreign ownership in Saudi public companies is at an all-time high of around 6%, up from 4.7% recorded at the end of 2018 The company plans to increase the number of malls from 19 to 27 within the next four years

The recent regional tension stemming from acts of sabotage and drone attacks on Saudi Aramco delayed the share offering by Arabian Centres following a US-staged IPO until tomorrow from Monday May 20, 2019.

It’s all good now but what do you need to know?

Valuation

Reuters said this was one of the biggest IPOs in Saudi Arabia since National Commercial Bank raised $6 billion in 2014 and Saudi Ground Services raised $752 million in 2015, Refinitiv data showed.

The Financial Times (FT) said the flotation of Arabian Centres values the country’s largest shopping mall developer at around $3.3 billion.

Arabian Centres, which is majority owned by Saudi’s Fawaz AlHokair conglomerate, did not give any reason for delaying the initial public offering but said shares would start trading this Wednesday. It expects to raise SAR2.6 billion to SAR 2.8bn, having been priced on May 8 at the bottom of the range of SAR26 ($7) to SAR33 ($8.91) per share.

A US sale, a first

The offering from Arabian Centres, majority-owned by Fawaz Alhokair Group, will be the first in the kingdom under Rule 144a introduced in 2017, which allows the sale of securities primarily to qualified institutional buyers in the United States, said Reuters.

Arabian Centres enlisted blue-chip Wall Street banks to help with the IPO process, appointing Morgan Stanley and Goldman Sachs as financial advisers, with Credit Suisse  and Citigroup as bookrunners, alongside a host of local banks, according to FT.

Who invested so far?

After a hectic 10-day book-building process, which involved 106 meetings with investors spanning the Middle East, London and New York, the books for the IPO were covered. Non-Saudi investors accounted for 16.7%, said FT.

Saudi Arabia’s sovereign wealth fund, the Public Investment Fund, invested through separate institutional investors so that it would not own a direct stake in Arabian Centres, according to people close to the situation.

Foreign ownership in Saudi public companies is at an all-time high of around 6%, up from 4.7% recorded at the end of 2018. In the year to date, total active net foreign buying stands at $5.5 billion.

Saudi Arabia’s equity markets are expected to get a boost this year when the country is added to MSCI’s Emerging Market Index, which is tracked by around $14 trillion in investor assets. Analysts estimate around $15 billion could flow into the capital markets once Saudi is included in the benchmark. The country will account for around 2.4% of the index.

The Tadawul is down 10% since May 1 but the index was up 20% in the first three months of the year and gained over 14% percent this year so far.

How will the money be spent?

The bulk of the proceeds from the Arabian Centres IPO will be used to pay down debt with the rest used for expansion as the company looks to tap into the rapidly shifting demographics in the country, where around 52% of the 33 million population is under 30 years old, according to Reuters.

The company plans to increase the number of malls from 19 to 27 within the next four years and fill them with more restaurants and cinemas.

 Arabian Centres owns 19 malls, making it the leading owner and operator of shopping malls in Saudi Arabia by total gross leasable area as of the end of 2018.

Four cinemas are already under construction, with 12 more to come over the next two years.

Fawaz Alhokair, a major shareholder in Fawaz Alhokair Group, was detained in an anti-graft probe in which Saudi authorities held dozens of senior officials and businessmen at Riyadh’s Ritz Carlton Hotel in late 2017, but later released after being cleared or reaching settlements with the government.

Is the retail market healthy?

The GCC retail industry will grow four per cent from $253.2 billion in 2018 to $308 billion by 2023, driven by growth in population, tourism, and per capita income, Khaleej Times reports.

Regionally, the UAE and Saudi Arabia are expected to continue to dominate the retail sales in the region, cumulatively accounting for 77% of the total retail sales in 2023.

Dubai-based consultancy Alpen Capital predicted that the Saudi Arabia will account for 44.6% or $113 billion of the total Gulf retail spending last year followed by UAE at 32.4% or $81 billion.

By 2023, retail sales in the region's largest economy Saudi Arabia will reach $132.7bn.