Oil and gas companies in the Gulf are trying to adjust to a new normal following the oil price drop of 2014.
The majority are exploring financing options such as tapping debt markets and undergoing privatisation to raise funds primarily to support further growth and development in infrastructure and exploration.
Perhaps the most talked-about deal is Saudi Aramcos imminent initial public offering (IPO), which will see 5 per cent of shares offered to investors. Other players that might soon float shares are Kuwait Energy and Oman Oil Company. The latest move has come from Abu Dhabi National Oil Company, which is in talks with several energy majors to renew an oil concession in a way that accommodates more partners.
The GCC IPO market hit a five-year high in the first quarter of 2017. Against this backdrop, many companies would likely consider going public. These firms must not lose sight of the fact that they need to consider the various processes involved in listing their shares.
They might be tempted to think choosing the right exchange or arriving at a good valuation might be the most pressing needs. However, preliminary activities, appointing lead managers, underwriters and other advisers, through to the intention to float, IPO launch, subscription, and the initial obligations of life as a public company are equally crucial to a successful listing and future as a public company.
The first step is to assess the readiness of a firm to go public. A pre-IPO readiness assessment compares the existing critical processes and controls with the standards required by a listed company.
In terms of financial reporting and planning, many businesses may need to undergo a seismic shift in processes owing to the transparency required from public firms. This involves compliance with the International Financial Reporting Standards, a set of accounting standards that applies to publicly traded firms in most major markets.
As investors and authorities will look out keenly for a history of robust financial reporting, many firms will need to reanalyse their past financial results to bring them into compliance with the relevant accounting framework.
For firms with complex financial histories, resulting from a diverse geographical scope or a history of mergers and acquisitions, additional documentation may be required, such as pro-forma or carve-out financials. Carve-out statements are used to separate the financial statements of a particular division or business unit to assist in the valuation process.
The market will also expect to see a strong and detailed financial plan for the company, as well as robust forecasting and budgeting capabilities.
It is imperative for companies to bring on board helpful companions in their IPO journey. Firms may need:
- Lawyers to develop prospectuses and structure capital market contracts;
- Accountants for restatement of past financial reports and the creation of controls and processes to ensure a strong reporting function;
- Auditors as required by regulated capital markets to review and attest to the consistency of financial records of public companies;
- Underwriters and investment banks to disburse the shares to the market, promote the IPO and communicate with institutional investors;
- Investor relations professionals to manage day-to-day shareholder communications and the regular investor and analyst requirements;
- Business analysts, strategists and integrators to create everything from a compelling go-to-market story through to back-end technology integrations.
A trap easily fallen into is the one set by the varied opinions on what a firms valuation should be. Several factors may influence valuation, some of which may even be external, such as fluctuations in the economy, or negative reviews from analysts.
Further, since the company will be relatively unknown in the market, valuation may even be discounted to offset the perceived risk. Formulating an equity story that highlights the successes and growth potential of an IPO candidate will help achieve a higher valuation.
Most firms take between four and six months to complete the formal pre-IPO process in normal situations. But these months witness a high volume of work including regulatory paper work and reviews; pre-IPO analyst presentations and investor conferences; and the creation of comfort letters and other legal documents.
Firms must remember going public is a time-consuming, transformational process. It involves personality and attitude changes, what with the requirement of being open and transparent at analyst road shows, investor briefings, annual general meetings and so on.
However, a well-defined plan, forecasting capabilities and the right partners can make the journey a rewarding one.
Ossama Kayed is head of capital markets at KPMG in the Lower Gulf