Family-owned companies see future in IPO



Family-owned companies in the GCC have been slow to list themselves on stock exchanges but now a renewed enthusiasm for going public is in the air.


More and more top company officials in the region are convinced that an initial public offering (IPO) is the way to go – and the best time to do it is now.


“It is a good time for family-owned companies to go public,” Rami Makhzoumi, President and CEO of Future Pipe Industries (FPI) told Emirates Business. “Investors are itching to go back to the market and the banks are incredibly positive too.


“There is a tremendous opportunity now. The markets are upbeat and we have been receiving good feedback from investors. They are so excited as there are not many IPOs around. So it means you are actually competing against no one.”


The company is the latest family-owned business  to confirm its intention to go public after Shuaa Capital. FPI’s owners, the Makhzoumi family, are to list 35 per cent of the company solely on the Dubai International Financial Exchange (DIFX).


The price and number of shares on offer will be unveiled in the prospectus to be issued on April 13 and the listing is expected to take place in early May. It will be open to global institutional investors as well as UAE residents and GCC nationals.


Mohammed Al Zamil, Chairman of Saudi Arabia’s Zamil Group, said going public meant greater stability, more chances of investment and increased market share.


“It is indeed the best time for family-owned companies to go public,” he told Emirates Business. “The greater transparency entailed in going public also means even higher profits in the long term.”


Zamil Group was one of the first to heed the call to open up although it did not do so directly. Using an alternate route, it first became a closed joint-stock company and then prepared its subsidiaries to go public.


From a small family business, Zamil has now grown to include more than 50 companies under different forms of ownership – private holdings, joint-stock and publicly listed companies, joint ventures and affiliates.


In the UAE, one of the driving forces for going public is the new law that allows families to retain as much as 70 per cent of the firms they put up for sale.


The earlier limit of 45 per cent had discouraged UAE families – some of whom had built up multi-billion-dollar businesses on the back of oil-driven wealth – from selling their closely-held shares.


Abu Dhabi-based Al Sayegh Brothers, whose five companies operate in a number of industries, including oil services, said the change would probably encourage the launch of more IPOs, the  number of which fell in 2007 after surging for three consecutive years. Mickey Jagtiani, CEO of the Landmark Group, said his company was considering the option but declined to elaborate.


The decision by DIFX to further slash the minimum free float for its IPOs to 25 per cent was expected to appeal to family enterprises as they would not have to give up their majority stakes.


But there has been a long wait before any of the family-owned firms responded to the initiative as FPI is the first to do so.


Makhzoumi said: “It helps to have an exchange where you are allowed to open up only 25 per cent. In the Dubai Financial Market (DFM), for example, you are required to float around 50 per cent to 55 per cent. That means giving up the majority of your business, which is why a lot of family-owned businesses are not interested.”


But companies must be certain of their objectives, however, attractive the option of going public may seem, said Makhzoumi.


“I encourage family-owned businesses to go public but that really depends on their intentions,” he added. “Our intention is to cement a leading position and derive more growth. We are not going public to raise capital but because we have a tremendous story in fibreglass technology. We are the largest fibreglass company in the world and we want to tell that story and raise our profile.


“If others want to go public that’s fine but if a company goes  public just for the sake of going public that is not a good enough reason,” he said.


Mishal Kanoo, Deputy Chairman of Kanoo Group, said family-owned companies planning IPOs were often ill-prepared for shareholder scrutiny.


“It is fashionable, people’s perceptions of the recipe for success is to go public,” he said.


“This is a wrong perception, unfortunately, that you have to go public to become massive. Family businesses in the region tend to be driven to go public out of vanity so they can boast of having an enlarged company because of the capital raised.


“In any company, especially family businesses, if they decide to get public money they must be ready for the public scrutiny that comes with it – and a lot of them are not ready for that concept.


“This is an interesting phenomenon that family businesses are not used to, especially if there is a patriarch of a certain age. To get that person to accept that someone else is going to be questioning him is a very hard pill to swallow.”


While persuading a family-owned business to go public is already a challenge, the existence of a business community dominated by private companies has become another problem. Currently, there is a very limited number of listings and a lack of free float of existing listings.


Dr Nasser Saidi, Dubai International Financial Centre’s Chief Economist, said 80 per cent to 85 per cent of privately owned businesses in the Gulf were family owned.


Dr Eckart Woertz, Gulf Research Centre’s Economics Programme Manager, told Emirates Business this translates into a problem for the young GCC stock markets.


He said the stock markets were dominated by a few big companies, which had the stake as a majority shareholder, while most of the larger private enterprises were family owned and not listed.


“The largest 20 or so companies in each of the GCC countries are not listed,” said Woertz. “On the other hand, among the listed companies the largest 10 companies in each country make up between 50 per cent and 80 per cent of market capitalisation.”


He said the GCC stock market bubble of 2005-2006 would probably not have reached the level it did if “too much money had not chased so few stocks”.


Being private is the norm with only a handful of exceptions such as Shuaa Capital of the UAE, Sultan of Kuwait and Saudi Arabia’s Al Rajhi Bank, Al Abdullatif Industrial Investments and Zamil Group.


While the biggest companies in the GCC are state-owned, the small- and medium-size enterprises sector is dominated by family-owned private sector companies, Woertz said. Some of these, such as Olayan, Al Futtaim, Kanoo and Zamil, have reached the size of large conglomerates.


In these companies family members hold key executive positions and the family mostly holds full ownership. However, family enterprises elsewhere in the world have gone public – and often the respective families have not retained a majority stake, Woertz added. Examples include Wal Mart (38 per cent family ownership), Ford (40 per cent) and BMW (47 per cent).


In the Western world, most of the companies, barring those deemed sensitive by the state, are in the hands of the public, who not only have to answer to shareholders but also have to be more open to scrutiny.


“In the GCC such a trend has not been observed so far,” said Woertz. “The advantage of trust within established family relationships is valued higher than the advantages of increased corporatisation and going public, namely enhancement of the available talent pool and accountability and easier access to financing from the capital markets.”


Instead financing via retained earnings and sometimes banks remain the rule. GCC family enterprises are reluctant to give up unlimited control and accept the increased accountability standards that come with a public listing, such as quarterly reports and the appointment of independent directors to the supervisory board.


One reason for the relative reluctance of private companies to enter the stock market may be attributable to their distance from the capital markets in general, Woertz added.


Astonishingly, access to loans from banks is difficult for many companies despite the huge credit growth that has taken place in the region. The available funds been directed mainly towards a select minority of large companies and consumer financing, he said.