The global interest in HSBC's recent IPO for Palestinian telecoms company Wataniya Mobile was not only a big success for the young telco, but also for Palestine in general, as it showed that the territory is a safe and potentially lucrative destination for capital markets.
In the search for higher equity returns, braver investors have moved on from emerging to frontier markets. It takes a very calculated form of courage, however, to invest in the Palestinian West Bank. But while the politics of Palestine remain turbulent, its economy is surprisingly vigorous, which helped HSBC attract significant international interest to the recent initial public offering (IPO) of Wataniya Mobile (Palestine).
Wataniya was floated on the tiny Nablus-based Palestine Exchange which, until now, has had only two actively traded stocks accounting for 80% of daily turnover. They are Wataniya's competitor, Paltel, and holding company Padico, which is the majority shareholder in the exchange itself. Total market capitalisation is some $2.5bn and liquidity, with trading of about $1m a day, is low. So the listing of Wataniya, valued at $335m, was something of an event for the exchange as well as the company.
Before the IPO, Wataniya was 57%-owned (now down to 48%) by Qatar Telecom (Qtel), the Doha-quoted telecommunications company with operations in 16 countries, stretching from Algeria in the west through much of the Middle East to the Philippines in the east. The other 43% (now 37%) was held by the Palestine Investment Fund, a $850m sovereign wealth fund established in 2003 by the Palestine Authority.
Wataniya was awarded the second mobile licence for the Palestine territories as far back as 2006, but Israeli intransigence over releasing sufficient radio spectrum delayed the start of operations until late 2009. The terms of the licence included an obligation to spread ownership by floating the business, and in April 2010 HSBC was mandated as sole global coordinator and bookrunner for an offer of all-new shares representing 15% of the company.
HSBC dominance
HSBC has an unrivalled record in Middle Eastern equity capital markets, having completed more than 30 issues in the past five years. These have encompassed London listings as well as purely local deals and have involved almost every regional country, including Egypt, Kuwait, Lebanon, Oman, Saudi Arabia and the United Arab Emirates. In many of these transactions, the bank has helped to develop local regulation while internationalising the local exchange.
Among the Middle Eastern telecoms issues led by HSBC have been the $748m IPO of Oman Telecom in 2005 and last year's $960m deal for Vodafone Qatar. "Vodafone Qatar was also a start-up, and the deal was done during a time of volatile market conditions," says Michael Bevan, HSBC's head of equity capital markets (ECM) for the Middle East and north Africa. "But while it was nearly 20 times the size of Wataniya, the Palestinian deal was significantly more difficult from a marketing perspective, given the limited investor interest in Palestinian companies."
The challenges for the HSBC ECM and telecoms teams, both based in Dubai, were many and various. One of the most basic was simply getting to Ramallah to see the client. This was definitely not just a case of hopping on a plane, though each journey did start with a flight to Amman in Jordan. Then it was a taxi to Allenby Bridge, the crossing point from Jordan to Israel. The invariably drawn-out border crossing, which included a bus transfer over the bridge, would be followed by a car journey to Jerusalem and, finally, passage to the West Bank. As one of the bankers describes it: "It took 10 hours on a good run and 18 on a bad one."
The mandate called for the IPO to help internationalise Palestine's parochial capital markets, which presented another challenge. "Earlier Palestinian deals had been conducted according to local practice," says Mr Bevan. "However, we were trying to sell to the international market, so we needed to internationalise the process, including the prospectus and the marketing. Since the deal had to be structured to align with Palestinian law while also being attractive to an international audience, it was essential to spend time with the regulator to get it comfortable with our approach."
One of the issues with which the regulator needed to feel comfortable was the pricing. "Previous deals had always been priced at par," says Faaiz Hasan, Dubai-based HSBC director of telecoms. "Wataniya's owners were not distressed sellers, and they wanted to price at a premium – a new concept for the regulator."
The company itself was in the early stages of operation with a limited historical track record, and doing business in an environment that is testing at the very least. Occasionally violent internal political strife and continually threatening tensions with Israel pose risks that demand particularly high rewards. All this made valuation crucial, especially when IPOs in far more sophisticated markets were failing in their droves.
In such an improbable context, the Wataniya story had some strong positives, which HSBC was quick to exploit. "The Palestinian economy generally is doing very well and growth in the West Bank and Gaza is among the highest in the region," says Mr Hasan. "The market demographics are very positive. Palestine has the highest literacy level in the Middle East, with a young population that is growing rapidly, including a large community of students, who are typically early adopters. These are ideal consumers for a mobile operation."
Between 2009 and 2012, the Palestine economy is expected to grow at an annual rate of 9%, based on International Monetary Fund and other forecasts. In regional terms, this puts it second only to Qatar (15%). It has the lowest mobile penetration anywhere in the Middle East and north Africa – 49% in 2009 compared with Jordan's 101% – leaving considerable scope for growth.
Rapid progress
Wataniya's history, though brief, was nonetheless one of progress on all fronts, with meaningful increases in revenues and market share. Still to come are its launch in Gaza and the roll-out of 3G technology, to which the company has exclusive Palestinian rights. The business plan centred on tackling a monopolistic incumbent with more choice and better service. So the tale HSBC prepared to tell investors was one of a well-run, hungry young operator in a market with good growth potential within a resilient, growing economy uncoupled from the global downturn.
Success required selling that story to three separate constituencies, in ascending order of difficulty. It was important to generate strong local demand from Palestinian investors. The next audience was made up of Middle Eastern investors from the surrounding region, such as Saudi Arabia, Qatar and the UAE. Finally, the hardest part would be to appeal to investors in Europe and offshore US.
A one-month marketing and subscription period kicked off in early November. The physical marketing campaign was split into two. That aimed at local investors hinged on a large retail-focused PR and advertising campaign, using newspapers and radio. For investors outside the territories, a roadshow took in Doha, Saudi Arabia, Dubai, Abu Dhabi and London, and management spoke to offshore investors in the US. "The management team had a good mix of local and international expertise, and put across the opportunity in a coherent manner," says Mr Hasan. "Investors proved eager to buy into their story."
So they did. The shares were priced at $1.30, making an offering size of just over $50m. As it turned out, subscriptions totalled $75m. What was gratifying for the team was that demand was more or less evenly split between local retail investors (47%) and international institutions (53%). Allocation was proportional to demand and all subscribers were given a guaranteed minimum of 300 shares. The institutions included mainstream emerging and frontier market funds from the US, UK and Europe.
"The international interest in the deal suggests a broader move up the risk curve by institutional investors who continue to move funds out of developed markets and into emerging markets, as they seek growth and higher returns," says Mr Bevan.
The successful issue certainly indicates a growing appetite for frontier markets, even at the outer limits. And it will do Palestinian markets no harm at all. "The success of the deal has not just been important for the company," Mr Bevan concludes. "It has also been a fillip for Palestinian capital markets as well as for Palestine itself."
