The mobile phone operators are finally getting their IPOs [initial public offerings - A company's first offering of common stock to the public] organized. Recently Asiacell and Zain began conversions to joint stock ownership. Zain is also reported to have engaged Citibank and BNP Paribas to work on valuation. So far as I know, Korek has not been in the news but it is presumably on a similar track.

These will be enormous offerings for a market as small as the ISX. Each company is required by the conditions of its license to list 25% of its shares. Asiacell alone will have to list 67.5 bn shares. (See this post.) At par (IQD 1), that would be about US$ 58 mn and they will certainly be looking for a higher price than that. With ISX daily volume now averaging only around US$ 2 mn, the total for the three IPOs could easily be the equivalent of a year’s worth of trading.

You might think the ISX would be overwhelmed. In fact, shouldn’t the market be falling already, as people raise cash for the new issues?

Actually there’s no cause for alarm. The companies clearly will not be trying to raise hundreds of millions of US dollars from local investors. The involvement of Citi and BNP makes it obvious that the main focus will be on foreign institutions, most of which are not yet in Iraq at all.

For these investors, the key obstacle to investing in Iraqi shares is the lack of a custodian bank. (See this post for more on the custody problem.) But this will be easy to fix. According to the Word Bank’s Republic of Iraq Financial Sector Review (p. 54), “a major international bank” [i.e. HSBC] has already made the necessary preparations to provide custody services and is just “waiting for the necessary licenses to be granted.” (There’s a link to the World Bank report here.)

The real significance of the IPOs is that they can provide the stimulus necessary to get those licenses issued. That, in turn, will allow a host of new foreign investors, potentially commanding far greater amounts of capital than the telcos will be raising, to get into the market. This portends not so much a flood of new shares as a deluge of new money.

Image by Angela See. Used by permission.

With most Middle East stock markets having been dragged down by the turmoil unleashed by the Arab spring and a sputtering global economy, some adventurous fund managers have started exploring opportunities in the tiny Iraqi market, according to a report from Bloomberg.

The Iraqi Stock Exchange, or ISX, says its main market index has surged some 65% so far this year, making it one of the world’s best-performing markets. Though many doubt the accuracy of the ISX’s main index, fund managers who follow the country agree that Iraqi share prices have risen about 15% in 2011—still outperforming most global peers.

Investors have been attracted by the relative political stability following the formation of Prime Minister Nouri al-Maliki’s coalition government last year, as well as the promise of higher oil revenues and the reconstruction of the economy. The International Monetary Fund estimates that Iraq’s economy will grow at 9.6% this year and likely expand by 12.6% in 2012.

“Foreign buying has picked up in the past 18 months or so with inflows estimated at about $130 million in this period,” said Shwan Ibrahim Taha, chief executive of Rabee Securities, whose weekly stock market reports are published by Iraq Business News.

“The fact that it is one of the best performing markets this year, with further potential upside as the economy develops, is definitely whetting investor appetite,” he said.

The Iraqi bourse’s gains this year compare well to the performance of other indices in the region. Saudi Arabia, the Middle East’s biggest market, is down some 7% so far this year. Egypt, the most open market in the region, has dropped 38% in the wake of the January revolution that toppled former President Hosni Mubarak.

Asiacell has launched what may be the world’s smallest ever public offering, raising about US$ 8,500 through the sale of 10,000,000 shares at IQD 1 each. The subscription period started on September 14 at the Baghdad and Sulaimaniya branches of Al-Shamal Finance and Investment Bank and will continue for up to sixty days.

Obviously this is not the long awaited IPO called for by the conditions of the company’s operating license. That would require the sale of a 25% stake. With share capital of 270 bn, Asiacell would have to be selling 67.5 bn shares.

The current micro-offering is merely a preliminary step to convert the company to joint-stock status. I don’t know why this couldn’t be taken care of as part of the actual IPO. My guess, for whatever it’s worth, is that the existing shareholders might otherwise have to do the entire offering at par (IQD 1).

As I understand it, the Company Law (Article 154), requires new shares to be issued when a company converts to joint stock form but does not allow for these to be sold for more than their IQD 1 par value. Once the conversion has happened, however, Article 55/4 says that new shares “may be offered at a price equal to or greater than their nominal value…and priced in light of the company’s performance.”

If I’m right, two separate offerings would make sense. In the first, you try to set the record for world’s smallest IPO, selling only a tiny number of shares at par. Then you do the real IPO, selling the shares for what they are actually worth.

At the end of last month, the Iraq Securities Commission (ISC) announced new rules on stock suspensions. Effective September 1, trading is to recommence no more than four months after general assembly meetings when rights issues are announced and immediately otherwise. Pre-general assembly suspensions are limited to one week.

This new schedule is a big improvement. Previously, stocks were suspended after general assembly meetings for as long as three weeks even when no particularly market-moving news was announced. Post-rights issue suspensions have typically lasted anywhere from four to eight months. Warka Bank is still not trading over a year and a half after its failed rights issue early last year.

The one-week pre-general assembly period isn’t really news, however. This appears to have been in place since some time in the second half of last year. Formerly, there had generally been two weeks between the suspension and GA meeting dates.

It’s unclear why any of these suspensions were necessary in the first place or what has changed to make them less necessary now. I suspect that they were never really necessary and that nothing has changed. I think the ISC is simply trying to improve the trading environment ahead of the telecom IPOs that were supposed to have taken place last month.

If that is the goal, however, the new rules obviously do not go far enough. Unnecessary trading halts are just as unacceptable whether they last for four months or for eight.

If the ISC really wants to get an ‘A’ from foreign institutional investors it will have to eliminate pre-GA and post-rights issue suspensions altogether.

An Iraqi economist says the country will lose $22 million because of “extra” Eid al-Fitr holidays that the Iraqi government announced.

Eid al-Fitr, which follows the Muslim holy month of Ramadan, is usually three days, however, AKnews reports that the Iraqi government last week extended the holidays to six day, to accommodate differences between the Sunni and Shia calendars.

Ali Keji, an economic analyst with the Iraqi Market Center, told the agency that “according to the preliminary estimates, Iraq will lose approximately $22 million [26 billion Iraqi dinars] due to the suspension of the stock market during the six days”.

He complained that the “government does not respect economic problems because of the holidays. It takes such a decision without consulting the Securities Commission and the Central Bank.”

Iraq’s stock exchange (ISX) handled 210 billion shares worth about $326 million since January, an increase of about 40% on last year. In 2010, the total fiscal year’s 255 billion shares were worth about $342 million.

Hundreds of Iraqi and foreign businessmen and share-holders deal with the ISX.

Salam al-Quraishi, an economic adviser to the Iraqi government said “the holidays cause delays in the economic and commercial transactions but not huge money losses”

He defended the government’s position saying they have talked to economic institutions before taking on any such decision to extend the holidays to six days.

“When the Iraqi government decided the Eid al-Fitr holiday to be extended for six days, it had actually consulted economic institutions and looked into its impacts on economic activities.”

(Source: AKnews)

Last weekend two stories, one in Al Hayat the other in the Abu Dhabi paper The National, confirmed that Standard Chartered is in talks to take over Warka Bank (BWAI). (There’s more on the story here.) While there have been rumors to this effect for over a year, this is the first time anything has been officially disclosed. Hayat cited Warka Bank Executive Director Mohammed al-Samarrai as saying that the merger has reached its “final stages.” A Standard Chartered official interviewed by The National was a bit more circumspect. He characterized the negotiations as “still in the early stages” and cautioned that “It’s not final until it’s absolutely final.”

It’s said that the opera isn’t over until the fat lady sings. While she hasn’t come out yet, it looks like she has already begun warming up backstage.

If the deal goes through, Standard Chartered will presumably be taking up the approximately 145 mn rights issue shares left over from Warka’s failed capital increase in early 2010. At IQD 1 per share, this would add IQD 145 mn to June 30, 2011 net equity of IQD 138 mn, bringing the total to IQD 283 mn. Share capital would increase to 250 mn, with the British bank holding a 58% stake.

In this scenario, book value per share would come to 283/250 = IQD 1.13.

Among the ISX-listed banks, Warka would become only the second to have a major international financial institution as a controlling shareholder. The first was Dar Es Salaam Bank, which is controlled by HSBC.

Dar Es Salaam trades at 7.0 times book value. The same rating for BWAI post-merger would mean the shares would reopen at 7 x 1.13 = IQD 7.92. Anyone who had bought at BWAI’s last traded price of IQD 1.26, got the 33.33% bonus, and taken up the 150% rights issue would be looking at a return of 710%. (Both original and bonus shares were eligible for the rights.)

The final act of this drama may turn out to have been well worth the price of admission.

Photo by: http://www.flickr.com/photos/aliens_ufo_proof_evidence/

Iraq’s three main mobile phone companies - Zain Iraq, Asiacell and Korek – appear unlikely to meet a month-end deadline to list on the local stock exchange, raising the chances of them being penalised, according to Reuters.

The companies are required by Iraqi law to launch initial public offerings on the Iraq Stock Exchange (ISX) by 31st August as part of the 15-year, $1.25 billion operating licences they secured in 2007.

None of the three limited companies has yet become a shareholding firm, a key requirement and the first main step towards going public on the local bourse.

“They must meet the requirement to be a shareholders’ company before anything,” ISX Chief Executive Taha Abdulsalam told Reuters. “After that, we will talk about listing.”

He said that after becoming shareholding companies, the firms would need approval from the ISX board and Iraq’s securities commission in order to be listed; the ISX board decision could take 24 hours, while the securities commission may take up to a week to give their consent. It would then take 2-3 weeks before the companies would be ready to trade.

He concluded that it was impossible for the companies to list on the bourse by the end of August.

“We still insist that they have to reach the licence conditions within the deadline of 31 August,” CMC Commissioner Ahmed Alomary told Reuters. “Otherwise they will receive penalties.”

Zain Iraq is a unit of Kuwait’s Zain, while Asiacell is an affiliate of Qatar Telecom (Qtel), and Korek is part-owned by France Telecom SA and Kuwait’s Agility.

There are now around 23 million mobile phone subscribers in the country, according to the Communications and Media Commission (CMC), which regulates telecommunications in Iraq.

(Source: Reuters)

Winston Churchill once likened observing Soviet politics to “watching two dogs fighting under a carpet.” All you can say for sure is that something’s going on.

The latest news on Warka Bank has exactly this ‘subcarpet’ quality. The ISC has ordered Warka’s brokerage subsidiary to stop its operations in the market effective July 26 following the seizure of the bank’s equity in this company by the Ministry of Trade. (See the pdf file at the bottom of this link for the Arabic version of the announcement.)

The Ministry is also seizing shares held by the bank in nine other companies. Appended to the ISC’s announcement is a letter from the Ministry’s Office of Companies Registration to the Diyala Public Company for Electrical Industries dated July 11. This provides the following list:

1.) Al-Asyl for Horse Breeding and Marketing LLC / number of shares (1,020,000).
2.) Al-Iraqiyah for Bank Guarantees LLC / number of shares (400,000,000).
3.) Afaq al-Ghad for Trading Agencies and General Trade LLC / number of shares (200,000).
4.) Al-Mas for Security and General Protective Services LLC / number of shares (200,000).
5.) Al-Mas for Real Estate Investments LLC / number of shares (135,000,000).
6.) Warka Company for Mediation in Trading Securities LLC / number of shares (980,000,000).
7.) Dallat al-Jazeerah for General Transportation LLC / number of shares (680,000).
8.) Al-Ufuq al-’Alamiyah for General Trading LLC / number of shares (1,340,000).
9.) Al-Mass for Recording of the Holy Book Verses LLC / number of shares (60,000,000).
10.) Al-Mas for Real Estate Investments LLC / number of shares (135,000,000)

Note that none of these are ISX listed companies. (6) is the brokerage.

Apparently, there must be a dispute between the bank and the Company for Electrical Industries to whom the Ministry’s letter is addressed. But there’s no way to tell what this dispute might be, why these ten names were selected, how they will be disposed of, or when the brokerage will be allowed to resume its operations.

It would be nice if someone could pull back the carpet and let us see what this fight is about.