Investors keeping close eye on Arabian Centres’ IPO

Arabian Centres is the leading owner, operator and developer of malls in Saudi Arabia.
Sunday 23/06/2019
A view of the Mall of Dhahran, operated by Arabian Centres in Dhahran, Saudi Arabia. (Reuters)
Receiving attention. A view of the Mall of Dhahran, operated by Arabian Centres in Dhahran, Saudi Arabia. (Reuters)

The initial public offering of shares in Arabian Centres, Saudi Arabia’s largest shopping mall operator, is significant, not only in the sale being the third largest the kingdom has witnessed in five years but also in it being the first to welcome qualified US institutional investors.

For those reasons, potential investors in the much-anticipated limited sale of Saudi state oil and natural gas giant Saudi Aramco were watching how the Arabian Centres initial public offering (IPO) played out and how the company’s shares performed on the domestic stock exchange, the Tadawul.

The government of Saudi King Salman bin Abdulaziz Al Saud has been encouraging family-owned Saudi companies to list in an effort to strengthen the kingdom’s capital markets as part of Riyadh’s economic reform drive under Saudi Vision 2030. Arabian Centres is the majority-owned subsidiary of the Saudi retailer Fawaz Alhokair Group.

Fawaz Alhokair, the co-founder and majority shareholder in the group, serves as Arabian Centres chairman. He was arrested in November 2017 as part of the Saudi government’s anti-corruption crackdown that included prominent Saudi executives, government officials and royals. He was released in January 2018.

Arabian Centres is the leading owner, operator and developer of malls in Saudi Arabia, with 19 shopping centres in ten cities and plans to expand its operations to 27 malls within four years. Its parent company owns the kingdom’s franchise rights to well-known retail brands, including Banana Republic and Gap. Part of Arabian Centres’ expansion plans include cinemas, of which four are under construction with another 12 in the works.

There had been much hype leading up to the Arabian Centres IPO in May, though the sale may have suffered from a lacklustre investor response and the company’s cautiousness.

The IPO was expected to be among the largest in the kingdom since Saudi lender National Commercial Bank raised $6 billion in November 2014 from the sale of 500 million shares, representing a 25% stake in the financial institution. The Gulf country’s second largest IPO involved Saudi Ground Services, the kingdom’s largest airport ground handling services provider, which earned $752 million from the public sale of 30% of the company in June 2015.

When Arabian Centres announced in April that it was preparing to offer 95 million shares, which represented around 20% of the firm, CEO Olivier Nougarou, appointed Arabian Centres’ CEO in March, suggested the offering could raise “in the range of $1 billion but it’s very difficult to confirm.”

The company’s prospectus for the IPO projected that the sale could earn as much as $836 million, based on the top of the share price range that Arabian Centres had calculated in its “book-building” process with potential investors ahead of the listing on the Tadawul. The Saudi mall operator planned to sell 65 million existing shares and 30 million new shares at 26-33 riyals ($6.93-$8.79) per share.

Arabian Centres ultimately priced its IPO shares at the bottom of that range, providing the company a market capitalisation of $3.3 billion. The sale garnered the firm $747 million. The company indicated that proceeds from the sale would go towards debt repayment and expansion plans.

What distinguished the Arabian Centres IPO from previous public offerings in the kingdom was that it was foremost an international sale. It was the first time that shares in a Saudi firm could be directly and primarily sold to qualified US institutional investors under US securities Rule 144a. Arabian Centres said: “Final allocations were approximately 94% to institutional investors entitled to participate in the book-building process and approximately 6% to individual investors in the Kingdom of Saudi Arabia.”

The company noted that public funds, private funds and discretionary portfolios were the main investors in the IPO. There were reports that the kingdom’s main sovereign wealth fund, the Public Investment Fund, had indirectly invested in the Arabian Centres IPO through institutional funds.

The Arabian Centres IPO is the first beneficiary of new rules recently introduced by the kingdom’s market watchdog, the Capital Markets Authority, that aim to limit stock fluctuations after a public share sale.

Arabian Centres’ debut performance on May 22, however, proved underwhelming, perhaps resulting from a somewhat tepid response to the IPO that included negative sentiment regarding the Saudi retail market. While the price of Arabian Centres’ shares reached $6.96 on the exchange’s opening, it subsequently traded as low as $6.29 and closed at $6.66 on that day. Since Arabian Centres joined the Tadawul, its share price has consistently settled below $6.93, the low end of the IPO range.