Axiom model was flawed
Early analysis of the Axiom IPO cancellation said a weak market was to blame. But this Reuters report says the company’s own model may be the cause.
December 9, 2010 2:54 by Samuel Potter
Axiom Telecom’s abrupt cancellation of its IPO two days before listing is likely more a reflection of the Dubai retailer’s own qualities than the state of the local new issues market as a whole.
The offering would have been the first in the United Arab Emirates in two years and had been taken by some market players as a signal that the dormant IPO market was reviving.
But some investors were long unconvinced about the Dubai retailer’s business model and planned use of sale proceeds, analysts said.
Axiom planned to use IPO funds partly to pay down debt, instead of expanding operations, raising concerns among some local fund managers, who were also deterred by the offering being only open to institutions. Retail investors were excluded.
For UAE authorities the broader issue of investor sentiment towards stock offerings is important because Dubai, struggling to emerge from under a massive debt burden, has said it could sell stakes in crown jewel companies to raise cash.
Stakeholdings in assets such as DP World, Emirates Airlines and Dubai Electricity and Water Authority (DEWA) would likely attract keen interest from potential investors regardless of the fate of Axiom.
“The UAE is ready to come out with IPOs, (but) they have to be stories that will appeal and be well understood by local investors,” said Haissam Arabi, chief executive and fund manager at Gulfmena Alternative Investments. “If the big Dubai cash cows were to privatise these would be many times oversubscribed.”
Little revenue from Axiom’s IPO was earmarked for boosting its business, with existing shareholders selling about two-thirds of the shares on offer. Axiom itself would have received a maximum of $107 million and it said it would use $100 million of this to pay off some of $354 million in credit lines.
“It seems that a lot of investors saw this as more a restructuring via a public offering, as the company needs to reduce leverage, and I don’t think the first IPO in the UAE in over two years should have been of this nature — it was the wrong deal at the wrong time,” said Akram Annous, a strategist at Al Mal Capital.
“Most of the proceeds of the IPO would have gone to paying down debt, either directly or indirectly, and that isn’t going to get too many people excited because the company is selling from a perceived position of weakness.”
Axiom cancelled the IPO late on Monday despite receiving enough orders, mostly from European and U.S. investors, to cover the offering, it said in a statement, citing market conditions and liquidity concerns for scrapping the deal.
Axiom, which was set to list on Nasdaq Dubai, is 53 percent owned by Al Bannai Investments, with 40 percent held by a subsidiary of TECOM, itself part of Dubai Holding. Seven percent is owned by Al Zarooni Enterprises.
“For IPOs to succeed they need retail investors — without retail, institutions will not make much money,” said Mohammed Yasin, CAPM Investment chief investment officer.
The IPO was priced at between $0.80 and $1.15 and many analysts had forecast it would price at the lower end of its range, while some warned the company was overvalued based on recent earnings.
The retailer’s 2009 profit was 22 million dirhams on revenue of 5 billion. It made a loss of 359 million dirhams in 2008, according to the IPO prospectus.
“Axiom is just a retailer — the brand doesn’t really mean anything and would anyone care whether they bought a Blackberry at Axiom or Carrefour?” said a regional fund manager who asked not to be identified. “It is selling commoditised products. Axiom doesn’t have a sustainable competitive advantage.”
Arabi at Gulfmena Alternative Investments was more upbeat.
“Axiom is a great company — it has a niche business model and maybe this was misunderstood by local investors,” he said. “Putting off an IPO so it can demonstrate momentum growth in its bottom line would probably make it more appealing.”
(By Matt Smith. Editing by David Holmes) ($1=3.672 UAE Dirham)