* Three telcos must IPO by August-end, but reluctant to list
* Low liquidity, small mkt cap seen hurting valuations
* Penalty a smaller price to pay than poor IPOs
By Matt Smith
DUBAI, July 20(Reuters) - It was meant to symbolise the triumph of capitalism in post-Saddam Hussein Iraq.
But the stock market flotation of three Iraqi telecoms firms, required by law to go public by the end of August, is stuck, with the operators holding out for better market conditions and higher valuations.
As a result, all three are likely to miss the deadline in a move unwelcome to the Baghdad bourse and the telecom regulator. Zain Iraq, part of Kuwait's Zain , Qatar Telecom's Asiacell and France Telecom affiliate Korek have dragged their feet on selling 25 percent stakes and listing on the Iraq Stock Exchange.
The IPOs, the first major listings since the U.S.-led invasion that toppled Saddam in 2003, are a condition of their 2007 licence agreements. "Telecoms companies across the Middle East have been forced to launch IPOs within a few years of starting operations -- if the carriers don't need to raise cash, it's not something that makes economic sense for them," said Pedro Oliveira, partner at consultancy Oliver Wyman. The companies have invested billions of dollars in war-ravaged Iraq and are loath to launch untimely flotations.
But for the bourse, the IPOs are a matter of prestige, a sign that Iraq is open for big business after the dark years of civil war that followed the removal of Saddam.
If they fail to go ahead, it would show the challenges still facing investors in Iraq's developing market and underscore concerns over the uncertainty of local regulation.
RISK OF FINES "Defying regulators in emerging markets is a dangerous game," Oliveira said. "If operators were fined for missing the deadline, it doesn't mean the regulator wouldn't impose further penalties later." The companies seem willing to take the risk and are in talks with Iraq's telecoms regulator and the bourse.
Failure to extend the time limit will mean penalties from a regulator not shy to impose them. In February, Zain Iraq was fined $262 million for sim card violations. Ahmed Alomary, commissioner of Iraq's telecoms regulator, said the carriers were unlikely to list in time and there would be a process to impose any penalties. Iraq's bourse is up about 40 percent in 2011, but it remains in its infancy: market capitalisation is around $3.8 billion and daily trading in May was less than $2 million. Add political instability -- violent civilian deaths hit a five-month high in June -- the absence of an IPO track record and volatile global markets and it is no surprise that the telcoms companies are wary.
Violence has eased since its bloodiest during 2006-2007. The mobile phone market has boomed and foreign investment is rising in industries from oil to construction. But insurgents and militias still carry out daily bombings and assassinations and Iraqis struggle with weak basic services such as power supplies. Market leader Zain Iraq warned it faced a 'big challenge' to meet the deadline. Asiacell, 30-percent owned by Qtel, says an IPO depends on clarifications of license terms and company law. Korek says it can IPO in time, but would prefer to wait. "The three operators feel the timing is not conducive to launching IPOs -- they would rather sell a smaller percentage or delay it altogether," said a telecoms industry source. EXCHANGE NOT READY The bourse seems unready for the IPOs, which could lift market value by more than half, potentially destabilising the market. Fewer than half the 85 listed stocks are active daily and not many boast more than 20 trades.
Nomura gives Zain Iraq an enterprise value of $4.9 billion and Asiacell $4.4 billion, making quarter stakes in both worth about $2.35 billion combined. "There's a strong appetite for the IPOs, but the market would probably not be able to absorb all at once," said Sherif Salem, lead manager for Invest AD's Iraq Opportunity Fund, which has about $12 million invested in Iraq equities.
Carriers would not get acceptable valuations due to the low liquidity and market breadth. Secondary trade may also weigh on share prices, trimming the value of shareholders' remaining stakes and potentially upping future borrowing costs. "Even if these IPOs were sold into developed markets, they would be low multiple transactions," said Martin Mabbutt, Nomura telecoms analyst. "Data is enjoying explosive growth, pushing operators to meet this rising demand, but it's very hard for them to monetise this."
OTHER OPTIONS Iraq is one of the few regional markets to offer double-digit subscriber growth, with mobile penetration low by Middle East standards at 76 percent, according to 2010 International Telecommunication Union data. That puts Iraq 133rd in the world.
By comparison, Saudi Arabia has a penetration rate of 188 percent, Kuwait 161 percent and the United Arab Emirates 145 percent.
Iraq has also yet to introduce 3G and earnings will grow once these services are rolled out and penetration levels rise, so it makes sense to wait with the IPO. Zain, which owns 72 percent of Zain Iraq, could probably earn more per share selling the licence to another operator than through a flotation. The remainder is held by Iraqi investors.
Analysts say the carrier, which divested its African assets last year, may sell some of its seven licences separately after a failed $12 billion takeover by the UAE's Etisalat in March. Zain Iraq is a prize asset, its $1.5 billion in revenues in 2010 -- nearly a third of the group total -- alluring to former Gulf monopolies battling sinking home revenues. Floating the company in August at likely low multiples would set a benchmark for potential bidders later on. Asiacell provided 19 percent of Qtel's revenues in 2010. "Qtel wants as big a share as it can get in all its operations and doesn't want to dilute its holdings," added Nomura's Mabbutt. "That's probably true of all Iraq operators." Carriers could instead seek dual listings, said James Hogan, chief executive of HSBC Iraq. "You're looking at a minimum 12-month calendar -- given the relative lack of experience we all have here in Baghdad, that would probably take longer rather than shorter."