* Asiacell's $1.35 bln IPO is country's biggest
* Success could energise stock market, lure foreign funds
* But valuation of offer does not look particularly cheap
* Questions over small market's ability to absorb shares
* Absence of foreign banks may limit interest abroad
By Aseel Kami
BAGHDAD, Jan 2 An advertisement for Iraq's stock exchange, running in local newspapers over recent weeks, poses the question: "How can I invest in shares?" It then assures readers that the process is easy, advising them to contact brokerages for details.
Another ad, by Iraqi mobile telephone operator Asiacell, warns readers: "Be ready, because we are ready."
Investors will get a chance to buy into the country's oil-fuelled economic boom this month as Asiacell seeks to raise at least $1.35 billion by floating 25 percent of its share capital on the Baghdad stock market.
It will be the country's largest-ever initial public offer of equity, and one of the Middle East's biggest share offers in the last several years - the first major IPO in Iraq since a U.S.-led invasion toppled Saddam Hussein in 2003.
So it will be seen as a test of investor confidence in an economy that is recovering from years of war, political instability and financial sanctions.
Officials hope a successful IPO will galvanise the stock market, luring foreign money into the country and helping make the market a useful tool for Iraqi companies to raise funds for expansion.
But the country's small and undeveloped financial system is lagging its economic growth, and this could hinder Asiacell's IPO, preventing some of the shares on offer from being sold. The stock market may have trouble absorbing the new supply, and interested foreign investors may find it difficult to move their money into the country.
Saad al-Bayati, an economist based in Baghdad, said a weak investment environment because of political instability, unreliable physical security and capital flight from the country would jeopardise such a large IPO.
"All these are issues which affect the share market and do not allow for rational economic predictions," he said.
FIRST OF SERIES
Asiacell, in which Qatar Telecom owns 54 percent, will sell 67.503 billion shares at a price of at least 22 Iraqi dinars ($0.02) per share in the IPO, which starts on Jan. 3, the company said in a statement last week.
It is expected to be the first of three big telecommunications IPOs in Iraq; Asiacell and its two domestic rivals, Zain Iraq, a subsidiary of Kuwait's Zain , and France Telecom affiliate Korek must raise funds through IPOs as a condition of receiving their $1.25 billion operating licences from the government.
All three companies missed an earlier deadline of August 2011 to do so, arguing the stock market was not sufficiently prepared at the time, and have been fined for the delay.
The IPO requirement is a way for authorities to try to encourage private ownership in an economy still dominated by state-owned companies, and to spread more of the wealth created by Iraq's recovery around the population.
Taha Abdulsalam, chief executive of the Iraq Stock Exchange, told Reuters that the listing of Asiacell's shares on Feb. 3 would be a boon to the market by adding the telecommunications sector to investors' options.
Currently the market, where the main equity index fell about 8 percent in 2012, has about 85 listed firms with capitalisation heavily focused on the banking sector, though there are also stocks in industry, insurance, hotels and agriculture.
Abdulsalam predicted the market's trading volume, which was around $3 million per day this year, would rise about 10 percent because of the listing.
In the long term, telecommunications could be a great bet in Iraq; the International Monetary Fund predicts Iraq's economy will grow more than 10 percent this year and at least 9 percent annually over the next five years, aided by rising oil output. That should boost demand for higher-end data services.
Asicaell, which claims to have a 43 percent share of revenues in the mobile phone market and 9.9 million subscribers, posted net income of 474 billion dinars in the first nine months of last year, against 505 billion dinars in all of 2011, according to a company statement.
Based on a 22 dinar IPO price, Asiacell shares are likely to be valued at about 9.6 times expected 2012 earnings, according to Reuters calculations. That may not be seen by investors as generous - the valuation is similar to that of Qatar Telecom in Qatar's better developed, less risky stock market - but it could be justified by Iraq's long-term growth prospects.
Asicell's IPO may not go as smoothly as the long-term economic outlook suggests, however. The Iraqi stock market's current capitalisation is only about 5.6 trillion dinars ($4.8 billion), so Asiacell's float may not be easy to absorb in one gulp. All three telecommunications firms combined are expected to roughly double the market's capitalisation.
Furthermore, a mass share-owning culture has yet to develop in Iraq, where many people - mindful of the country's troubled political history - prefer to keep their money in liquid cash or bank deposits.
"I do not invest my money in the bourse because there is no profit expected. Most of the companies registered are not profitable companies," said Akram Mohammed, a 30 year-old engineer in Baghdad. He keeps his savings in a bank.
Foreign investors, whose ownership of listed shares rose to 19 percent at the end of 2011 from 3 percent in 2008, might be expected to buy shares in Asiacell.
But this hope has been complicated after two international banks, Morgan Stanley and HSBC, late last year cancelled plans to help manage the IPO. The banks declined to comment on their reasons.
Baghdad-based broker Rabee Securities has been left as sole distributor and selling agent for the shares. Without the involvement of foreign banks, it may be harder to drum up international interest and to arrange share purchases in a currency which is not internationally traded.
Abdulsalam insisted that Asiacell's IPO would attract substantial foreign interest, however, and that it would help to encourage more foreign equity funds to enter Iraq. Five foreign funds currently operate on the Baghdad exchange.
"A lot of investors, whether Iraqis or non-Iraqis, send us messages saying 'we are a portfolio or a fund company and we want new shares, we want new companies'," he said.
"Can you imagine how much passion there will be? There is a passion and a thirst" for shares in the Iraqi telecommunications companies, he added.
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