News Column

Vanguards of cautious change

June 1, 2014

Later this year, Jeddah's most venerable financial institution will float 15 per cent of its stock in an initial public offering (IPO) on the Riyadh bourse, in the first Saudi bank flotation in six years and one of the region's largest share sales for years.The move is significant because of the identity of the bank in question, National Commercial Bank (NCB). Currently majority held by the government via the Public Investment Fund, NCB was established by members of one of the Western Province's legendary business families, Bin Mahfouz, back in 1953. Privately held until 1999, when the Saudi government intervened in response to a sharp rise in non-performing loans, the decision to sell 15 per cent of the bank's stock represents a significant shift in the bank's ownership structure.

Having started out as a privately-held institution, before moving into the state's hands, the Jeddah-based bank is now moving full circle, evolving from a family business into one that is finally being opened to the Saudi public to invest in.

NCB's example is not typical of Jeddah's entrenched family firms. Very few have sought to go public, until now. In the the case of Bin Mahfouz, the wresting of control of the bank from the family to the state - ahead of its proposed IPO - was out of necessity rather than choice.

Some of the kingdom's largest family firms were founded in Jeddah, historically the country's commercial hub. Families like Binladin, Bin Mahfouz and Binzagr - who can trace their origins to Yemen's Hadramawt region - and others like the Alireza family, who founded the Xenel Industries conglomerate, developed sizeable businesses out of their Jeddah base, which until 1979 was the kingdom's capital. These powerful companies grew by servicing the construction and downstream services associated with Saudi Arabia's hydrocarbons boom, as well as engaging in traditional agency business, representing major international brands under license from their foreign owners.

Jeddah's family firms can lay claim to being the heartbeat of the Saudi private sector, which is heavily dominated by these companies. More than 80 per cent of the businesses in Saudi Arabia are family-owned or controlled, consultancy PwC estimates.

Their success - Saudi Binladin Group (SBG) is by far the largest construction company in the kingdom, securing a massive $7 billion contract in 2010 to build the first phase of King Abdulaziz International Airport in Jeddah - has in some cases insulated them from pressures to reform the business model and engage in succession planning.

But even SBG is looking at an IPO. Its affiliate Construction Products Holding, a building materials and services company with annual sales of about SR10 billion ($2.7 billion), was reported earlier this year to be planning a public flotation by the summer, with plans to offer 30 per cent of its shares.

That would represent another significant move by one of the most powerful business empires in Saudi Arabia, and provide a potential signal to others to consider IPOs.

It would not be the first Jeddah family business to go public in recent years. Back in 2008, just before the financial crisis brought the Saudi IPO industry to a grinding halt Halwani Brothers Company, a diversified food and retail group, floated on the Saudi Tadawul.

Established in 1952 as a family operation, the company offered 30 per cent of its shares to the public in an IPO that was oversubscribed nine times. The Halwani family interest is now represented only by Muhammad Abdulhameed Halwani's estimated seven per cent shareholding.

There is growing pressure for businesses to follow these examples. Family business contributes around one-quarter of Saudi gross domestic product (GDP), noted Jeddah Chamber of Commerce and Industry (JCCI) chairman Saleh Kamel at a forum two years ago.

"There are more than 5,000 family businesses across the kingdom, of which only 156 are listed on the Saudi bourse. This is a small figure compared to the prospects this market holds," Kamel told the forum in Jeddah in July 2012. The JCCI itself has sought to encourage more private sector players to go public.

"The new generation should plan a better future for their businesses, primarily by choosing qualified management teams, effective investment modules, and competition methods," JCCI deputy chairman Mazin Batarji told the forum.

Many of Jeddah's family firms are taking up that challenge. Some of the largest have migrated from the old rent-based contracting model, or from agency arrangements with foreign importers.

Groups like Xenel Industries have pursued an aggressive diversification policy. The successor to one of the region's oldest trading houses, established in Jeddah in the mid-19th century, Xenel now operates affiliates in the US, Pakistan and Singapore, with interests ranging from real estate through healthcare to construction.

While going public with share offerings of minority stakes is one avenue for broadening the ownership model, Jeddah family firms have experimented with alternative forms of ownership, including private equity. In 2008, Kuwait'sGlobal Investment House's (GIH) private equity arm acquired a majority stake in the Jeddah-based Al Sawani food and industrial supply company, leaving the original family with just a 40 per cent stake. That was a bold move in the context of the kingdom's business culture.

Building trust is essential to getting the ball rolling. At the time, GIH's senior vice president said: "Saudi families know us, they trust us, and they now understand the value we add to their business."

Such moves suggest Jeddah's biggest businesses are alive to the need for change. But more adaptation will be needed, with formal family governance structures the exception rather than the rule.

As a Pearl Initiative/PWC report on Gulf family firms notes, the conglomerate structure of many GCC family firms means that individual businesses are often run by different family members, so the owner/founder is the only director with a clear idea of the business as a whole. When control passes to the next generation, those on the Board may lack the knowledge they need to make objective decisions about all the diverse parts of the business. The risk, should this occur, is that decisions will be made for emotional rather than commercial or strategic reasons, and conflict can arise between different 'fiefdoms'.

With the likes of SBG and NCB taking the initiative and launching IPOs, Jeddah's business elite will likely be in the vanguard of change, though in the traditional Saudi manner it is likely to prove a gradual process.

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Source: Gulf, The (Bahrain)

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