As Ethiopia is gearing up to open its capital market, the Capital Market Authority and Securities Exchange are going full steam with the fund-raising road show for the latter with a target opening of 2024. As ambitious as it is, it’s happening.

To add fuel to the momentum, the School of Commerce and the Chartered Institute for Securities and Investment (CISI) have also recently started training professionals, intending to increase the talent pool in the market. Amid all this, one of the real estate players, Flintstone, announced that it was issuing shares to the public[1].  This blog sheds light on the process currently and what it might be when the capital market opens.

Currently, without the new capital market infrastructure, a company that issues shares to the public: prepares a prospectus that outlines the price per share, the draft memorandum of association, a summary of expert valuation (if there are contributions in kind), and the management team; submits it to the Ministry of Trade (MoT); secures approval; and announces that it will sell the shares. In this process, the price is fixed by the issuer, the involvement of professional service providers is limited to audit firms and lawyers and the MoT review process is opaque. The process lacks transparency and offers limited information to the public to make the ultimate decision: buy or not buy, and at what price?

In the future, going public will be a lot more sophisticated with the involvement of an underwriter and/or lead arranger (an investment bank), a transparent process, and ultimately market factors determining the price of the issued shares.

Internationally, an IPO process (preparation & execution) takes between six months and two years; it would be wise to assume the same in Ethiopia, if not more, at least initially. But the more critical question here is why and what takes place within that time frame, despite its duration.

Company readiness: The company planning to go public needs to understand and be aligned with existing shareholders about why it aspires to go public. A company usually goes public to raise more money when it thinks it has matured and has the muscle to cope with the regulatory requirements of going public or payout a return to existing shareholders for taking the early risk.

Choosing the underwriter: The selection of the underwriter is also critical, as it has the potential to dictate who invests in the company and how smoothly and efficiently the process runs and is executed. A company can base its decision to select the underwriter on industry expertise, previous track records, prior relationships, etc.

Due diligence and regulatory filings: Throughout the IPO process, companies must fill out and submit a variety of documents, including financial statements. The registration statement is the key document used to file the IPO. It is divided into two parts: The prospectus and private information that must be submitted to the security authority are not required to be disclosed to investors. The underwriter prepares the prospectus, and the quality of the research conducted establishes the assumptions that drive the business.

Pricing: After going through a rigorous regulatory and compliance process, the underwriter starts book building, which in most cases sets the base for setting the IPO price. During the roadshows, potential investors get a deeper understanding of the financial performance, strategy, and management team of the target company. In the roadshows, the underwriter receives nonbinding offers from investors, which are then used to set the offer price for the company. Alternatively, there could also be a fixed-price IPO, which is set by the company in consultation with the underwriter. In both cases, the offer price is impacted by factors including the current value of the company, future prospects, and market forces (demand and supply).

Going public: The final stage of an IPO is going public: listing, which enables shares to trade in the secondary market.

Flintstone might just be the last company to “go public” in the current environment without the capital market infrastructure. In the future, there will be more companies going public; time will tell who the first company to IPO will be.

[1] https://businessinfoeth.com/flintstone-homes-to-go-public/