Literature Review

Private Equity: Lost for ideas REGIONAL 22 Jun 2007

Cash-rich funds find investment opportunities elusive. Victoria Robson reports

Capital raising for private equity funds in the GCC reached $10,000 million in 2006, according to a joint report published by Dubai-based Ithmar Capital and Dow Jones Private Equity. The figure was almost double the $5,700 million raised the year before. Finding capital in the GCC to fund deals is not a problem. There are plenty of investors interested in putting cash into the proliferating number of private equity funds. However, securing a pipeline of deals in the GCC is harder. Few funds target investments in a specific country, because of the risk of relying on a thin trickle of deals from an individual market. Family businesses are an obvious target for private equity investors. They account for the majority of private sector enterprises in the GCC. Highly diversified, large holding firms offer rich pickings to investors looking to buy a division of the business, increase its value through the addition of capital or expertise, and sell it off for a profit. But few families are tempted to spin-off even non-core assets. “Family businesses will be the largest contributor to the private equity space,” says Faisal bin Juma Belhoul, managing director of Ithmar Capital. “The issue is the reluctance of family businesses to give up control or a stake.” Originating deals The number of potential transactions remains huge, untapped and difficult to source. Financial intermediaries in the GCC that introduce deals are scarce, prompting private equity houses to use their shareholders and co-investors as deal originators. The practice raises corporate governance questions about the objectivity of investment decisions and the distribution of funds between the firm and third-party investors. The absence of a sourcing network further excludes international firms. “It is a gap for international players to bridge,” says Omar Adel el-Maghawry, managing director of Dubai-based Corecap. Acquiring family business assets requires local knowledge and tact. “The region is relationship driven and is very much a closed culture,” he says. “Owners see companies as children and if they want to engage with another business, they have to check the background.” Attractive assets Many family businesses either do not need, or will not admit they need, investor capital. But they are interested in acquiring management skills, sector expertise and access to markets. “You need to bring the money and the idea,” says CN Ramachandra, partner, advisory corporate finance, at Bahrainbased KPMG Fakhro. Consequently, the progress of transactions is slow. “You cannot rely on family businesses for deal flow,” says Rana Al-Khaled, director private equity at National Bank of Kuwait. “It takes too long.” Privatisation is another potential source of GCC private equity deals. But it is also taking time to bear fruit. Energy and utility assets are particularly attractive. “A lot of governments are saying they do not want to be in business any more, they want to be in regulation,” says Ramachandran. “But it is not happening at a pace everyone would like.” Following the regional stock market collapse, firms can no longer buy a stake in a company, take it public and realise a huge return on the back of inflated stock prices. The time and expertise it takes to make a profit on an investment promises to weed out the smaller, inexperienced firms. “You will see some consolidation in the industry,” says Ramachandran. “The market is not yet mature.”

market in focus: regional: Repatriate games REGIONAL 9 Mar 2007

The impact of global stock market falls is becoming apparent. Matthew Martin reports

Regional stock markets such as Saudi Arabia’s could benefit from the repatriation of funds as investors look to divest from underperforming markets such as London and New York, according to observers. As international markets begin to look less attractive, Arab investors are expected to start bringing their money back home in search of better yields. Western investors are meanwhile doing the opposite. Middle East markets that are more open to international investors, such as Egypt, have posted declines as investors sell to cover poor performance of stocks in the West. The fall in global markets has failed to take its toll on the Saudi Arabian market. Although profit-taking following the bourse’s bull-run during the first two months of the year has steadied the market’s gains, it was up strongly over the course of February. Saudi Arabia’s Tadawul All-Share Index (TASI) was up just over 7 per cent between 28 February and 6 March, although this masked a more significant 21 per cent increase in the market compared with the beginning of February. The market fell as investors looked to book profits at a three-month peak. Standard Chartered Bank senior economist Monica Malik says: “I think we will see Arab investors start to look for better value opportunities in domestic markets and look for stocks with the best prospects.” The TASI could stand to benefit from this, although Malik says the market still suffers from a lack of actively traded stocks. It is also at a good stage in its recovery after the crash of March 2006, although it is still expensive in terms of price/earnings (PE) ratios compared with some of the region’s other markets. Malik says: “The TASI has become more reasonable in terms of price, but it is not as cheap as some of the other markets in the region. At its peak, the PE ratio of the Saudi Arabia market was about 40. It has dropped substantially since then but is still higher than the Dubai Financial Market and the Abu Dhabi Stock Market.” This contrasts with the picture in Egypt, which is the largest Arab market open to international investors. Delta Securities Egypt analyist Sarah Tolba says: “Since the Japanese market started to go down, Egypt has seen some profit-taking by international investors.” This has seen the market go through a four-day slump, bringing it down by 6.5 per cent on 6 March. “A lot of international investors are selling in emerging markets to make up for losses back home,” Tolba adds. Until the end of February, Tolba says the Egyptian market had been relatively stable. The uplift of foreign investment in the region had been preceded by a report by HSBC saying it was overweight in the region. “There has since been a lot of foreign flow into the region,” she adds. Whether markets like Saudi Arabia can capitalise on this repatriation of Arabic funds remains to be seen, but the impending initial public offerings of five new insurance companies will at least give investors some opportunities to buy into the market.

MARKET IN FOCUS: UAE : Global access COMPANIES UAE 5 Oct 2007

HSBC’s announcement that it has become the first international bank to establish brokerage services in the UAE is likely to lead to a significant uplift in institutional investment on the Dubai Financial Market and Abu Dhabi Securities Market. Although the brokerage sector in the emirates is already overcrowded, HSBC’s entry marks the first time that international institutional investors will be able to have access to the UAE stock markets. The news comes in the same week that 11 brokerage firms were suspended by the Emirates Securities and Commodities Authority (Esca) for failing to comply with new capital guidelines. Sherif Abdul Khalek, dealing room manager at HC Securities, says both events demonstrate that UAE markets are maturing. “The quality of brokers in the UAE is not very high,” he says. “There are about 100 companies offering brokerage services but there is not enough trading to support them all. The new rules and regulations will help improve the quality of brokerage firms, and the arrival of HSBC will increase the competition in the market.” The 11 suspended firms had failed to increase their capital from AED 10 million to AED 30 million and bank guarantees from AED 10 million to AED 20 million by 30 September, as Esca stipulated at the beginning of 2007. “AED 10 million was fairly easy for an investor to raise and then set up their own brokerage firm, but the market was just not sustaining that level of business, especially with costs rising,” says Khalek. Because of the low entry requirements, about 60 brokerage firms started in 2006 alone. HSBC Middle East Securities will begin trading in UAE stocks before the end of 2007, initially offering services to international institutions, before expanding to offer trading to retail investors. The bank will market Middle East investment opportunities to institutional investors and pension funds in New York, London and Japan. “Those sorts of investors are important for markets like these,” says Khalek. “They demand a high quality of research and are used to the standards of developed markets.” As part of the establishment of its UAE brokerage firm, HSBC has also created a new equities research team, the first international bank to do so. Having such a significant player join the market and channel large institutional funds into the region, should also help prices and trading to be based much more on fundamentals than rumour and speculation. “Other big international banks are not likely to be far behind HSBC, and the more that come here the better the standards of research will become, and trading activity will increase,” says one local analyst. Although the region is awash with cash, trading on the DFM has dried up over the summer. Average daily volumes on the bourse were only AED 600 million-800 million ($163 million-218 million). HSBC has also confirmed it is exploring opportunities to offer brokerage services in the Saudi Arabian and Egyptian markets. The brokers that have been suspended by Esca are: Merchant Securities, Al-Madina Finan- cial Brokers, Faisal Shares & Bonds Broker, Emco Financial Services, Delma Brokerage, International Shares & Bonds Center, Dubai Brokerage, Al-Theqa Financial Services, Global For Shares & Bonds and Falcon Financial Services. Matthew Martin

Dubai exchange introduces sharia-compliant structures

COMPANIES UAE 19 Oct 2007

The Dubai International Financial Exchange (DIFX) is to expand its range of traded structured products with the addition of sharia-compliant versions. The products, which allow investors to buy into groups of securities, are expected to list by the end of October. The exchange has already listed almost $14,000 million worth of sharia-compliant bonds. The DIFX launched the region’s first structured product platform, DIFX Trax, in August, targeted at retail investors. Investors can trade 23 securities that follow the performance of local and international stock exchange indices. Citigroup will join Morgan Stanley, Merrill Lynch and Deutsche Bank, which have already listed products, when it launches the Dubai Oman Participation Instrument. The capital guarantee note, a type of structured product, is based on the performance of the Oman sour crude futures contract listed on Dubai Mercantile Exchange. Retail investors can trade structured products through Mashreq Capital, a subsidiary of the local Mashreqbank, investment bank EFG-Hermes and local trading platform Mubasher but volumes have been low. “There has been minimal retail interest,” says Abdul Kadir Hussain, chief executive officer of Mashreq Capital. The exchange has opened a kiosk in the Mall of the Emirates to raise awareness of retailers.

Capital Markets: Winning the business UAE 1 Dec 2006

Every international financial centre needs an international stock exchange. The Dubai International Financial Exchange (DIFX) at the Dubai International Financial Centre (DIFC) was born of grand ambitions, set up to meet international regulatory standards to attract global companies. The new exchange was intended to be a beacon for international listings in the region. By seeking a place on the international capital markets stage, the DIFX has placed itself in direct competition with long established bourses in Europe and the US. A year on from its launch in September 2005, the exchange is struggling to meet the challenge. In Dubai, where the speed of change makes even the most dynamic business executives catch their breath, the torpor on the new bourse has become a talking point. There are 21 securities listed on the DIFX, of which 16 are traded. Of the listings, nine are Deutsche Bank certificates of index, three are illiquid sukuks and two are bonds. Only three companies – Dubai-based Kingdom Hotel Investments (KHI), Bahrain’s Al-Baraka Banking Group and Swiss-based Fortune Management – have listed ordinary shares and four companies have listed American or global depositary receipts (GDRs). In an early blow, shares in Beirut-based Investcom delisted from the bourse in August. Trading in the remaining equity stocks is scant. This is for a good reason. All equities listed on the bourse are also listed elsewhere and on established and more liquid markets. KHI ordinary shares trade on the London Stock Exchange (LSE), Al-Baraka stocks are listed in Bahrain and Fortune’s shares trade in Frankfurt. The strategy to host cross-listings successfully raises the profile of the DIFX and boosts its credibility, but it also raises the question why investors would buy and sell their shares on the DIFX if it is so much easier to do so on another market. “It’s a good question – how can we compete with them?” says DIFX chairman Henry Azzam. “It takes time.” But it may not only be a question of maturity. With its staunchly international outlook, wholesale profile and location in the offshore DIFC, the DIFX sits deliberately outside and separate from the local market. Despite its global character, it is still searching for an international client base. Investment banks from primarily Europe and the US that have crowded into the DIFC are also global in outlook and point their

clients towards markets with which they are familiar. “Investment bankers advise their clients to look to London first,” says Azzam. “We want investment banks to convince clients to come to us.” Local investment banks, which have a regional perspective and could have been early stakeholders in the bourse, have shown little interest. Initially, compliance standards at the DIFX excluded them. Now the market has opened to local members. But still they do not come, preferring instead to make a lucrative living advising clients and investors ploughing money into other regional capital markets. While struggling to capture the business of local financial institutions, the DIFX has also failed to cater to a cohort of local and regional investors who are highly liquid and who do not invest far from home. “There’s a segment of investors in the GCC who don’t do business in London, New York or Tokyo,” says Khalid Sifri, a partner in Dubai-based Rasmala Investments. “You could bring them into the DIFX by using regional investment banks instead of global ones. Even if the bourse becomes liquid, you can’t expect international banks to transact business there.” As yet, little regional cash has targeted the bourse and prefers instead to play the local markets in Dubai and Saudi Arabia. Market capitalisation on the Dubai Financial Market (DFM) stands at $68,097 million and on the Tadawul about $340,000 million, compared to equity market capitalisation of $7,432 million on the DIFX. This is despite a severe stock market correction that has plagued GCC markets for most of the year. Neither are regional investors, who are largely retail in nature, familiar with how the DIFX operates. In a good example of a clash of investment cultures, the route is unclear to many regional participants on how to subscribe to a future initial public offering (IPO) of shares. Local investors are used to filling in a form, sending it to a receiving bank and hoping for an allocation. On the DIFX, the process of applying for shares through an institutional member of the offering syndicate – normal practice elsewhere – is alien in the Gulf. Regional issuers are also more tempted by local markets. “People are interested in listing on the DFM, where the PEs [price/earnings ratios] are higher,” says Emirates Securities managing director Mohammed Ali Yasin. “The DFM is much more attractive. Its problem is that it’s regulated by the ESCA [Emirates Securities & Commodities Authority] and is not a platform for international funds.” To capture some of the local business, the DIFX has permitted local brokers through a member custodian to transact trades on the bourse. “They are trying to make a link between the DFM and DIFX to make use of the DFM liquidity and the relationship that exists between brokers and clients,” says Yasin. To spark trading, the DIFX has signed up Deutsche Bank as its first market-maker, which will trade shares in KHI and South African mining company Gold Fields. Dubai-based investment bank Shuaa Capital will become the second market maker when a suitable new issue lists. New listings are vital. “There are many in the pipeline and we’ll see some by the end of the year,” says Azzam. “It’s a chicken and egg situation. We don’t have liquidity but we need more listings.” Companies from China and India have expressed an interest in listing on the DIFX, he says. The listing of shares in Dubai-based Oger Telecom was due to boost the exchanges’ quota of large, regional companies. In a tried and tested model, the company was also to list GDRs on the LSE. But Oger Telecom cancelled its proposed IPO on 21 November, its conditional listing date and three days before its formal listing. The company changed its plans “in the light of increasingly challenging and volatile market conditions”, it said in a statement. Trading is unlikely to take off on the bourse without an exclusive listing. And it needs to be one that will make a splash around the region, appeal to local investors and draw the attention of international institutions. Obvious candidates would be an IPO of shares in a Dubai-branded, headline company such as Emirates, Nakheel or Dubai Aluminium Company (Dubal). “The DIFX needs a face,” says Salam Saadeh, Shuaa’s managing director, capital markets. “Everything else is ready – brokers, the market, investors are

there.” Such a listing would be a bold move for the company and the government. It would allow international investors to buy shares in a Dubai publicly-owned company, but require top-level support, as well as a change in regulations. Victoria Robson

CAPITAL MARKETS: Hoping for recovery UAE 1 Sep 2006

For some time, a chorus of glum UAE stock watchers has been decrying the state of the markets, disheartened by the ongoing correction that began at the end of last year. But there are signs that the tide may be turning. The slump – which turned into a slide in mid-March and has continued through the third quarter, fuelled by wavering investor confidence, the summer exodus from the Gulf and the conflict in Lebanon – could be gently reversing. The markets stabilised in August as the volatility that has plagued them since spring abated. The Dubai Financial Market (DFM) and the Abu Dhabi Securities Market (ADSM) have been trading sideways on meagre volumes as the remaining speculators fled the market over the course of the summer. Non-UAE funds have turned their attention to the DFM and ADSM, eyeing stocks trading at an attractive average price/earnings ratio (PE) of about 15. Trading volumes climbed almost 50 per cent from July with average daily turnover of AED 599 million on the DFM in mid-August and AED 115 million on the more conservative ADSM. Liquidity remains low compared to market capitalisations of about AED 207,000 million on the DFM and the ADSM’s AED 304,000 million. But a clutch of new listings will increase market breadth, bringing the total number of stocks to 113. Kuwaiti companies Bayan Investment Company and Kuwait Commercial Markets Complex Company, as well as Fujairah Trade Centre, have received approval from the Emirates Securities & Commodities Authority to list. In a sign of a tentative improvement in investor sentiment, the DFM index rose by 11 per cent over the course of August, trailed as usual by its less dynamic cousin in Abu Dhabi, which showed a 5 per cent rise. Leading the rally were shares in DFM bellwether Emaar Properties, which outperformed the market. And this time, the market held up against profit-taking on the price rise. Emaar shares were trading around AED 13 at the end of August, up 20 per cent over the course of the month. But the price was still well below Dubai-based Shuaa Capital’s reported fair value target of AED 18.70, making it an attractive buy. Emaar’s 2005 earnings announcement is often cited as a cause of the market dive in March and the stock overshadows trading on both exchanges. Any movement in the stock in either direction is taken as a message by investors telling of things to come. “Emaar’s movement up reflects on the ADSM,” says Emirates Securities managing director Mohammed Ali Yasin. “There’s a wide spectrum of shareholders that are able to liquidate if the stock moves up, generating positive sentiment. The markets are highly interlinked. There’s no investor in Abu Dhabi that’s not invested in Dubai.” But this quarter’s earnings reporting season is over with no unpleasant surprises. Worries about banks’ exposure to dropping markets appeared to be unfounded, at least in the short term, with most banks reporting very healthy first half profits. “People were waiting for the release of results and were expecting the worst,” says one analyst. “Earnings came out in July but the market did not move.” Trading was also unaffected by the initial public offering (IPO) of shares in Gulf Navigation Holding that closed on 7 August. The low profile IPO was oversubscribed a healthy 3.5 times, but contrasted with previous issues, such as the enormous demand in March for shares in Islamic finance company Tamweel, which was 485 times oversubscribed. Some analysts believe the Gulf Navigation offering signals a positive shift in investor profile away from aggressive retail speculators to informed market participants. In a move that could be seen as too little too late and with no IPOs on the horizon, the Central Bank of the UAE

indicated in late August that it will tighten rules on lending for IPOs. Market watchers, who have been patiently waiting out the downturn that has seen the combined value of bourses drop by a third since the beginning of the year, continue to mull solutions to scant liquidity. Proposals include a reduction in government stakes in listed companies, improved mutual fund regulation to encourage foreign fund managers, a change in the company law to allow businesses’ owners to retain a larger stake in an IPO and roadshows to promote the markets. One longstanding suggestion to improve the performance of the bourses has been to merge them. But despite the shared investor base, talk of consolidation has quietened now the DFM plans to privatise through an IPO of 20 per cent of its shares, pending legislative change. “It would be a stronger reflection of the economy if there was one market,” says Yasin. “The markets are small and it creates difficulties for investors. We have two markets and five to six trading floors. It wastes energy and efficiency.” As brokers, fund managers and the exchanges themselves hold their breath to see if the rally can be sustained, the worst of the market slide appears to be over. “We’ve probably seen the low for the year,” says Yasin, who expects blue chip prices to rise by 15 per cent by December. To that end, the recent uptick is perhaps the slow start of a market recovery. Victoria Robson

ALDAR PROPERTIES: Aiming to get it right UAE 7 Jul 2006

After five years as a spectator, Abu Dhabi now has a raft of developments to rival those of its neighbour Dubai. The scale is staggering: over the next 10 years, the UAE capital will carry out up to $100,000 million worth of projects. Real estate developers will be at the forefront of the projects barrage, which the government hopes will transform Abu Dhabi into a modern city that will last for generations. The largest of Abu Dhabi’s developers is ALDAR Properties. The company launched a hugely successful initial public offering (IPO) in late 2004 that was 450 times oversubscribed. In the following 12 months, the developer unveiled a range of mega-projects including the $15,000 million Raha Beach, the redevelopment of Abu Dhabi’s central market and the Al-Gurm resort. Despite the apparent sense of urgency, Ronald Barrott, the company’s recently appointed chief operating officer (COO), maintains the secret to lasting success is planning ahead and making sure everything is right before ground is broken and construction begins. “What is important is that you get it right. Yes, we want to develop as quickly as possible, but we are going to be careful, and we are going to ensure we get the job done properly,” Barrott says. “There is no point rushing development at the expense of quality and safety. It’s not the most cost-effective way of doing things. You get more for your money doing it properly than you will by rushing.” The company recently underwent an internal restructuring which, among other things, saw the introduction of a revised project management strategy for major infrastructure developments and the cancellation of tenders for the souk and basement packages on its Central Market redevelopment to allow redesigns to be considered and adopted. ALDAR’s philosophy meshes with the Abu Dhabi government’s own priorities. The emirate has a lot to lose if developments are not properly planned. The late Shaikh Zayed bin Sultan al-Nahyan, former UAE president and ruler of Abu Dhabi, left a legacy of environmentalism, and most of the emirate remains in pristine condition. The Environment Agency will not allow developers to proceed with construction work in sensitive areas without ensuring that environmental damage will be kept to a minimum. “Our resorts will be five-to-10 minutes away from the city centre. There is no other city in the world with a coastline like Abu Dhabi’s that can achieve this,” says Barrott. On ALDAR’s $15,000 million Raha Beach development, controlled masterplanning will be used to ensure

that all buildings, including the 60 towers comprising the central business district, relate to one another. Building heights will be regulated and there will be an overall design theme throughout the development. Sustainable development is a key goal. Rather than designing second homes in the sun, ALDAR is aiming to create communities that will attract full-time residents working in Abu Dhabi. There is already substantial demand from existing residents. Many have capitalised on recently relaxed ownership laws that allow developers to sell freeholds to locals and GCC nationals, and 99-year renewable leases to expatriates in designated zones such as Raha Beach and Reem island. A key consideration is the infrastructure development. Close co-ordination with government agencies is a prerequisite to ensure the provision of basic infrastructure, such as roads, sewerage and power, along with municipal services such as schools, clinics and fire stations. “We are looking at innovative ways of funding and running these elements,” says Barrott. ALDAR is also looking to leverage off other local initiatives. Abu Dhabi Tourism Authority is promoting the emirate as an international tourist destination, and government-owned Etihad Airways is being expanded to bring in the 3 million visitors expected by 2015. “Our relationship with Etihad is critical,” says Barrott. “The two businesses are intrinsically linked. Etihad brings in tourists, business people and work.” With the plans in place, ALDAR’s attention is now turning to construction. Recent experience from Dubai and Doha has shown the capacity of the region’s construction industry is finite, and many developers have had significant problems finding contractors capable of executing their projects. “If you look at the UAE in design terms, it has always been at the forefront, but it has been using structures and systems with regard to procurement that are quite historic,” says Barrott. “Commercially, we have addressed those issues and you will see ALDAR doing things in a completely different way from other developers in the marketplace. You will see a marked difference in the way this company goes about its business.” One way forward is partnership: ALDAR already has experience of the design and build model on the Diabetes Centre, which it recently project managed. It remains to be seen whether it will follow the example of Doha-based developer Qatari Diar Real Estate Investment Company, which established a contracting joint venture with France’s Vinci Construction Grands Projets (VCGP). There is no secret formula for successful projects. Each development has unique characteristics based on its location, design and target market. But by taking the time to consider its plans carefully and coordinating closely with the local authorities, ALDAR hopes to avoid many of the pitfalls that have emerged during the construction of high-profile schemes elsewhere in the region. Colin Foreman

TNI: The national knowledge UAE 30 Jun 2006

International players dominate the UAE banking sector, but local institutions are grabbing a piece of the ever-expanding pie. Home-grown investment companies are carving out a niche in capital markets advisory, wealth and asset management and private equity, areas that require local knowledge and contacts. Among the most active is Abu Dhabi-based The National Investor (TNI). With a capital of close to $150 million, TNI is one of the biggest investment banking institutions in the UAE and stands ready to meet rising competition from foreign banks. “The sector is becoming crowded,” says TNI’s chief executive officer (CEO) Orhan Osmansoy. “Some bulge-bracket institutions are coming. But we are a GCC-based institution and we know the market. We are committed and the risk of retrenchment isn’t there.” The number of local investment institutions is also on the rise, and for good reason. The stock market boom has provided rich pickings for local institutions. Initial public offerings (IPOs) on the Dubai Financial

Market and the Abu Dhabi Securities Market mean capital market advisory work continues to be profitable. Other expanding avenues for fee income include mergers and acquisitions, family business advisory and privatisation mandates. TNI has been operating in the market for more than a decade and has developed a reputation as a leading adviser on IPOs. Now, the company is trying to dispel the perception it is a one-trick pony by boosting its other business lines, focusing on asset management, real estate and private equity. In early June, TNI launched a $200 million real estate development fund, which will buy land and redevelop and refurbish property. And the company is planning more sector-specific funds. TNI will hold the second closing of its $150 million Capital Growth Fund in the summer, which will provide late-stage financing to businesses in the Gulf, the Levant and the sub-continent. “In the past, a big chunk [of our revenue] was driven by our proprietary portfolio,” says Osmansoy. “Two years ago, 90 per cent of our earnings were from equities. Now it’s closer to 25-30 per cent. The quality of our earnings has improved. We’re going from a one-cylinder engine to a four-cylinder engine.” TNI posted net profits of $30 million for the fiscal year ending March 2006, with its bottom line unaffected by the recent crash. “Most banks have taken a hit,” says Osmansoy. “TNI felt an impact on its proprietary book, but early on we took a defensive approach to equity investment, which pushed us to exit. We were exposed but not quite as much as our competitors.” The diversification away from stock market-related income also reflects a downturn in primary market activity. “We still have a healthy pipeline of IPO mandates,” says Osmansoy. “But on an absolute basis, IPOs have slowed down. We’ve not seen one come to market every week like a year ago.” The company is turning its attention to other regional markets and is planning to set up in Saudi Arabia. Osmansoy expects to hear from the Capital Market Authority (CMA) by the end of the year about its licence application. “We’ve got strong relationships with clients there and can leverage our contacts and our name. We’re doing more and more across the region for local money going out and outside money coming in,” he says. The company is also pitching for business outside the region. India, which supplies one third of TNI’s deal flow, is where Osmansoy sees enormous potential and plans to establish an office. “We have a captive client base in India,” he says. “We’ve had compelling opportunities presented to us in businesses that through an acquisition or restructuring can generate returns in excess of 25 per cent.” Typically, TNI is looking to invest over a three-five-year timeframe in Indian telecoms, oil and gas and shipping firms that require growth capital. Bridging the gap between markets, TNI will also advise businesses seeking to list on the Dubai International Financial Exchange (DIFX). Osmansoy is bullish about TNI’s future. “We are providing a service, pitching for mandates and can fend off competition,” he says. Victoria Robson

UAE: Learning the hard way UAE 26 May 2006

Investors in the UAE stock exchanges now recognise a painful law of the markets – what goes up must come down. The lesson has been a hard and often costly one to learn. Many retail investors, who make up the trading majority, are highly leveraged and are struggling to pay their debts now the gold rush is over. Despite repeated warnings of a long-overdue correction, the recent market crash has been a rude

awakening. “We’ve not been here before,” says Khalid Sifri, chief corporate officer at Dubai-based Shuaa Capital. “The UAE didn’t have an organised stock market three years ago. Now, the number of investors is quite different. There’s no history in terms of market capitalisation, prices and people involved.” The hordes of retail investors who scrambled to buy shares, many at the top of the market in late 2005, are now exiting in droves, creating sustained selling pressure that shows no immediate sign of letting up. In mid-May the Dubai Financial Market (DFM) All-Share Index stood at about 460, compared with a market peak of 1,267 last November and down more than 50 per cent since the beginning of the year. Its less exuberant cousin, the Abu Dhabi Securities Market (ADSM) All Securities Index, had slid from its peak of more than 6,100 last July to 3,400 in mid-May, and is down more than 30 per cent year to date. Brokers, fund managers, the markets and the government are searching for ways to rekindle investor faith. Beyond educating investors about the potential perils of plunging savings and borrowed money into the bourse, there are mounting calls for regulatory change. High on the agenda is a proposal to limit the number of initial public offerings (IPOs) that come to market. “You have to look at the IPO schedule to see if it is faster or slower than the market,” says Chahir Hosni, relationship manager at Prime Emirates brokerage. The overlapping IPOs of Islamic home finance provider Tamweel and the UAE’s second mobile operator du in early March raised in total almost AED 700,000 million ($190,690 million). The offerings exacerbated the correction, already in train since late 2005. The DFM dropped 11 per cent on 14 March, its sharpest decline on a single day to date. The Economy & Planning Ministry responded with plans to sequence further IPOs, rights issues and capital raising measures. For some, nothing short of a temporary ban on IPOs will do. Mohammed Ali Yasin, managing director of Emirates Securities, is blunt: “If they don’t stop, IPOs will fail.” No longer guaranteed to deliver immediate returns to offset the cost of borrowing, investors are increasingly wary of new issues. Shares in du cost about AED 6.60 ($1.80) for leveraged investors but were trading in late May at about AED 5.80 ($1.60). “People were willing to pay multiples,” says Tamer Bazzari, head of investment banking at Rasmala Investments. “But now with negative sentiment, they’re not prepared to pay for companies that have not shown a strong profit or have a track record.” In an effort to alleviate selling pressure, the government announced in mid-May a change to the share buyback rules that will allow companies to purchase up to 10 per cent of their own stock. The move addressed one recommendation, made by a committee of brokers and fund managers that met at the beginning of the month, to modify a clause that prevented companies from buying stock until its price had fallen below book value. But the change is not necessarily attractive to companies seeking to buoy their share price as, in many cases, their shares are now trading at prices higher than they sold them at. And the amendment will take time to have an effect, since any buyback of stock requires shareholder approval. Another recommendation of the committee was to establish a fund-of-funds to inject much-needed liquidity into the market. “Funds are stuck for cash and are highly leveraged,” says Yasin. “It’s not a bad idea to create a fund-of-funds to bring bank and government funds under one umbrella. It would be a kind of stabilising mechanism, independent of one bank, and would create liquid blue-chip stocks and increased demand for smaller stocks.” It would also create a counterweight to the mass of retail investors who trade with only short-term gains in mind. But the suggestion has been met with trepidation from some, who resist direct government intervention and the exposure of social security funds to a volatile market. “Pension funds are supposed to be safe,” says Bazzari. There are also appeals to the government to curb investor and broker behaviour and crack down on illegal activities. “There are rules, but the problem is enforceability,” says Bazzari. “There’s inside information and rumours being spread but people are not being fined.”

Another group of brokers representing about 70 institutions met with Emirates Securities & Commodities Authority (ESCA) officials in mid-May and recommended publishing a code of practice. The brokers also suggested blacklisting investors participating in overdraft transactions, forming an association to communicate with ESCA and limiting the number of new brokerage licences. The number of brokerages in the federation has almost tripled in the past year and competition is fierce. “Some practices need to stop,” says Yasin. “Bottom line is that you need to regulate margin trading. The majority of investors trade with money they don’t have and are encouraged by some brokers.” The practice compounds market volatility, encouraging trading early in the session and then stock dumping before the market closes. But one of the government’s first responses to the stock market downturn was to increase the ceiling on banks’ lending to 80 per cent from 70 per cent against the market value of shares to sustain liquidity levels. In a move that was possibly too little, too late, the Central Bank of the UAE sent round a circular in early May asking banks, financial institutions and brokerages to submit quarterly reports on their direct and indirect exposure to the markets through investments, lending and guarantees. But the picture is not entirely bleak. The drop in share prices has brought valuations down to far more reasonable levels. DFM pillar Emaar Properties was trading at a 2005 price/earnings (PE) ratio of 13.7 in mid-May and at about AED 11 ($2.90) a share compared to AED 27 ($7.30) around the market peak in November. There are buying opportunities and chances for institutions and foreign investors to get back into the market. “Now you can distinguish between good companies, companies not making money and those up because of hype,” says Bazzari. “There are good buys and foreign fund managers are interested.” And the end is perhaps, if not near, at least in sight. “We’ll see the bottom toward the end of summer,” Bazzari says. Until then market watchers are hoping for a period of stability, measured buying and reasonable valuations to signal that the slump is over. VR

DIFX : New exchange takes stock UAE 26 May 2006

The Dubai International Financial Exchange (DIFX) was launched to great fanfare last September. In contrast to underdeveloped and patchily regulated regional bourses, the new exchange presented itself to both investors and issuers as a market offering international standards of regulation. Eight months on, it is time to take stock. “We believe that we have been successful in achieving substantial progress in making this the premier listing destination in this region and the market with the greatest listing power,” says Nasser Alshaali, chief operating officer of the DIFX. “We now have 13 direct bank members and a good spread of international banks – the likes of Citigroup and HSBC – and regional institutions, such as EFG-Hermes and Shuaa Capital.” Certainly the DIFX has come some way from its humble beginnings. It launched offering just five indexlinked certificates from Deutsche Bank. Since then, several high-profile companies have staged initial public offerings (IPOs) through the index – notably Kingdom Hotel Investments (KHI), a subsidiary of Prince Alwaleed bin Talal’s Kingdom Holding Company, and emerging market telecoms operator Investcom. “It is encouraging to see the range of the five listed firms – a Saudi hotel company, a regional telco, a Jordanian pharmaceuticals company [Hikma Pharmaceuticals], a diversified Indian industrial conglomerate [Man Industries] and now a sugar company [India’s Rana Sugar, which listed on 18 May],” says Alshaali. “And note that none of these are from the UAE.” The pace of IPO activity on the bourse could hardly be described as frenetic. However, officials confidently predict an acceleration. Newly installed chairman Henry Azzam, who replaced the bourse’s first boss Lynton Jones in January, said in late March that he expected at least 10 IPO listings by the end of 2006.

Alshaali agrees: “I expect to see at least one capital-raising listing a month.” So far, all the listings have been dual or secondary listings. Hikma, Investcom and KHI all staged dual IPOs through the DIFX and the London Stock Exchange. The trend is reflected in the fact that many of the listed equities are global depositary receipts (GDRs) – with the company’s ordinary shares listed on a different market. “Hopefully, our first exclusive listing will be staged in the third quarter and should be the sort of listing that will generate investor excitement around trading on the bourse,” says Alshaali. Building a groundswell of trading activity will be crucial if the DIFX is to succeed in its ambitious aim – genuinely to fill the geographical gap between East and West in global financial markets. So far, trading has been painfully thin. A snapshot on 23-24 May showed that on both days, only KHI shares changed hands. “Unlike other new exchanges, which have been conversions from OTC [over-the-counter] markets, we had to start with a completely clean sheet,” says Alshaali. “We are still in the process of attracting a liquidity pool around a listed company or group of listed companies to create wider interest.” The exchange is also looking to widen its product range. In addition to equities and the Deutsche Bank products, the floating rate notes (FRNs) issued by Mashreqbank and National Bank of Dubai from their euro medium-term note (EMTN) programmes are listed. So too, to add an Islamic flavour to the mix, is the recent sukuk issued by Dubai Ports, Customs & Free Zone Corporation (PCFC) to fund DP World’s P&O acquisition. “We are looking both to increase the offerings of our existing products and to add new asset classes,” says Alshaali. “Derivatives should be available by the end of the year, for the first time in the Middle East. This is very exciting because it will help move speculative activity away from equities towards derivatives. It will help diversify options for listers. All the region’s markets are currently experiencing excessive liquidity chasing few, inflexible plain equity stocks in which you can only go long.” The stated “footprint” of the DIFX covers the GCC, the Indian subcontinent and South Africa. However, the trading system deliberately makes it impossible to determine from where the current smattering of traders come. “All trading is completely anonymous, with trades coming through our [member brokers] and the DIFX guaranteeing the trade,” says Alshaali. “This is very important, because it minimises the possibility of insider trading and counterparty risk.” It has been all change at the top of the DIFX recently. Not only has Lynton Jones already departed, but so will chief executive officer Steffen Schubert in July. He will be replaced by Per Larsson, a former head of Sweden’s Om Group, which owns several European stock exchanges. Schubert oversaw the project’s birth. Larsson will assume the task of nurturing it into maturity. CD

Interview: Osman Sultan, CEO, EITC: Ringing in the changes UAE 10 Feb 2006

In one of his first interviews since becoming chief executive officer (CEO) of the federation’s new operator EITC, the former MobilNil CEO, Osman Sultan, explains why the new operator will make a difference As a new operator in a market that already has high penetration rates, how will you gain market share and differentiate yourself from the incumbent? The level of penetration in the market we are entering is a key challenge. We are competing with a very established operator that has reached these levels of penetration without the proper focus on marketing. We will introduce very innovative products and services that could meet the needs of different segments and above all on customer experience across the entire value chain of the customer journey from availability of the product to how this product is suitable to certain segments. Because of the level of penetration and presence of the incumbent operator, I think we have to be more specific and have a better market understanding by focusing more on needs of the customers. We believe we will offer the next generation of product services that telcos can offer. It will not just be technology and services, but customer experience will also be very important; every single

point of contact from when the customer sees a billboard, to when they enter a shop and they buy one of the products. It will depend on how easy and uncomplicated we make the customer’s relationship with us and how they feel the emotional bond with the company. What experience does EITC have that will enable it to compete with Etisalat on a level playing field? We are bringing people that are well experienced from all over the world who have in-depth knowledge and have lived the issue of the conversions such as fixed to mobile or 2G to 3G. And we are bringing people from other areas that have experience and managed operations for the corporate market. We have people coming from these mature environments that have been instrumental in developing the telcos sector. People from the likes of Vodafone and Orange and regional players such as Q-Tel [Qatar Telecom]. We are building on their experience to reach our targets. Consumers are most interested in how competitive you will be. Which areas do you feel you will be most competitive and how? Our competitor has a very solid offering and it is far from me to underestimate them. However, I believe there is a possibility of differentiating our company and our offerings. The customer experience is the number one criteria that makes or breaks the success of any telecoms operator today. However, when it comes to competition on price there is a misconception in the market. If the question is on which field you are going to compete, our answer is on all fields, including pricing. But we have to be realistic. It will not be a cut-throat price war, because do you really believe I will go and strongly attack one of the strongest financial operators in this part of the world. Pragmatically, I cannot corner my competitor on that, but it doesn’t mean we won’t compete on having better prices or better value for money. I want to be clear the competition will play on all aspects of the value chain. I have experienced this and a lot of people working in the company have experienced it and we feel very comfortable in our ability to offer real value for money. But if people imagine that prices will be slashed on the first day of service, this is not realistically an option. We are dealing with a company with very deep pockets. If we did this [begin a price war], customers would churn very quickly and they [Etisalat] will not allow this. We have to be creative in our pricing, which means things like offering different packages. And by offering better value for money, prices will progressively go down or adjust and other prices that we see in the [regional] market will also be adjusted in a different way. What will be your roll-out strategy and when will customers begin to use your services? We are expecting to start offering a nationwide coverage on the mobile sector before progressively offering more and more on the conversion services. Technical constraints in areas such as fixed and broadband mean it will take more time to offer these services. We are looking at the second half of 2006 for mobile services, but I want to be a little vague on purpose in order to properly raise expectations. We want to claim with a lot of confidence that we are entering the market as the best in quality. We will not accept to offer less to our customers. If we are competing, this is not an option. What sort of targets have you set yourself beyond the first year of operations? At the moment, we can’t divulge this type of information, because these still need to be clarified, whether capital expenditure or market share. However, we are definitely looking at an initial public offering (IPO), which will be launched before the start of services. We are hoping this will be sooner rather than later.

Economy: What goes up… UAE 2 Dec 2005

Under current conditions, the federation’s economy could hardly fail to blossom. The twin pillars of record revenues from Abu Dhabi’s oil and Dubai’s booming real estate and tourism market are driving soaring gross domestic product (GDP) growth. With oil prices forecast to remain high throughout 2006, the general outlook remains positive. The only clouds on the horizon are steep-rising inflation, particularly in Dubai, and a stock market widely regarded as overheated. The UAE’s economy is more diversified than most in the GCC but oil remains the key. According to figures from the Economy & Planning Ministry, oil accounted for about 33 per cent of GDP at current prices in 2004, up from about 30 per cent the previous year, and 2005 is set to see another increase. Crude’s contribution to government revenues is considerably higher, at about two-thirds in 2004 and heading for about 75 per cent in 2005. Recent GDP growth has reflected both the surge in prices and increased production. Crude prices consistently at or above the $50-a-barrel mark have propelled nominal GDP growth, calculated by Standard Chartered Bank (SCB) at 25 per cent in 2005 and likely to be in the region of 10 per cent in 2006.

Production has also increased, boosting real growth. Since the beginning of 2005, average monthly oil production has increased by about 250,000 barrels a day (b/d) as OPEC quotas have been relaxed and new capacity brought on stream. In 2004, the economy expanded in real terms by 7.8 per cent, according to SCB estimates, and this is expected to rise to 10 per cent in 2005, before falling slightly – as high oil prices become the norm – in 2006 to 7 per cent. Making hay while the sun shines, Energy Minister Mohammed bin Dhaen al-Hamli in late November announced plans to boost production capacity to more than 3.5 million b/d from about 2.5 million b/d over the next few years. There are some drawbacks to the buoyant oil market. "While we acknowledge the fact that high oil prices generally lead to a healthy external balance for oil exporters on the back of higher government revenues, we remain concerned over the likelihood of potential internal imbalances unless appropriate corrective measures are taken," says National Bank of Dubai (NBD) in its latest quarterly report. The UAE’s economy is adding more strings to its bow, most notably the frenetic development of the real estate market – initially in Dubai but now being closely followed by other emirates. In 2004, real estate and business services contributed about 8 per cent of federal GDP while hotels and restaurants added a further 2 per cent, government figures show. The upshot is a healthy fiscal position. Statistics from the Central Bank of the UAE put the 2004 consolidated current account surplus at $12,900 million, a 71 per cent increase on the previous year. And the federal budget deficit – the only budget for which figures are available – was only $200 million, a fraction of the fiscal gap in previous years. Few complaints are heard about such economic conditions, of buoyant and relatively broadly based growth. But rising inflation and exaggerated asset prices are causing some concern. The inflation problem is evident both at a macro level and on the ground, as stories abound of tenants hit with hefty double-digit rent hikes. "Inflation is definitely a concern," says Steve Brice, senior economist at SCB. "Our estimate, contrary to official statistics, is that inflation in 2005 will average 7 per cent across the federation, and will be higher in Dubai – around 9.4 per cent. This signals that monetary conditions are too loose, in addition to a weak US dollar and interest rates too low for the current stage of the economic cycle." NBD’s conclusions are even more blunt. "Inflation, which was largely benign throughout 2003, began to rise in 2004 and a dramatic rise is expected in 2005. Significantly higher rent prices and increased fuel prices have led to strong cost-push inflation, while the increase in money supply and fiscal expansion has resulted in demand-pull inflationary pressures," says the bank’s most recent report. "Despite the central bank’s determined rhetoric to keep inflation in check, we expect inflation in the UAE to reach record levels this year… Although monetary authorities may well congratulate themselves in combating ‘official’ inflation, the current sharp increase in rentals which form the single largest constituent of the CPI [consumer price index] at 36.1 per cent raises considerable fears over the exact market rate of inflation, which we estimate to be at least 15-20 per cent." The other main worry is inflated asset prices, chiefly for property in Dubai and for listed stocks across the federation. The NBAD and Shuaa UAE indexes are up by more than 100 per cent since the start of the year and the Emnex index has surpassed 90 per cent. "The stock market is of the greatest concern," says Brice. "PE [price/earnings] ratios are averaging 35-40, which is similar to levels on the [US] Nasdaq before its crash, and could lead to a significant sell-off. Property is less worrying, because there is abundant demand and new supply is coming on gradually, so there is more likely to be a gradual deflation of the market than a crash." The government has taken firm steps to calm the primary market for shares, bringing to a close the bonanza for greenfield companies finding their untested shares dozens of times oversubscribed, by barring such issues until further notice. New rules on initial public offerings (IPOs) are under preparation. They are widely expected to end the universally vilified rule that at least 55 per cent of a firm’s shares must be sold, and at par. At present, the focus of IPO activity is the privatisation of existing state-owned companies (see pages 41-42). Late 2004 saw the offering of shares in Emirates Foodstuff & Mineral Water Company (Agthia), the first of the former assets of General Industry Corporation – now held by General Holding Company (GHC) – to be sold off. This was followed in July by the sale of a stake in Abu Dhabi National Energy Company (Taqa), set up by presidential decree the previous month to own assets in the power,

water, energy, oil and mineral sectors, both in the federation and abroad. Next to come to market are likely to be shares in the building materials assets of GHC. In the secondary market, NBD believes investors’ expectations will become more realistic over the coming year. "Going forward, we believe that 2006 will be a year of transition from a post-bubble stock market environment to a more moderate investing climate. Sentiment should moderate as we contend that investors are likely to adapt to the realisation that the UAE bourse will not replicate its 2005 performance unless a significant correction takes place which would bring prices closer to more realistic levels." Most observers agree that the stock market is due a correction and that inflation is a growing worry. However, with such strong economic fundamentals in place, as well as oceans of liquidity, the landing is likely to be a soft one. Clare Dunkley

RAK Heavy Industry: Raking up the potential UAE 2 Dec 2005

Shaikh Saud bin Saqr al-Qassimi, crown prince and deputy ruler of Ras al-Khaimah (RAK), is not one for hanging around. In May, his government – with the World Bank – organised a major conference outlining the opportunities and benefits the emirate offers to regional and foreign investors. One of the plans to come out of the two-day event was an innovative idea to develop a petrochemicals industry in RAK. Shaikh Saud announced that the government was looking at a joint venture (JV) with Iran’s National Petrochemical Company (NPC). In some ways it was not surprising. The region has the world’s largest hydrocarbons reserves resulting in relatively cheap and abundant quantities of gas feedstock. The high price of crude oil has inundated the Gulf with liquidity. Investors from across the private sector are considering the petrochemicals sector as a viable alternative to the flooded capital markets and real estate industries. Likewise, demand for Gulf products from the emerging markets of China and India is bullish. However, RAK’s planned foray into petrochemicals has generated considerable scepticism. And it is not difficult to see why. Unlike Abu Dhabi, and, to a lesser extent, Dubai and Sharjah, it has no hydrocarbons reserves to speak of. In addition, its industrial heritage has been geared to light industry and manufacturing and not the energy-intensive petrochemicals sector. That has been compounded by a shortage of available gas and power generation and a relatively underdeveloped infrastructure. Nevertheless, the World Bank completed in June a technical co-operation programme outlining the competitive factors existing in the emirate for attracting foreign investment and singled out heavy industries as a potential target sector. Since May, Shaikh Saud’s vision for RAK’s petrochemicals sector has become clearer. A project company, Ittihad Investment Company, has been created out of the newly established RAK Petroleum Company (RPC) to act as the holding company for RAK’s push into the industry. One of the first initiatives has been to propose a 50:50 JV with NPC. Under the plans, the venture will set up project companies such as Ittihad Polymers and Ittihad Chemicals Company to deliver on the emirate’s ambitions. Ittihad will initially invest in both Iran and RAK. In Iran, the venture will build the first olefins complex at Assaluyeh. It will contain a 1 million-tonne-a-year (t/y) ethane cracker, a 300,000-t/y high density polyethylene (HDPE) plant and a 250,000-t/y low-density polyethylene (LDPE) plant. In tandem, a 320,000t/y monoethylene glycol (MEG) complex will be built in the emirate, which will take ethylene feedstock from olefins 1. "Transporting ethane is highly volatile and the economics of doing it don’t work," says a source close to the project. "Therefore, what we have decided to do is to crack the ethylene at the source and then produce MEG in RAK."

The project will take about 42 months to complete. The UK office of Houston-based Stone & Webster Management Consulting Group is close to completing the pre-front-end-engineering and design (FEED) work, with the likelihood that it will move into the FEED stage by the beginning of 2006. Ittihad has also appointed Energy Projects Development (EPD) to work as project manager in the development stage and PricewaterhouseCoopers as financial consultant. "Those three derivatives [MEG, HDPE, LDPE) were chosen because of the market demands," says Izzat Dajani, chief executive officer of RAK’s Investment & Development Office. "Our close proximity to China and India and the project’s dynamics will allow us to develop downstream products from the MEG that will have a mushrooming effect for RAK." The plans are the cornerstone of developing a downstream petrochemicals base and creating job opportunities in the emirate. It aims to double both gross domestic product (GDP) from $7,000 million and the population, from just under 200,000, within 15 years. "This [MEG] plant will have a multiplier effect," says Dajani. "The end products that you produce can then be used as feedstock for other products. The idea of setting it up with feedstock providers opens the project up for investors to come in from the UAE and the region, offering them an opportunity to tap into an undervalued sector. It will also enhance the skills of management and enhance technologies in the emirate." Project costs are estimated at $1,500 million and will be financed through a 70:30 debt/equity package. However, international contractors that have been approached say that, until issues are resolved over the delivery price of the ethylene feedstock, a question mark will remain over the project’s fate. "We have started talking to banks, but our approach will be modest until we reach the FEED stage," says Dajani. Significantly, RPC has a mandate to develop several areas within the heavy industrial sector. The company is on a firm financial footing. It was established with a capital of AED 2,000 million and is waiting for Planning & Economy Ministry approval to launch an initial public offering (IPO). Given the strong response to the IPO of Sharjah-based Dana Gas in October, which was 200 times oversubscribed, and the high level of liquidity in the market, it should do well. Dajani says the company is made up of the cream of local and regional investors, high-level companies involved in the oil and gas sector and financial institutions, as well as the government. While the petrochemicals complex will be RPC’s first undertaking, a number of other initiatives are in the pipeline. It is planning to dive into upstream exploration and production in the oil and gas sector. "We are talking to various countries in North Africa and Central Asia [with a view to] securing concessions on blocks and reservoirs that will benefit the company and the emirate," says Dajani. "We will bring the right teams that are engaged in the sector with the right consultants, the right management structure and look at acquiring companies with existing assets in the industry." RPC’s final objective will be to develop vertical integrated refineries that will process gas enabling the emirate to possess control over its feedstock. "It will offer us more value-added products and better returns," says Dajani. "We’re studying this, and looking at a sum in the region of AED 1,500 million-2,000 million." With increased feedstock demand, the emirate has also taken steps to address its shortages. In early May, Abu Dhabi-based Dolphin Energy announced it would supply natural gas to RAK. The agreement will see the emirate receive gas for an indefinite period with restricted quantities of 40 million cubic feet a day until 2007 and then supplies increasing depending on its requirements. The Ras al-Khaimah Gas Commission has also signed an agreement with Indago for the processing and purchase of gas from the West Bukha field. The prospect of additional gas supplies has instigated plans for new power generation capacity. The emirate is now evaluating bids to set up a new 129-MW power plant, while the Federal Electricity & Water Authority (FEWA) is studying plans to build another station. Both will serve the industrial zones. RAK has also started work on its logistical infrastructure. Its ports are undergoing a $1,000 million upgrade and expansion with the assistance of the private sector. KGL Port Management, a subsidiary of Kuwait Gulf Link Transport Company, was awarded in 2004 a 21-year concession to manage and operate the container terminal at Mina Saqr. Private sector involvement is also planned at the airport, for which a new masterplan has recently been completed. The road system has also seen a marked improvement, with the new

Emirates road opening in mid-June and cutting journey times between Dubai and RAK to an hour. Starting from scratch, the emirate has set itself an ambitious objective. Nevertheless, government officials are undaunted about the challenges ahead. "We feel it will work because of the expertise of our partner, the availability of feedstock and the financial make-up of the company," says Dajani. Whether it can turn its economy around and add the oil, gas and petrochemicals sectors to its portfolio remains to be seen. John Irish

New moves on Umm al-Nar debt BANKING UAE 4 Apr 2003

Financial close set for June

The bank group supporting the consortium led by International Power (IP) on the Umm al-Nar independent water and power project (IWPP) is being expanded, a three-tier structure is being finalised and a schedule has been drawn up for the proposed financing package. The IP group was ranked in late January as first bidder for the project, ahead of France’s TotalFinaElf. The appointment of a foreign developer is awaited on the Abu Dhabi Water & Electricity Authority (ADWEA) project. "We are aiming for financial close in June," says one of the lead arrangers backing the IP bid. "The war in Iraq makes it difficult to call just when the syndication will be launched, but we’re working hard on this." The six-strong group of banks that originally backed the IP-led consortium has had two confirmed additions and the possibility of a third. National Bank of Abu Dhabi and First Gulf Bank have both joined – the former as an underwriter and the latter taking a $75 million take-and-hold ticket. It is understood that Royal Bank of Scotland might also join the lead arranging group. Attempts at further expansion have been thwarted by a reluctance on the part of international houses such as BNP Paribas and Credit Agricole Indosuez to participate. The six original banks are HSBC, Gulf International Bank, Bank of Tokyo-Mitsubishi, ING, Sumitomo Mitsui Banking Corporation and West LB (MEED 31:1:03). The first three have underwritten the transaction and the last three have committed to take-and-hold positions. The proposed financing package is likely to be divided into three tranches. The first is a $900 million, 20year commercial facility. The second, worth $250 million, will also have a tenor of 20 years and will be Islamically structured: Abu Dhabi Islamic Bank is expected to lead and Kuwait Finance House and Dubai Islamic Bank are probable participants. The third tranche, a $300 million facility, will have a tenor of only five years – it will be used to finance the acquisition of existing assets on the brownfield project – and is expected to be the preserve of the regional banks in the lead arranging group.

Saturday, Sep 29, 2007 Gulf News The UAE has opened the door for family-owned companies to float some of their stock in a public offering without relinquishing too much control, but will they take the plunge?

The UAE Federal Government recently lowered the ceiling for commercial companies to float 30 per cent of their shares on the stock market, from the 55 per cent minimum earlier, a move widely seen as a tantalising offer for family-owned businesses to seek a public listing. "This is a massive change. I think the government has changed the regulation knowing it will increase activity in the market and re-energise it," says Amer Halawi, securities director at The National Investor. Halawi recently wrote a report on the UAE IPO market before the law was amended, identifying the 55 per cent law as one of the seven issues to be addressed to reactivate the country's IPO market. "Reducing the minimum float would encourage more businesses to come to market, thus participating in greater depth, breadth - and ultimately liquidity - for the market," he wrote in the report. Khalaf Habtoor, founder of the Habtoor conglomerate, was the first to heed the call, stating on Arabic TV channel Al Arabiya that Al Habtoor Engineering could be the first jewel from his group on the IPO block by 2008. This will be the first time a family enterprise offers a public sale in the UAE. Family concerns in other Gulf states such as Saudi Arabia, Bahrain and Kuwait have gone public in the past, with mixed results.

in Saudi Arabia and Nass Corporation in Bahrain were among the half a dozen family company listings in the past few years, while Kuwait's Hayat Communications Company went for a private placement before a public listing on the Kuwait Stock Exchange in 2006. Fawaz Abdul Aziz Al Hokair

Bare cupboard The cupboard is even barer in the UAE. Tentatively, only Future Pipe Industries, owned by a Lebanese family group, Damas Jewellery and Damac Holding, have announced their intention of going public in a couple of years, according to the Zawya IPO Monitor. "I hope the law will mean the listing of more quality businesses," says Deon Vernooy, head of asset management at Emirates Investment Services, who manages more than Dh5 billion in funds. "I would like to see major family businesses come on the market. But these processes take a long time, there might be a one or two-year lead time." "Although it is a step in the right direction, I am not sure if it's enough on its own to spur family businesses into action." Going public carries with it a different set of disciplines and some family businesses may not be comfortable in answering shareholders, adhering to much stricter transparency, or even handling the media attention. Interestingly, the Dubai International Financial Exchange (DIFX), regulated by the Dubai Financial Services Authority, offers 25 per cent flotation, but there has hardly been a queue for listing at the exchange, as companies have to comply with much stricter rules. When launched in 2005, one of the exchange's mandates was to encourage regional family concerns to list. But the DIFX ticker boasts of only one family company, although DIFX sources say as many as 30 family businesses in the region are "seriously" considering an IPO. There also appears a resistance to relinquish control, with some such as Husain Sajwani, head of Damac Holding, arguing that the flotation ratio should have been even lower to 20 per cent. But that could make the stock illiquid. "We need to think of issues such as liquidity. If the stock does not trade and does not represent a substantial portion of absolute market capitalisation, the listing becomes meaningless. Also, investors will punish the stock if the company continues to be run as a private concern." There are other things to consider as well. Lack of book-building during a company's IPO process could also impact the valuation and returns to founders who have spent years building their empires. At the moment, the Ministry of Economy determines both the price and the timing of the IPO.

Price ranges "We are advocates of price ranges and market consultation, which allow the issuer to test the market for a given price," says Halawi. Such a practice often results in adjustments to price ranges (up or down, either within or outside a range). It also allows the issuer to gain a certain degree of confidence, and to minimise mis-pricing mistakes. Yasmina Chraibi, senior financial analyst at Zawya.com, says that the Ministry of Economy should not outsource the valuation of a company to one of the Big Four accounting firms. "Globally, this is done by investment banks, or lead managers, who are better equipped to value firms," she says. Halawi argues that some UAE companies may have gone for a listing in the past few years for entirely the wrong reason. "For many companies, public flotation is seen as get-rich-quick scheme," says Halawi. "We suspect that the unbelievable amounts raised in a very short period of time have encouraged UAE business-owners to get into 'IPO mode', regardless of the fundamental need to raise money - in other words, going public just to get rich, or richer." Perhaps, it's the mindset, more than the laws, that need to change. - Yadullah Ijtehadi is managing editor, Zawya.com. © Gulf News 2007. All rights reserved.