GULF INVESTMENT: Asset management

17 February 2006

Dubai is on a spending spree, and only the best brands will do. The latest big name in its sights is P&O, for which the local DP World in November tabled an audacious bid worth in excess of $5,500 million. Dubai's determination to acquire the 169-year-old UK port and ferry operator has led to a two-month bidding war against Singapore that saw DP World outbid its rival at the last minute with an offer worth nearly $6,900 million.

If successful, it would make DP World the third biggest ports operator in the world and cement its transformation from a local to an international player. And this is just one in a series of high-profile investments by Dubai government-owned institutions that have grabbed international headlines.

More than $5,000 million has already been spent in the last 12 months on an eclectic foreign portfolio that now includes the Madame Tussauds' waxwork museum in London, the UK's Inchcape Shipping Services and a stake in DaimlerChrysler (see table). And more is to come. In late January, Dubai International Capital (DIC), the international investment arm of Dubai Holding, announced plans to set up a $15,000 million fund to invest in global blue-chip firms.

Investment mandateDP World, which has concentrated on acquiring port capacity, and DIC, which has a diverse investment mandate, have headed the investment drive. They have been joined by Istithmar, part of local property developer Nakheel, and Dubai Holding subsidiary Dubai Investment Group (DIG).

GCC overseas investment is nothing new. For decades, oil-rich Abu Dhabi and Kuwait have channelled a percentage of their petroleum income into the global equity, bond and real estate markets through Abu Dhabi Investment Authority and Kuwait Investment Authority (see box).

Dubai's investment drive is different, however. For a start, its oil reserves are scant and dwindling fast. 'Dubai has done a great job of diversifying its own economy and the logical next step is to diversify abroad,' says DIC chief executive officer Sameer al-Ansari. 'It is common sense - the local property market is booming now but nothing goes up forever.' The approach is being followed by the emirate's leading real estate companies: both Emaar Properties and Dubai International Properties - another subsidiary of Dubai Holding - are expanding rapidly across the region. The visibility of its investment targets and its willingness to take on management control also set Dubai apart. 'Dubai's success is due largely to its marketing abilities: the emirate survives on its image. So for example, the way to enhance its image in Europe was to buy a landmark asset such as Madame Tussauds,' says a Dubai-based analyst. Its financing model also differs from the traditional cash-based Gulf approach. Acquisitions by Dubai have been highly leveraged, utilising international bonds and local bank debt. As a case in point, Dubai Ports, Customs & Free Zone Corporation in January issued a $3,500 million sukuk - the world's largest - designed primarily to fund the P&O purchase. The government is seeking a credit rating independently of the federation to facilitate future debt issues and allow wider distribution of paper. 'The amount of equity that is being put up by Dubai is small and is not coming from oil, but from the proceeds of land and property sales,' says a London-based investment banker.

Dubai's investments have some logic. 'The government is taking a synergistic approach - the ports deal blends in with Dubai's role as a trading hub for example,' says the analyst. 'Similarly, the tourism and industry acquisitions overseas mesh with the emirate's strengths at home.'

Inevitably, Dubai's dramatic emergence on the international investment scene has provoked some scepticism. 'There is still some perception that the guys from Dubai are just coming over and splashing their cash around,' says Al-Ansari. 'But this is only from the ignorant - we h

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