Dubai World’s last option
Placing prized assets on table seen as negotiation tactic; International assets not seen covering debt burden.
August 28, 2010 12:58 by Reuters
Dubai World’s willingness to sell prized assets such as ports operator DP World to pay down its debt pile is considered such a drastic move that analysts see it more as a last-resort bargaining tactic.
Documents obtained by Reuters this week revealed the surprising news that the debt-laden conglomerate was willing to let go of “strategic assets” such as DP World, Jebel Ali Free Zone and Dubai Maritime City (DMC) as part of a $19.4-billion fundraising effort as it tries to reach a restructuring deal with creditors by Oct. 1.
By displaying its willingness to put these assets on the block, Dubai World is effectively offering creditors an insurance policy that if the restructuring plan runs into trouble, it will sell core, strategic assets.
In reality, analysts said, it would be too painful for Dubai World to dispose of its crown jewels.
“These are success stories and they are the core of the Dubai trade industry,” said Mohammed Yasin, chief executive of Shuaa Securities. “They are highly sought after and therefore they are the carrots at the end of the stick that they are using to make the lenders accept their terms.”
Dubai built itself into a global trade and business hub over the last decade, becoming a primary destination for foreign investment with its ambitious real estate and infrastructure projects. The emirate was hard hit by the global financial crisis as its property market crashed late 2008.
Dubai World shocked markets in November when it announced plans for a standstill agreement and the restructuring of $26 billion in debt. This put Dubai’s hard-won global brand in jeopardy and selling symbols of its success and an integral part of its economy would be the final blow.
“If you sell those, you sell Dubai,” a person involved in the restructuring process said.
The symbolic value of these assets is also crucial and their loss could have political repercussions, analysts said.
“There is so much prestige that will be lost in this,” said British historian Christopher Davidson. “To my mind it is really the political damage that matters more than anything because the ruler has put so much into saving face and giving the impression that we’ll pick up again fast and it will be business as usual.”
Dubai World is controlled by Dubai’s government, led by Sheikh Mohammed bin Rashid al-Maktoum, who also has direct business interests across the economy.
Dubai World said at the start of their debt debacle that assets such as DP World and Dry Docks World would not be included in its debt restructuring. However, asset sales including top names had always been part of the plan, despite a clear reluctance to sell.
Under the current restructuring plan, the potential sale of those assets would come at the end of the eight-year period designated for the sales process.
“By pushing the local assets, or those with a local presence, to the latter part of the sale process, they are hoping that by that time things will get better and if they do they can refinance the debt,” said Yasin.
The proposed sale of the port operator, whose first-half results exceeded expectations, is not scheduled until 2016, and even then analysts are sceptical a majority stake would be sold.
“DP World is one of their (Dubai government) jewels, one of their best performing assets… and it goes with the story of Dubai as a trade and business hub so I don’t think they’ll let it go… In the worst case scenario they will still own a majority stake,” said a Dubai-based analyst.
The lack of a back-up plan, reliance on a global economic recovery in its restructuring plan, and the deterioration in the value of its international investment portfolio, all leave Dubai World – and by extension Dubai – in a tight spot.
Even if the company manages to offload all its international assets before the clock runs out for its more prized possessions, the proceeds from these sales may not help much in repaying its mounting debt burden, signalling the extent of depletion in the value of its trophy assets.
Most of Dubai World’s storied international portfolio was acquired at peak prices before the financial crisis, including assets such as luxury retailer Barney’s and casino operator MGM Resorts International.
The firm’s private equity arm, Istithmar, which owns most of the overseas assets, is expected to raise a maximum of $4.5 billion over a five year period, according to the firm’s own best estimate.
Dubai World subsidiary Infinity paid about $2.2 billion for a 5.9 percent stake in MGM in October 2007 and $4.8 billion for an investment in its Las Vegas development, CityCenter. Infinity’s MGM stake was bought at an average price of $83.15 per share in October 2007. MGM shares closed at $9.4 in the New York Stock Exchange on Wednesday.
If Dubai World fails to raise the necessary funds, this could see Abu Dhabi stepping in once again to aid its struggling neighbour. Some would argue that this would cause as much harm to the Dubai brand as selling off its prize possessions.
(By Raissa Kasolowsky and Tamara Walid. Additional reporting by Dinesh Nair, Nicolas Parasie, and Cynthia Johnston; Editing by Reed Stevenson and Sitaraman Shankar)