Dubai weighs what may rank as GCC's sale of the century

Recent signs suggest Dubai Inc is getting serious about the potential privatisation of some of the emirate's best-known assets.

Emirates Airline is the leading Airbus A380 buyer.

As a policy initiative, it seems pretty conclusive.
On two separate occasions in the past few weeks, Dubai's leading officials have discussed a planned programme to sell government-owned assets: privatisation, as it is more usually known.
"We are working on opening up the capital of leading companies to our public." Sheikh Ahmed bin Saeed Al Maktoum, the chairman of the Dubai Supreme Fiscal Committee as well as the head of Emirates Airline, said last week.
Mohammed al Shaibani, the director general of the Dubai Ruler's Court and the chief executive of the Investment Corporation of Dubai, underlined those comments. "There might be a privatisation plan, which is something that we are working on with the Government," he said.
Such a plan could be a "mechanism for reducing some of our debt", he added.
The pronouncements were carefully hedged: privatisation is a possibility; a potential policy the emirate might adopt; an option under consideration, which could bring in just under US$20 billion (Dh73.45bn), The National calculates.
In the same interview in which he first mentioned privatisation, Mr al Shaibani went on to qualify the prospects for the company many believe is the easiest of Dubai entities to privatise - Emirates Airline. "A share sale by Emirates might be a reality one day, but not now," he said.
Suggestions of a big asset disposal programme sparked immediate interest in Dubai financial circles.
If the sell-off does come to fruition, Dubai can expect investment banks and other financial operators to be beating a path to the emirate's door to secure a chunk of the lucrative advisory work.
Mr al Shaibani acknowledged as much. "We have been chased by so many friends, bankers and investment bankers to really do something with our assets," he said.
There is, however, neither agreement on why Dubai should undertake a privatisation programme at this time, nor on what course it might take. There is even debate as to whether the emirate needs to make such a move at all.
On the face of it, the requirement is obvious: according to recent estimates from experts such as the IMF and Barclays Capital, Dubai has total debts of about $110bn including government and government-related liabilities.
That includes $30bn of direct government borrowing and Mr al Shaibani hinted it would be positive if that were to disappear completely. "I would like to see the Government debt at zero and this is something we are aiming for," he said.
But not everybody agrees that is necessary.
"Why do they need to sell these major assets at all? Sure, they have liabilities, but it's perfectly feasible to refinance those in the bond market over a number of years and maybe top up with some minor disposals," said one banker who has advised government-owned companies in Dubai and who asked to remain anonymous.
Others take a different view. "Given the substantial size of the debt overhang, it would be very difficult to clear this from economic growth alone," said Khalid Howladar, a senior credit officer at the ratings agency Moody's Middle East.
But even if there is disagreement on the need, there is a general recognition that privatisation of some assets would be a good thing for the emirate.
"Even if there is no financial imperative, it would be positive for the UAE and regional markets," the banker said. "Working towards initial public offerings [IPOs] is desirable in itself. Looking like a public listed company gets you better access to all capital markets, not just equity markets."
Mr Howladar agreed. "IPOs may make sense from many perspectives and public listings could improve transparency, accountability and governance in many entities," he said.
An economist at a top regional bank echoed those views. "Periods of crisis often signal a positive transition in policy," he said.
"[Privatisation] could shift entrepreneurs from the public to the private sector, broaden ownership of the assets and give UAE markets a higher profile. Changes like this were one of the ways Dubai led regional development in earlier times and if Dubai does it, others will follow."
General agreement on the benefits of privatisation among western advisers seems, for the first time, to chime with the public position of senior Dubai politicians. "We've heard a lot of this kind of thing before but this time it looks more serious," said the banker.
There also appears to be a consensus as to what parts of Dubai Inc might be suitable candidates. In a recent interview, Mr al Shaibani mentioned five entities as possible privatisation vehicles.
Some are more attractive to investors than others.
"Solid companies with stable cash flows and future growth potential are likely to be attractive to investors, especially given strong global interest in emerging markets," says Mr Howladar.
By that yardstick, the Jumeirah hotel and leisure group, Emirates Airline and DP World (already part-privatised) look the most likely to undergo the IPO process.
A crucial litmus test of global investor appetite takes place next spring, when DP World is set to list on the London Stock Exchange. The reaction to that event, which might also be the occasion for DP World's parent company, the Government-owned Dubai World, to sell down some of its almost 80 per cent stake, will be closely watched in Dubai establishment circles.
Preliminary calculations suggest the five entities Mr al Shaibani recently mentioned might bring in just under $20bn for the Government of Dubai, with the three most marketable - Emirates, Jumeirah and DP World - accounting for more than $10bn of that. Such amounts would go a significant way towards meeting his goal of reducing government debt to zero.
If Dubai does decide to go wholeheartedly down the privatisation route, there will be no shortage of expert advice on hand.
All the major global investment banks, such as Rothschild, HSBC, Goldman Sachs, Deutsche Bank, Barclays Capital and Morgan Stanley, have strong privatisation specialities and international brokerage businesses. Advisory experts such as Lazard and Moelis & Co are also likely to be interested.
As one adviser said: "We love privatisations."
 
DP WORLD: Possible first port of call
DP World is the easiest of the Dubai assets to value in a potential privatisation programme because it is part-privatised already and run as an orthodox public-listed company.
It is the leading ports and logistics company in the region and was floated on the NASDAQ Dubai exchange in 2007.
At a price of US$1.30 per share, some 20 per cent of the company was floated for a total market capitalisation of $21.5 billion (Dh78.96bn). The shares quickly slipped below the offer price, however, and with the credit crisis following on, they have never recovered. The shares were trading at 60 US cents last week.
Mohammed al Shaibani, the director general of the Dubai Ruler's Court and the chief executive of Investment Corporation of Dubai, singled out DP World in a recent newspaper interview.  "We expect of this company alone, in five years, that it [the share price] would reach about $1.40 or $1.50, that will be capable of paying all Dubai World's debts as a value," he said.
DP World, which owns the former P&O global ports business, is committed to seeking a listing on the London Stock Exchange (LSE) next spring. Many analysts expect its owner, ultimately the government-owned Dubai World, will use the LSE listing to sell more of the 80 per cent of shares it holds. The debate within Dubai Inc, however, is whether the current market price values the company correctly.
But, in any circumstances, the Government is unlikely to want to hand over majority ownership so the maximum that could be sold is a further 29 per cent. At today's market price, that would be valued at about $3bn.
 
EMIRATES AIRLINE: Airline could land $7bn
Emirates Airline is regarded as the jewel in the crown of Dubai's commercial businesses. From its origins with two small aircraft and US$10 million (Dh36.72m) government start-up capital in 1985, it has grown to be one of the fastest expanding in the world.
At the end of last year, Emirates flew to more than 100 destinations in 60 countries. It had a fleet of 152 aircraft and there are ambitious plans to increase that number. In particular, it is the leading purchaser of the Airbus A380 "superjumbo".
At the Berlin Air Show in the summer, it placed an order for an additional 32 A380s. It is also the largest operator of Boeing 777s, with 50 more aircraft pending delivery. Emirates's total order book stands at 202 wide-bodied aircraft, worth more than $68 billion.
But to accord generous stock market valuations to the airline industry is notoriously difficult. With high capital requirements and exposure to cyclical economic factors, airlines struggle to command high ratings. Emirates has its own share of wrangles, including an ongoing row over landing rights in Europe and Canada. Sir Maurice Flanagan, the airline's veteran vice chairman, said recently Emirates was in line to make a profit of $1.4bn this year.
On a conservative price-earnings ration of 10, that would give it a market valuation of $14bn but, again, the Government (Emirates is part of the Investment Corporation of Dubai portfolio) would not want to lose majority control. It could expect to receive somewhere in the region of $7bn for a 49 per cent flotation.
 
DEWA: Inclusion quite a shock
The Dubai Electricity and Water Authority (DEWA) was a surprising inclusion in Mr al Shaibani's list of Dubai corporations that might be suitable for privatisation.
It is true that other utilities companies have been privatised by governments in Europe - and the US power and water authorities have always been run along private lines.
But DEWA is deeply embedded within the government structure and is regarded as one of Dubai's principal cash generators. It is also regarded as a strategic industry, given the importance of power generation and water provision in the difficult climatic conditions of the emirate.
"DEWA is one of the main ways the Government of Dubai can raise revenue from expatriates. It would be like privatising the Inland Revenue service in the UK," one banker said. DEWA is no stranger to the international capital markets and a recent bond prospectus gives some idea of its value.
The business is pledged to increase electricity capacity by 20 per cent and water desalination capacity by 40 per cent by 2012, which will require a big capital commitment. This has to come largely from external debt markets.
For last year, the prospectus shows "total comprehensive income" (effectively net profit) of Dh4.16 billion (US$1.13bn). In the unlikely event of a privatisation, that would give DEWA a market value of perhaps about $12bn, of which the Government could expect to sell a maximum $6bn worth.
 
JUMEIRAH: The five-star attraction
Alongside Emirates Airline, the Jumeirah hotel and leisure chain is perhaps the best known of Dubai's international brands.
Every year tens of thousands of international tourists sample its five-star attractions. Its flagship, the Burj Al Arab, is widely recognised around the world as the symbol of the emirate.
The group has seven hotels and resorts in Dubai, two in London and one in New York. But there are ambitious plans to expand the brand to 60 establishments by the end of 2012. A sub-brand, Venu hotels, has already opened in Shanghai, China, with another one planned for Baku, Azerbaijan.
That all adds up to a costly refurbishment and opening schedule that will probably have to be financed outside of Dubai Holdings Commercial Operations Group, Jumeirah's immediate owner which is itself part of Dubai Holding, owned by Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai.
Preliminary plans for an initial public offering are believed to have been prepared but they await the green light from the Government.
Jumeirah does not publish separate financial figures, although it submits accounts audited to international standards to its shareholder. Analysts estimate, however, that top-line earnings will be about US$226 million (Dh830m) this year, giving a possible market capitalisation of about $2.3 billion. The shareholder could therefore receive $1.15bn, assuming a 49 per cent flotation.
 
DUBAI ALUMINIUM: Veteran a surprise pick
Dubai Aluminium (DUBAL) was another surprise choice by Mr al Shaibani as a possible privatisation candidate, largely because it has not published any financial figures and would seem to be a long way off being ready for a market flotation.
Still, it has a 31-year pedigree in the emirate and is one of the main vehicles for Dubai's policy of economic diversification away from oil dependency.
The company has also been an instrument in the economic development strategy with Abu Dhabi, having set up a joint venture with Mubadala Development, a strategic investment company owned by the Abu Dhabi Government, to invest in the production of aluminium on a UAE-wide level at Emirates Aluminium, which is intended to be the largest smelter in the world.
It also has plans to open smelting and refining projects around the world. DUBAL has a licence to generate electricity and desalinate water at its Jebel Ali production site.
Although it has produced no published financial details, a recent prospectus for a Dubai Government bond gave some details of the Investment Corporation of Dubai portfolio, where DUBAL is located. Its value was given as almost Dh16 billion (US$4.35bn).
Assuming, again, that the Government would not want to sell a majority, that would imply an initial public offering value of $2.2bn for a 49 per cent stake of the company.
[e-mail]