The Abdullah brothers must have felt like three prodigal sons in July 2008 as Damas, the jewellery retailer founded in 1907 by their grandfather as a tiny shop in Dubai, made more than US$270 million (Dh991.7m) in an initial public offering (IPO) of a little less than one third of the company.
It was a defining event for Damas, the brothers and their dynasty. For the company, it was the latest stage in a multi-generational arc that transformed their grandfather Mohammed Tawfique Abdullah's storefront into a regional giant with nearly 450 stores in 18 countries. The third generation of brothers, Tawfique, Tawhid and Tamjid, were taking it to the next level. With the IPO proceeds, they would be able to open 100 stores a year and extend their reach across the region.
But just 15 months after that supposedly transforming event, Damas was in crisis. In October last year, banks began to call about debts that were due and the share price dropped by 16.2 per cent in a single day of trading. But the most shocking revelation came as Tawhid, the second-eldest brother who had been appointed the chief executive, stepped down from the top job as Damas was forced to reveal $165m worth of "unauthorised transactions"; mainly property acquisitions that had nothing to do with the company's core business.
They were transactions neither investors nor the Damas board seemed to know anything about. The amount spent represented about 60 per cent of proceeds raised in the IPO. The money, it emerged, had been invested in more than 50 projects ranging from a shopping mall in Turkey, to a hospital in London, to a pair of 49-storey towers on Sheikh Zayed Road. Initially, Tawhid denied he had done anything wrong. "The news about me making unauthorised transactions is not true," he told Reuters at the time.
But the firm later admitted that the brothers had overstepped and would pay back the entire $165m to shareholders within 18 months. Damas hired the auditing company PricewaterhouseCoopers and the law firm Dewey & LeBoeuf to oversee an investigation into exactly what had occurred in the short period between the IPO and the chief executive's resignation. At the heart of those investigations is how the money was spent on property and other assets unrelated to the company's core activities.
The incident was a powerful example of the difficulties family-owned companies face when they make the transition to a public company. A source familiar with the matter explained that the brothers did not follow necessary steps to gain the approval of the shareholders before making the investments. "There is nothing mysterious in the unauthorised withdrawals. It was an oversight in getting the approvals," said the source, who declined to be named because of a continuing investigation into the transactions.
In fact, the withdrawal of some of the funds from the company were disclosed in plain view in the company's financial statements. The situation at Damas has undoubtably overflowed into the Abdullahs' personal lives. The three men live with their families in a compound of homes in Jumeirah and often fish or cruise around the coast of Dubai. But to raise cash to pay back the company, they have lately been promoting the sale of their yacht, which has been on the market since before Tawhid's resignation.
The brothers would be left with at least two smaller fishing boats, but the sale of personal assets could be a sign of the challenges they face in liquidating the investments that were made with Damas funds. "The Damas case, and a number of recent cases involving regional families and businessmen, highlight some of the challenges that regional business leaders face as they tap capital markets, which demand a higher degree of transparency and accountability," said Nasser Saidi, an economist and the executive director of the Hawkamah Institute for Corporate Governance.
The Dubai Financial Services Authority, which regulates the Dubai International Financial Centre and the NASDAQ Dubai, has said it was closely monitoring the investigation at Damas to find ways to improve corporate governance, especially at family-owned companies that issue shares to the public. News of the transactions could not have come at a worse time for the company. Damas was already contending with a global economic downturn and a high gold price, which had cut into sales, when it emerged much of its cash was tied up in investments that had nothing to do with its core business.
A combination of the withdrawals by Tawhid, the rising price of gold and margin calls from banks that had provided gold loans had led to a serious cash shortage. While its retail business remained profitable with a gross income of Dh320m, it had large write-downs for underperforming loans and investments amounting to Dh715m. One loan stood out as a serious loss. Damas had loaned Dh294m to Dubai Ventures, an investment unit of the Dubai Government-owned conglomerate Dubai Holding. Instead of redeeming it in August last year, Damas agreed to convert the loan into an equity investment.
When Damas inquired with Dubai Holding last month about the value of its investment, it learnt that it was worth Dh73.5m - a 75 per cent decline in value - and comprised only shares of Damas, according to Damas financial statements for the six months to September 2009. Mala Pancholia, an analyst at Al Mal Capital, said in a research note last month the firm had "reached a point of inflection whereby financial re-engineering is required to carry on as a going concern".
To assist with its restructuring, Damas is in the process of hiring a chief restructuring adviser to guide its strategy for recovery. Paying back the $165m is also likely to be a challenge for the brothers. Nearly 70 per cent of the "unauthorised transactions" were investments in the property sector, with about 90 per cent of those in the UAE. Selling land and apartments in the current economic environment is difficult and would require significant discounts, analysts say.
But Tamjid Abdullah said during an interview in November that he and his brothers would have little difficulty paying back the company: "The assets we brothers have can cover way more than that deficit." The brothers have also pledged 350 million of their 515 million Damas shares with the stock exchange to further reassure investors that they would pay the back the money. But at Damas's current share price of 24 US cents each, the 350 million shares are worth just $84m, not enough alone to cover the deficit.
And if these shares were returned to the company in the event of non-payment, the brothers would only own 16 per cent of the company, spelling the end of more than 100 years of the Abdullah family running Damas. It would mean the loss of a company that Tawfique, Tawhid and Tamjid have been involved in since childhood. The three brothers grew up in a house just 100 metres away from Damas's first retail store in the Deira Gold Souk, which the company's outlets helped to cultivate.
As boys, the brothers would visit their father's jewellery workshop after school. They would tinker about with gold to learn the craft under the guidance of the jewellers in the workshop. Jewellery making had been a family tradition that began three generations earlier. Whether Damas will be in family hands for the next generation remains to be seen. The forensic audit investigating where the $165m was spent is continuing, and may wind up at the end of next month.
Securing a debt standstill with the banks for the roughly Dh4 billion in loans is a much-needed break, but will only give Damas a moment to breathe while the painful process of restructuring and liquidating is under way. @Email:bhope@thenational.ae aligaya@thenational.ae
