Kerzner deal a good fit for Investment Corporation of Dubai

Last week’s transaction between Investment Corporation of Dubai (ICD) and Kerzner International is a transformational deal on multiple levels.

ICD, under its chief executive Mohammed Al Shaibani, bought about 46 per cent of the company that controls the international up-market hotel group. The global operations of the Atlantis and One & Only chains, as well as the Mazagan beach resort in Morocco, thus fall under the control of Dubai. With another significant shareholding in Kerzner, about 25 per cent, held by Istithmar World, a subsidiary of Dubai World, the emirate becomes the majority shareholder in one of the biggest and most luxurious hotel operators in the world.

It’s worth noting that the minority is held by Goldman Sachs, the investment bank with a sharp eye for a good deal, and Colony Capital, a renowned Californian property investor. The presence of both on the share register alongside Dubai is a sign that international investors have confidence in the project.

Sol Kerzner is stepping down from the business he founded some four decades ago, and handing over the chair to Mr Shaibani. One challenge that falls to the ICD chief is to maintain the forceful and focused management style that had become Mr Kerzner’s hallmark over the decades.

That is the first way in which the deal is transformational. Mr Kerzner has pioneered the luxury resorts concept, first in his native South Africa but then across the world, and his departure marks a new era in the glittering world of luxury hotel resorts.

For ICD, it is a whole new sector brought into its portfolio. The owner of some of Dubai's biggest and most cash-generative assets – like Emirates Airline, Dubai Electricity and Water Authority and Emirates NBD – now also has a global hotel chain on its balance sheet.

No financial details were revealed at the time of the purchase from Mr Kerzner. The deal last year, in which ICD bought out a 50 per cent holding in the Atantis resort on Palm Jumeirah for US$250 million, should not be used as a guide.

In that deal, ICD bought physical ownership of the hotel, surrounding resort and land around the prestigious site. In the wider deal with Kerzner, it has mainly bought the contracts to manage global hotel assets, and the goodwill of the Kerzner brand.

Both of those are valuable things. The financial professionals love the cash flow that hotels throw up. Experts in the valuation of hotel assets believe ICD may have paid about $450m for the Kerzner stake, based on future earnings and cash flows and stripping out a relatively small amount of debt.

That is a bold step back into the water by ICD. Since the financial crisis of 2009, all the talk has been about debt reduction and assets disposals from most of the emirate’s big government-related enterprises.

The Kerzner deal is the first sign since those days of retrenchment that Dubai still has a global investment strategy, and that it can again be a mover and shaker on an international scale. ICD has the resources: its assets were recently value at $70 billion by the Sovereign Wealth Fund Institute.

The deal also cements Dubai’s role as a leader in the luxury hotels business. The leading local group, Jumeirah, has come to dominate the UAE business, and provided a rich stream of dividend to its owner, Dubai Holding, in the process. It is continuing to grow in the emirate, with the huge project to develop the site alongside the existing, and very successful, Madinat complex.

But Jumeirah has also forged the way in international expansion, opening and managing hotels from Baku in Azerbaijan to Shanghai in China, with Europe also a target destination. This will continue.

Big local corporations, like Emaar, Al Habtoor and others, are also involved in the booming Dubai hotels business. Some are looking overseas for expansion, although there is surely enough to keep them busy at home, with about 80,000 more hotel rooms required by the time the Expo 2020 show kicks off, double the existing stock.

Dubai understands the luxury hotels business, and adding Kerzner to its portfolio can only enhance its expertise.

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