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Shuaa-DBG Stand-off
Posted: 21-Jun-2009
Posted: 21-Jun-2009
So in the eight-month Mexican stand-off between Shuaa CapitalShuaa Capital
and Dubai Banking GroupDubai Banking Group, both sides finally pulled the trigger. Fortunately for the ongoing health of Dubai Inc, when the smoke clears we are likely to find they both deliberately aimed wide.Shuaa’s decision to issue 250 million new shares to DBGDBG
seems to have been partly brinkmanship, and partly spurred by a realization that – after several voluntary extensions to the deadline to convert AED1.5 billion into new equity – all formal options should be eliminated before the long summer period of inactivity, when key decision makers are likely to be out of the UAE.DBG’s reaction – in declining to accept the new shares and appealing to the Dubai Financial MarketDubai Financial Market
not to implement the transaction – was anticipated. DBGDBG stepped up the pressure with its notice of redemption, effectively asking ShuaaShuaa for its money back, plus interest, but this too was an inevitable step triggered by Shuaa’s move.Now the action moves to the Emirates Securities and Commodities AuthorityEmirates Securities and Commodities Authority
and the Federal Ministry of the EconomyMinistry of the Economy. Conveniently, both these bodies are under the administration of the same man, Sultan bin Saeed Mansoori. He now has the crucial job of ending the damage to Dubai’s image caused by the row.It is not edifying to see a Dubai government-related company and the region’s oldest investment bank playing an equity version of pass-the-parcel, but it is worth remembering how we got here. Things were not always so frosty between the two sides.
Back in summer 2007, when ShuaaShuaa
was first approached by Dubai HoldingDubai Holding entities – via the US investment bank Morgan Stanley - seeking a closer relationship, they sincerely thought they were on the same side. Dubai HoldingDubai Holding was embarked on consolidation of businesses within the financial sector as part of the strategy to make Dubai the premier regional market place.ShuaaShuaa
was the UAE’s oldest indigenous investment bank with a virtually monopoly of the IPO business in the region, a valuable asset management business and a lucrative brokerage operation. It also had an enviable position as both on- and offshore player via its twin membership of DFMDFM and Dubai International Financial CentreDubai International Financial Centre.To ally itself with the financial arm of Dubai HoldingDubai Holding
, the business unit of HH Sheikh Mohammed himself, Ruler of Dubai, made sound strategic sense. Three board seats were agreed for DBGDBG representatives to give voice to the 32 per cent stake DBGDBG would get on conversion. The cash from the deal would help fund Shuaa’s ambitious international expansion plans. It looked like the beginning of a beautiful friendship.With ShuaaShuaa
shares trading between AED4.50 and AED5.00, the eventual strike price of AED6.00 represented a healthy premium, but that reflected the apparently endless boom in store for the financial sector. To ease the deal through UAE company law, which made formal share issues difficult, a convertible bond mechanism was chosen, exerciseable in October 2008.Neither side could have had foreseen the global financial hurricane of the credit crunch, which by exercise date had torn all these financials to shreds. In autumn of 2008, ShuaaShuaa
was trading around AED3.50, and suddenly the deal was a money-loser for Dubai. The market had moved against DBGDBG, as indeed it had against the global financial sector.This is when the contract and corporate lawyers began to earn their big fees. Whether there is an enforceable ogligation for DBGDBG
to take the shares, as ShuaaShuaa claims, or whether ShuaaShuaa must pay back the AED1.5 billion, as DBGDBG asserts, are subjects that would keep learned counsel busy for months, if not years.Far more important for the reputation and wellbeing of Dubai Inc is where the matter goes from here. Both sides have already shown – by agreeing to extensions to allow negotiation - that there is a willingness to compromise and avoid more damaging confrontation. There have been suggestions of independent mediation, but none so far have been acceptable to both parties. Finding the right mediator, and finding a way of making his decision binding, have proved to be stumbling blocks.
Several practical proposals to resolve the dispute have already been explored, but to no avail. There have been several ineffective attempts to “split the difference” between the 2007 and 2008 share prices. There have been suggestions ShuaaShuaa
might buy back the shares, but once more the matter of price proved insurmountable. Extending the maturity date of the convertibles has also been examined, again with no outcome.Third party intervention has also been mooted. But if an international group got involved and took the 32 per cent stake, it would leave ShuaaShuaa
in breach of the foreign ownership restrictions. And even in the post-crisis environment, DBGDBG would not like to hand control of ShuaaShuaa over to a global competitor.Despite the financial ravages of the past nine months, ShuaaShuaa
remains the best the UAE has got. It is not overleveraged, has no “toxic” exposure to complex debt instruments, and is well-placed to take advantage of the recovery. With shareholder equity of AED2 billion, it is solvent – just - even if it had to pay back the convertible money.But it must be aware that an ongoing confrontation with the Dubai establishment would be to its long-term detriment. So far, its biggest shareholder with 14 per cent, Passport Capital of San Francisco, has stood behind its board, and is urging a diplomatic end to the squabble. The ShuaaShuaa
board appears to be fully aware of its fiduciary responsibilities, which dictate that it must get the best possible deal for all shareholders.I can detect no great appetite on either side to escalate the squabble further, to a level where serious and permanent damage is done to Dubai.
The best practical outcome would appear to be agreement on a mediator and contractual obligation to stand by his binding decision, in co-operation with the regulatory and ministerial authorities. In time-honoured UAE fashion, it should be resolved in majlis-style compromise and consensus. Over to you, Sultan bin Saeed.
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