DUBAI VENTURES OUT
With construction of the glittering city in full swing, Dubai now wants to take on the world.
By Abe De Ramos

Jamal Majid Bin Thaniah is waiting excitedly for the arrival of a nineteenth century model of a ship owned by Peninsular & Orient, the British shipping pioneer that once transported weapons during the Spanish Civil War of the 1820s. “It is made of wood, very old and priceless. Many British museums want it,” says bin Thaniah, one of the most senior board members of Dubai World, a holding company that runs businesses owned by the rich Middle Eastern emirate of Dubai. The model will be a tasteful addition to the memorabilia that accentuates his rosewood-furnished office. An antique globe stands next to his desk, behind which hangs a stunning photograph of a famous dome in Venice. Outside hangs a brass bell that was used on an old American container ship. All these came from companies that Dubai Ports World (DP World), a subsidiary of Dubai World, has acquired over the years – P&O was the latest, in March – and at the rate Dubai Inc is buying assets overseas, bin Thaniah will have a roomful of keepsakes before long.

In his office at the Emirates Towers – a pair of triangular skyscrapers that for now defines the glittering skyline of this booming desert city – Peter Jodlowski seems to have acquired a similar taste. The CFO of Istithmar, an investment firm under Dubai World, keeps a heavy pewter model of 230 Park Avenue, also known as the Helmsley Building, which towers over the famous Manhattan thoroughfare, as well as a framed black-and-white photograph of 280 Park Avenue. Istithmar acquired both assets in the last 12 months in deals totaling almost US$2 bn, not long after it bought a similarly prestigious address in London, One Trafalgar Square, for £155m (US$292m). Jodlowski, who moved to the Middle East from Britain after career soul-searching in 2000, likens Istithmar to no less than Temasek, the investment arm of the Singapore government – if not in size, then in mandate. “We’re an investment-holding company, a private equity company, a real-estate investor,” he says. “We operate on a four-sector basis: real estate, consumables, financial services, and industrial.”

And in the east wing of The Gate, a portal-shaped building that houses the new Dubai International Financial Exchange, Anand Krishnan fills his shelves with leadership books. It’s Your Ship, a title on turnaround leadership written by a Navy captain based on his experience as commander of the warship USS Benfold, is one of the three required readings for those who report directly to him. Krishnan came out of early retirement last January to become CFO of Dubai International Capital (DIC), the foreign-investment arm of Dubai Holding, another holding firm with 19 subsidiaries. In the last year, it has bought three companies in the United Kingdom, but Krishnan, who spent his 19 years at JPMorgan between the United States and Asia, is raring for a change. “In the next 12 months, we will be in the US and Asia,” he says. “We’re interested in direct-equity buyouts, and we aim high.” DIC’s investment limits are flexible, he says, but it must follow Islamic ethical standards; DIC is not interested in deals involving gambling or tobacco.

Outward Bound

These are just some of the names that business circles in Asia, Europe, and the US will hear more often in the years to come, as Dubai tries to reduce its dependence on thinning oil revenues (See box, “What Oil Money?,” page 26). To be sure, it’s for the same reason that Dubai is becoming what it is today, but the government has decided to take it further by flexing its financial muscle like Japan, backed by a strong yen, did in the 1980s, and what Singapore and China, driven by local market constraints and plain ambition, respectively, are doing now. For bin Thaniah, who is also vice chairman of DP World, the challenge also offers an opportunity for Dubai to prove a point: that its companies are just as globally competitive as any multinational anywhere. For this reason, DP World became the third-largest port operator in the world after its US$6.6 bn acquisition of P&O.

“It’s not out of passion, but out of a response to the reality today,” bin Thaniah says, hiking up his white dishdasha, the traditional clothing for Arabic men, to reveal brown leather cowboy boots. In fact, DP World draws inspiration from the ports empire of Hong Kong businessman Li Ka Shing, Hutchison Whampoa, which became the largest port operator in the world through acquisitions. “Hutchison realized the necessity of being a global player,” says the youthful bin Thaniah, whose staff call him Mr Jamal. “Business now dictates you have to be a global player. You can no longer conduct business sitting in the same region while the others are moving around, creating a network of ports at your expense. Customers would like to sign a global deal; they don’t see strategic value in regional players.”

The outward foray of UAE companies has a double-edged implication for the region. On one hand, it means the rise of formidable competition for the state-owned Asian companies that are themselves grabbing headlines with their overseas expansion. Last year, Etisalat – which has already figured in the top 150 of the world’s largest companies by market capitalization – beat China Mobile and Singapore Telecom in a bid for a 26% stake in Pakistan Telecom. Etisalat paid US$1.96 a share for the largest mobile phone operator in the south Asian country, easily trumping the US$1.06 a share bid of China Mobile and the US$0.88 bid of the Temasek-controlled SingTel.

The deep pockets of the Arabs mean Asian entities bidding against them for the same assets have to dig deeper into theirs to stand a chance, a lesson China Mobile and Temasek have learned. Last May, the Chinese carrier found itself in competition with Dubai-based Investcom for a full stake in Millicom, a Luxembourg telecommunications company that operates in 16 countries globally. Although Millicom eventually pulled out of the deal, China Mobile had won the bidding with a US$5.3 bn offer – an amount substantially jacked up from its reported original offer of US$4 bn after Investcom placed a bid in excess of US$5 bn. In February, PSA, another Temasek unit, lost out to DP World in a bidding war for P&O. The Dubai operator initially bid 443 pence a share for the British shipping company, which was then trading around 310 pence a share. PSA then offered 470 pence a share, only to drop out of the bidding when DP World outdid that with a 520 pence a share offer.

On the other hand, the rest of Asia could stand to benefit as Dubai seeks opportunities – whether Dubai buys and develops property in the region, acquires or funds projects started by enterprising Asians, or buys shares in Asian IPOs. “The goal of our 16 companies is to grow,” says bin Thaniah, referring to the companies under Dubai World in which he is a director, including DP World, Istithmar, and Nakheel, “and we would like to see a decent return on these investments in the future.” Wearing his DP World hat once again, bin Thaniah adds: “I wouldn’t put all these billions of dollars into a business that will give me a single-digit return on investment. I would like to see a 14% to 15% ROI; otherwise I would not commit my financial resources.”

For that reason, Asia is very much on the radar of Istithmar and DIC, which are pursuing similar strategies in the region, but with different interests. By the end of the year, Istithmar, which has so far shown a preference for real estate – “a timing rather than a strategy issue,” says Jodlowski – will have its first foreign office in Shanghai, even though the bulk of its investments have been in the US and Europe. (A New York office will follow in the first quarter of 2007.) Challenged with the idea that Shanghai is facing an overheating economy with a likely real-estate bubble, Jodlowski admits that Istithmar is “entering the market later than a lot of other people. We look at our competitors, and that may lead us to believe that we have to be somewhat more creative than them.”

That means Istithmar – the Arabic word for “investment” – is not likely to dive into China by itself as it did elsewhere. “The normal route that we’d take is to look for local partners to assist our ventures into these territories, and use their expertise, experience, and track record to assist us to identify opportunities,” says Jodlowski, “and once we’ve had the opportunities, making sure that we extract absolute benefit from them post-acquisition.” In a shape of things to come, Istithmar purchased in January a 6% stake in Bumrungrad Hospital in Bangkok, doing it with Temasek. “That’s our preferred route [rather] than going in without local coverage. We won’t be using the fingers-crossed approach.” Istithmar also bought into SpiceJet, a low-cost carrier in India, with Temasek, although the Singaporean firm, which owns a controlling stake in Singapore Airlines, pulled out due to India’s foreign-ownership restrictions in the airline industry. “We are very pleased with SpiceJet,” says Jodlowski. “That gave us a lot of heart, and you will see that as our steppingstone for other investments into India.”

That is pretty much the same approach Krishnan is using for DIC. Its acquisitions in Europe – including Tussauds, the famed wax-museum company that also runs the London Eye; Travelodge, a budget hotel chain; and Doncasters, a precision-engineering firm – have been through secondary buyouts, which means taking over majority ownership from an existing private-equity investor who had already put the right management in place. Acknowledging that the industry is still young in Asia, and that leveraged-buyout financing is not as deep here as it is in the West, Krishnan says DIC will seek Asian partners to explore opportunities in the region. “We’re embarking on a trip to India in November,” says Krishnan, “to meet with the big conglomerates, so we understand what they want to do, and if they want to do something we can be part of. Our first approach will be a co-investment, to make sure that we wet our feet the right way. We want to get more comfortable before we embark on a larger scale.”
Asian IPOs are also on their radar screens. DIC had wanted to invest at least US$200m in the IPO of Bank of China last May, but as the company was still mulling over its Asian strategy, it ended up with a much smaller stake (which made for DIC a 15% return in three days). Istithmar says its first investment in China will be announced “soon”, while Krishnan says DIC’s might happen before the end of the year.

Value Building

To be sure, there’s no telling exactly how large “large scale” could mean. With the Dubai government ultimately writing their checks, the size of their acquisitions can be very large indeed. Istithmar, which started with US$2 bn in seed capital, has so far invested USS$1.8 bn for the equity portion of its acquisitions, which Jodlowski estimates have a combined enterprise value of up to US$7 bn. (The rest is funded with debt, underwritten by foreign banks.) “You will see that number growing over the next few years,” he adds. Krishnan of DIC is more specific. “We have aspirations to have US$20 bn under management in the next three to four years,” he says. As of September, DIC had US$5 bn under management, twice as much as when Krishnan came on board last January. Unlike Istithmar, which has a sector focus, DIC has an investment-instrument approach. It has a mandate to invest independently in private-equity type ventures; it has a US$400m investment in funds; it is raising funds for a US$2 bn equity fund to invest in large-cap companies globally; and it has a special fund for investments in the Middle East and North Africa.

What is certain, however, is their uncompromising view on returns and proper risk management. When Istithmar bought the gold-domed 230 Park Avenue last year, it was criticized for overpaying for a property that had a higher vacancy rate than its neighborhood in midtown Manhattan – 20% at the time of purchase versus the 7.6% average, translating to a yield of only 4.89%, lower than the market average of 5.8%. Istithmar, which acquired the asset from Texas investor Robert Bass, spent US$15m to upgrade it. “It may be a lovely looking building, but it’s not been bought because it’s a trophy asset; it’s been bought because we can get a significant return from that asset,” says Jodlowski. “The average (vacancy) currently is about 5% to 4%, in some cases dropping down to 1% to zero; that’s where we are now, and that’s where we see we’ll be for the foreseeable future.” Nonetheless, he admits that Istithmar’s purchase of One Trafalgar Square “very quickly put us on most people’s A-list. Our real-estate guys were inundated very quickly with numerous opportunities.” Last June, Istithmar bought the Knickerbocker building in Times Square for US$300m, with a plan to have it developed into a luxury hotel.

At Dubai International Capital, the strategy is to buy major assets and later, or during the process, acquire minor ones that can be added on to the business to provide strategic value. When DIC bought Tussauds last year for £800m, it sat down with existing management and convinced them to acquire shares in the London Eye that it didn’t already own. “It’s a great money spinner which automatically added value to our investment,” Krishnan says. The company plans to use the same philosophy with Travelodge (acquired for £675m), which already has a license to operate hotels in the Middle East and Asia, as well as Doncasters (acquired for £700m), which supplies parts of machines to manufacturers such as Rolls Royce and Boeing. “Doncasters is doing pretty well as we speak,” he says, “but we would like to see if there are opportunities to acquire other precision-engineering companies in Asia that support different customer segments. Or by bolting on new acquisitions to Doncasters, we can then supply to the Boeings and Rolls Royces from a lower-cost perspective.”

Taking Stock

Both Istithmar and DIC look to exiting their direct equity investments in three to five years, a time horizon that will be less strictly followed for their capital-markets investments. The two companies are likely to grab headlines in the US and Europe in the future as they plan to continue adding high-profile stock purchases to their portfolios. DIC was the first to grab attention when it paid US$1 bn to buy 2% to 3% of the Frankfurt-listed DaimlerChrysler, the fifth-largest car manufacturer in the world. DIC would later categorize that move as an “equity special situation” investment, and its success inspired the creation of a US$2 bn Global Strategic Equity Fund that DIC is now raising along with other investors in the region. DIC will then “leverage even further and get into 15 to 20 large transactions like DaimlerChrysler,” he says. “It’s fully managed by us, but we will have other investors from the region who are pretty much aware of what we’ve done with DaimlerChrysler and the returns we’ve had, and who would like to ride with us to do other such transactions.”

The fund’s main strategy is to pick undervalued large-cap stocks. DaimlerChrysler was bought last year because Sameer al-Ansari, CEO of DIC, believed in the restructuring plan that the carmaker’s management had drawn up to boost its sales and operations, which included expansion into the Middle East. “It’s not just based on market sentiments,” says Krishnan. “We need to know more about the company, where there could be restructuring opportunities from which it could start building up its value. At the same time, if there is a strategic element where DIC could participate, that’s even better.” He adds that DIC spent four months on due diligence before making the DaimlerChrysler investment, with a reported equity of US$200m, and the balance leveraged. “We haven’t liquidated too much of it, but whatever we’ve liquidated, we had returns of 37% to 63%, so it’s been of great value to us. We’re working closely with the company on some aspects related to Dubai.”

Last February, Istithmar followed with a purchase of 2.4% of TimeWarner, the world’s largest media company, for US$2 bn. Istithmar raised eyebrows when it sought the advice of Carl Icahn, the American shareholder who launched a proxy war against TimeWarner and advocated its breakup into four units. Istithmar decided to buy into TimeWarner through a derivative instrument arranged with UBS, which minimized its downside exposure to a certain percentage of the shares it bought, but also limited its rights to voting and dividends. “In taking up a derivative position, we can leverage on an equity slice,” says Jodlowski. “Half of that equity slice is our own exposure. We’re tied in to leverage, so we get the benefits on the US$2 bn investment, but we’re only at risk for, say, US$400m to US$500m. It makes much more sense than potentially having US$2 bn on the line.” TimeWarner’s stock price has risen 3% since Istithmar invested. Istithmar’s CEO, David Jackson, had justified the purchase of the stock, which is outside of its apparently loose four-sector mandate, as a restructuring play.

Moving On

Bin Thaniah looks forward to another opportunity to buy assets in the US in the future, in spite of the political controversy it faced early this year. Buying P&O would have given DP World control over the operations of six US ports, a possibility that some US leaders balked at, citing national security issues; congressmen could not agree on the idea that US ports would be taken over by a company that comes from the same region as the September 11 terrorists. Although the Bush administration approved the deal, the tedious debate in Congress forced DP World to sell the assets instead. “It will only be a matter of time before many sensible congressmen realize that DP World has come to do business in the US to provide good services as a ports operator,” says bin Thaniah. “Once the Americans realize that idea, and if there is a business opportunity in the US, we will move to capture that opportunity.” (Dubai International Capital was also subjected to a similar congressional inquiry when it acquired Doncasters, which supplies to the US military. The deal went through.)

Until then, DP World is busy looking at projects in emerging markets, out of which it hopes to generate returns of around 18% to 19%. Now, DP World claims to be the largest private port operator in India, with operations in Chennai, Cochin, and Mumbai. It also has joint-venture terminals in Hong Kong, Qingdao, Tianjin, and Yantai. It is constructing the US$230m Saigon Premier Container Terminal in Vietnam, which will open in 2008, and is setting up a second container terminal at Port Qasim in Pakistan for US$211m. Bin Thaniah boasts that while DP World is the third-largest port operator in terms of volume, it has the widest geographic reach among its peers. “We are now focusing on Latin America, the Indian Subcontinent, and Africa,” says bin Thaniah. “We will continue to pursue port opportunities in the US and Europe, but as a main focus, I’d rather take the route to markets with a high demand for port development.”

The biggest risk DP World faces as it expands overseas, bin Thaniah says, is not US-style mistrust but local political risks. The company had been close to a deal to build a port in the Ivory Coast three years ago, only to be negated when the country’s leadership changed. An Asian government he refused to name also unilaterally reduced port tariffs by 25% to attract more traders. “All my financial forecasts were going up, then someone decides that tariffs should only be 75% and all of a sudden I see my revenues diving,” says bin Thaniah. “That’s not acceptable.”

Bin Thaniah admits that Dubai World had expected a certain degree of skepticism from potential acquisition targets and business partners following DP World and DIC’s debacle with the US congress. “We were expecting that if the US government decided to move our file to the security circuit, others might follow,” he says. “But we did not see it. We have seen other countries give us a warm reception. They understand that we can bring service value to our acquisitions, and that we are in those markets to expand. We look forward to working with these countries on a long-term basis.” All the better for his collection of memorabilia.