Investment Corporation of Dubai (ICD) has allowed the time limit to pass on its planned deal to buy Spanish property group Immobiliaria Colonial – but this, I suspect, is a tactical manoeuvre to show Dubai will not overpay for assets in this distressed market, especially when they come encumbered with equally distressed debt.
In short, ICD is saying it has as much sense as it has money.
It is a good lesson to get across, especially in these troubled times.
Dubai walked away from a deal once before because the price did not suit it – when Dubai International Capital allowed American businessmen George Gillett and Tom Hicks to buy Liverpool football club. Now Dubai is back in a commanding strategic position to take over Liverpool. We will have to wait and see the detailed terms to tell if Sameer Al Ansari’s wait was financially worth it.
The circumstances at Colonial and Liverpool are different. In the case of the football club, Dubai’s offer was turned down by the greedy former owners of the club, who suddenly saw millions more on the table from Hicks and Gillett. (Money borrowed by the Americans, as it turns out.) The delicate negotiations still being played out over Colonial are rather different, not least because they come after the collapse of debt markets around the world after the US sub-prime crisis. Colonial has some decent assets on its books, in the Spanish commercial market and in France, but is over-borrowed at the bank and undervalued on the market.
It appears ICD initially won the agreement of the controlling shareholders of Colonial to sell their stake in the company for a mixture of cash and bonds to the value of around €3 billion (Dh13.2bn).
The stumbling block, however, is that Colonial has more than twice that in debt, and its bankers would not agree to the takeover unless Dubai took on this debt at existing terms. Quite sensibly, Dubai pointed out that the market had changed in its favour – now, any financial deal that has the words “property” and “debt” in the same paragraph will get the corporate advisers and the lawyers running for the doors.
The Colonial bankers involved are interesting too. Goldman Sachs wants to keep its reputation as the one big US bank that sailed through sub-prime virtually unscathed; Royal Bank of Scotland wants to limit the already considerable damage it has suffered at the hands of American “trailer trash”; Calyon wants to prove that not all French banks are a soft touch when it comes to complex financial instruments. Together, they have said “no” to Dubai’s offer, which involved discounting the debt before agreeing
You have to admire the nerve of the banks involved. Dubai is offering hard cash, and bonds that (given the backing of ICD) are as good as cash, to a value way above Colonial’s collapsing worth on the stock market. The alternative to Dubai’s terms would appear to be effective bankruptcy for Colonial, which would leave the banks with only a small portion of their outstanding loans likely to be repaid. To insist on full value for the debt in these circumstances is either brave, if Dubai pays up, or foolhardy, if ICD walks away. It will be up to the bank’s shareholders to judge which.
The banks are trying to draw a line under their post-subprime exposure; Dubai is trying to ensure it does not overpay for assets, and demonstrate that it should not be viewed as a sovereign wealth fund with deep pockets, but shallow understanding of the financial world. It will be intriguing to see who comes out on top.
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