Borse Dubai has a serious calculation to make. Is it worth holding on to its 20 per cent stake in the London Stock Exchange?
Earlier this week, I reported how LSE had decided to go with Qatar, rather than Dubai, as its preferred partner in the competition to build a Gulf financial centre. This decision seems final, and exclusive, in the sense that if LSE backs Qatar it cannot simultaneously back Dubai.
This is not just because of the competition between the two Gulf states, though that is part of the reason. The requirements of commercial confidentiality, and the potential for conflict of interest, dictate that LSE has to choose between Qatar and Dubai.
LSE’s view, as expressed by Chief Executive Clara Furse, is that the choice was made for her when Dubai bought its 20 per cent shareholding from Nasdaq, and allied itself with the New York exchange in the co-development of Dubai International Financial Exchange.
A deal with Dubai on joint development of the Dubai Financial Market, which also comes under the Borse Dubai umbrella, is impossible in those circumstances, Furse said.
So Dubai is left with a 20 per cent holding in LSE, worth around £750 million ($1.5 billion) at current market prices. If ever Essa Kazim and Soud Al Ba’alawy, the two-man team leading Borse Dubai, ever saw this stake as the prelude to a commercial deal with LSE, that ambition is dashed now.
Dubai has gone for Nasdaq, LSE for Qatar. Now £750m is a tidy sum to have up your sleeve in the current financially turbulent world. Borse Dubai might like to have it in more liquid form at some stage, if it sees an unexpected opportunity oversees, perhaps in India, where it has been showing an interest in the Mumbai stock market.
If it wanted to extend this interest, £750m would be a nice deposit to put down on the commercial capital of India.
So there is a temptation for Kazim and Ba’alawy to sell their stake in LSE, for the benefit of their own cash-flow health. But I believe they will hold on to the LSE stake.
When they bought the shares last August, they cost around £1,400 per share, but the speculation that followed that purchase, and the market “raid” carried out by the Qatar Investment Authority (with LSE’s blessing), drove the price up sharply as arbitrageurs took positions in the stock, hoping for a contested and hostile bid battle between Qatar and Dubai. At one stage the shares hit an incredible £2,000.
But neither Qatar nor Dubai want to bid for the entire stock of the LSE. Furse, who has seen off several contested takeovers, has made it clear she values LSE’s independence above all.
She welcomes the stability the Gulf investors bring, but if they ever showed signs of a hostile bid, that would be the end of their current comfortable business relationship.
As this sunk in to the speculators’ minds, LSE shares came off their best levels. The global financial crisis has also done nothing to help sentiment towards stocks such as LSE either, and the shares have slumped quite sharply this year.
The result is that, if Dubai ever wanted to sell its stake, it has probably lost the best opportunity to take a big profit on it. In the absence of bid speculation, and with the world financial situation showing no signs of bottoming out, most analysts agree that LSE shares will struggle to hit those kinds of values in the short to medium term.
That is not to say anything has changed with the LSE business. Furse reports record volumes in the first two months of this year, and, barring a catastrophic collapse in world share values, it looks as though LSE shares will continue to prosper, albeit at more realistic levels. (LSE’s dividend policy is not extravagant, so the value of the Dubai holding as an income investment is irrelevant.)
But the Dubai holding in LSE has other, less tangible value. The presence of Dubai on LSE’s shareholder register is a stabilising force, which is very welcome in current market conditions; it gives Dubai a seat at the top table of world markets; it gives Kazim and Ba’alawy a chance to build relationships at the very highest level.
And if, by any quirk of circumstance, the LSE became the target of yet another contested takeover attempt, it gives Dubai a big say in that outcome.
Dubai may come under pressure from Qatar to try to equalise their shareholdings, especially as LSE has now made its choice so clear. But there is no reason why Qatar should be given a present of part of the Dubai holding.
The QIA has plenty of financial firepower, and could go into the market any time if it wanted to match Dubai’s 20 per cent.
As arrangements currently stand, Borse Dubai gains more from holding on to its LSE stake than it would from selling it.
LSE stake worth holding for Dubai