Dubai opens gateway for regional investments

Published: 9 June 2008

The United Arab Emirates (UAE), like most of its Middle Eastern neighbours, has long depended on oil and natural gas exports to sustain its economic growth.

The UAE now ranks as one of the most developed economies in the world, with average GDP growth estimated at around 9.4 per cent in 2003-07 and GDP per capita at USD34,673, which is comparable with those of leading West European nations.

Currently, a construction boom and thriving tourism, transportation and financial services sectors are helping the Emirates diversify its economy, thanks to key initiatives to boost the development of industries away from the oil sector.

Dubai's transformation as a world-class financial centre

Due to lack of oil reserves, Dubai has been in the forefront of many of UAE's non-oil developments, such as media, IT, healthcare, shipping, tourism and aviation. Dubai has also been leading the drive to entice investment from abroad through the development of financial infrastructure such as the Dubai International Financial Centre (DIFC) and investment policies aligned with international standards.

The 110-acre DIFC opened in September 2004 as the base for Dubai's transformation into a regional capital market. Financial institutions operating in the zone enjoy a zero tax rate on profits, the ability for foreign investors to acquire 100 per cent ownership and no restrictions on foreign exchange or repatriation of capital. HSBC is among the leading financial institutions established in the zone.

Most significantly, all financial and ancillary services within the zone are regulated by an independent statutory body, Dubai Financial Services Authority, which sees to it that these services adhere to international best practice.

The centre is also home to the Dubai International Financial Exchange (DIFX). The exchange caters to regional and international investors and issuers looking to share in the rapidly growing wealth of the region.

HSBC – an active market participant

As the most widely represented international bank in the Middle East, HSBC has played an active role in shaping the growth of the region's sukuk industry (a sukuk is a non-interest-bearing security which complies with Islamic law).

DIFX and HSBC jointly manage the HSBC/DIFX family of sukuk and conventional bond indices, a partnership that was formed to help promote the global sukuk industry and regional bond market.

The three main indices, together with a variety of sub-indices, track price movements and provide market liquidity information, helping to promote transparency in the region's booming credit market.

Moreover, in 2007, HSBC was the region's number one lead-arranger and underwriter for both sukuk (market share of 16.2 per cent; USD2.91 billion in value) and bonds (16.1 per cent; USD4.57 billion).

Borse Dubai aggressively pursues financial hub ambition

Borse Dubai is the holding company for DIFX and Dubai Financial Market, a local bourse (see sidebar story). Borse Dubai's growth mandate is based on the Dubai Strategic Plan 2015 which has identified financial services as a key focus sector.

After a careful study of exchange partners around the world, Borse Dubai concluded that OMX, the Nordic and Baltic exchange operator based in Sweden, was its preferred partner with its strong technology capabilities.

While Borse Dubai was keen to discuss potential cooperation with OMX it was prevented from doing so by OMX's agreement to be acquired by Nasdaq. Borse Dubai approached a number of investment banks for recommendations on how best to pursue a combination with OMX. HSBC suggested an innovative dawn raid to acquire a significant stake in OMX, a suggestion not made by any other bank. The subsequent HSBC raid secured for Borse Dubai 27.4 per cent of OMX in a matter of hours from hedge funds.

"Because of our extensive business with hedge funds we were confident we could find at least 25 per cent of OMX shares over-the-counter before the markets opened. We set the hedge funds a minimum requirement of 25 per cent to encourage them to sell us their shares. We also offered them a top-up for any subsequent higher offer made by our client. The marketplace was genuinely surprised by our successful dawn raid," explained George Davidson, Managing Director, Cross Border Business Group, Global Banking.

The following week, Borse Dubai announced a public offer for all outstanding OMX shares at a price of SEK230 (USD4 billion). As the offer price was above SEK220, shareholder's irrevocable undertakings with Nasdaq fell away.

DIFX, OMX and Nasdaq – a unique global exchange platform

Borse Dubai's full public offer made on 17 August led to a competitive bid situation, and was followed by extensive negotiations with Nasdaq. The talks culminated with the parties announcing on 20 September a series of agreements under which Borse Dubai would continue its existing offer for OMX. Upon completion of the offer Nasdaq would acquire all OMX shares purchased by Borse Dubai. In exchange Borse Dubai would become a 19.99 per cent shareholder in Nasdaq.

As part of these transactions:

• Nasdaq would become a strategic shareholder in DIFX
• DIFX would be rebranded with the Nasdaq name

Separately, Borse Dubai purchased from Nasdaq a 20.6 per cent shareholding in London Stock Exchange Group.

"By entering into agreements with OMX and Nasdaq, Borse Dubai was able to reap benefits from both the Nasdaq brand name and OMX technology to further develop its exchange platform," said Erwin Molenaar, Managing Director, Mergers & Acquisitions, Global Banking, who was one of the leading members of the M&A advisory team for this deal.

Borse Dubai completed its transactions with Nasdaq in February 2008. "These landmark transactions constitute a key milestone in Dubai's quest to become one of the world's leading financial centres. Dubai is a gateway to one of the world's fastest growing emerging markets and offers access to a liquidity pool of USD3 trillion in potential investment capital," according to Miray Aref, Director, Global Banking.

HSBC's long-standing relationship with Dubai, led by Mukhtar Hussain, Global CEO of HSBC Amanah and CEO of Global Banking and Markets MENA, and by Ms Aref, was indispensable in HSBC being awarded this mandate.

"In pursuing its capital market expansion plans, Borse Dubai turned to a trusted adviser. Aside from highlighting the Bank's expertise in complex cross-border merger transactions, this latest deal further strengthens our relationship with Dubai," emphasised Mr Hussain.

Industry recognition

Not surprisingly, this high-profile transaction merited HSBC citations from two respected industry publications. In choosing HSBC as Middle East Advisor of the Year 2008, Acquisitions Monthly made special mention of the Bank's role in helping Borse Dubai forge a partnership with OMX and Nasdaq. "The deal is of considerable strategic importance regionally and globally, reinforcing Dubai's pre-eminence as a leading financial centre in the region and playing a role in the consolidation of the ownership of the world's exchanges."

The transaction also forms part of the 12 awards received by HSBC in The Banker Deals of the Year 2008. The winners were picked from the 447 transactions submitted from 93 countries around the world.