DP World mulls heavily discounted rights issue

When DP World, the Dubai based ports operator that bought the P&O port business a few years ago, lists its shares for the first time in London in a couple of months speculation is growing that there will also be a big rights issue, necessarily at a heavy discount to the $1.30 paid for shares in its initial public offering 18 months ago.

Research from HSBC analysts suggesting the rights issue hit DP World shares hard yesterday in Dubai where they are traded exclusively on the Nasdaq Dubai. The bank has lowered its price target for DP World from 50 to 38 cents.

Rights issues, however they are presented, generally lower stock prices. Basically the supply of a stock is increased and laws of supply and demand do the rest.

Negative sentiment

There is also normally a feeling that rights issues – especially at heavily discounted prices – reflect something of an emergency situation at the issuer. Giving away the family silver at a knock-down price is not usually a good sign for financial health.

The position of DP World is complicated by the fact that it is 80.5 per cent owned by Dubai World, the hugely indebted conglomerate at the heart of the Dubai debt crisis last December.

One way for Dubai World to raise funds would be if DP World paid out a special dividend to its shareholders after a rights issue. Thus a rights issue is also a roundabout route for Dubai World to raise money from DP World and its London listing.

London listing

What a difference a couple of weeks makes. When DP World first announced its intentions for a London listing its shares jumped. Now analysts have concluded on reflection that this is most likely a route to an emergency discounted rights issue.

Perhaps it was a little naive to think that Dubai World could really insulate DP World from the conglomerate’s debt problems. HSBC now thinks DP World could raise as much as $2 billion in new funds by achieving a float of around 40 per cent of the company as opposed to less than 20 per cent today.

As ArabianMoney commented when DP World announced its London listing this still makes quite an assumption about the future health of financial markets. Any major market volatility would jeopardize such plans as the discount then required would just be too big to stomach.

Indeed, the markets will be the final arbiter of the value of DP World, and a lot will depend on the resolution of the $22 billion debt rescheduling at parent group Dubai World. Only when that is done will investors really feel comfortable holding DP World shares.