Should Dubai accept an offer for a DP World stake?

The cheeky offer by local private equity group Abraaj for a 15 per cent stake in DP World, the world’s fourth largest port operator and owner of the Jebel Ali Free Zone, poses a dilemma for the Dubai Government.

If the government accepts a reasonable offer then it sends a signal to the market that it is short of cash and that everything in Dubai is up for sale. After all DP World stock would be a steal for Abraaj with the stock trading at 39 cents down from $1.30 in the IPO 18 months ago.

Going cheap?

Why would a government that sold a 23 per cent stake for $5 billion in an IPO now be willing to accept say a third of that valuation in a private sale, even if most of the shares come from the free float as a statement has said?

On the other hand, Dubai could take the view that Abraaj is showing confidence in the future of the emirate and global trade in the midst of the worst trade slump since the 1930s, and see this as just the initiative to kick start stalled investment in Dubai.

That is clearly a judgment call for the highest levels of government. Outside observers can see some of the cards on the table but not all of them.

From Abraaj’s viewpoint there is also an element of risk. We do not know how long this year’s unprecedented slump in global trade will last. The regional private equity firms that were sold large stakes in shipping groups before the crisis by canny shipping owners must now be suffering from severe asset deflation.

Abraaj has been far more sensible in its asset allocation, and snapping up the jewel in the crown of Dubai at a bargain basement price is clearly good business. But then if this stake was put up for auction would it not fetch a better price?

Other bidders?

There might well be other potential investors who would then be flushed out, although the news about the ongoing talks will likely do just that. But it is good to see something happening on the Nasdaq Dubai which has been a very quiet market recently.

And this is certainly a ground breaking initiative from Abraaj whose boldness belies its humble origins from Pakistan, not much more than a decade ago. Indeed, this deal could set the tone for the local capital markets this year.

However, whether Dubai will want to sell DP World on the cheap any more than it might consider selling equity in Emirates Airline to Abu Dhabi in this climate remains to be seen. More details on this transaction will be awaited with interest.