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Dubai's new prospectors strike again

With little oil, the emirate's ruling family decided to diversify - and now they are on a worldwide shopping spree, writes Oliver Morgan

The Observer

There is no shortage of confidence in the Middle Eastern business community, as the agenda at last week's Arab Strategy Forum makes clear. Sessions entitled 'Enough Pots for all this Liquidity' and 'Going Shopping! Future M&A Trends' portray a region whose only problem is deciding where to invest its gushing cash flow.

Leading the way seems to be the country that played host to the conference: Dubai. Like the other Gulf states, the emirate has benefited from the doubling of the oil price in the past five years, the reason for the cash glut.

Unlike its neighbours, however, the impact on Dubai has been less direct: it is a minimal producer of crude and its output is falling. It benefits from surplus petrodollars only to the extent that it can capture them by presenting the best opportunities for investment. This has been the story of its rise over the past three decades.

Dubai-based Simon Williams, of HSBC, says: 'Decades ago, Dubai looked at itself and said that by 2010 it would not be producing oil any more; that it would have to diversify its economy. And its decision was to become a service hub for the region.'

The story is well known: Sheikh Rashid al-Maktoum, father of the country's current ruler, Sheikh Mohammed, began developing the state's infrastructure in the Sixties with the building of Dubai International Airport, moving, in the early Seventies, to establish the country as the centre of trade in the Middle East with the opening of Port Rashid and Jebel Ali, the largest man-made port in the world. In 1985 Sheikh Mohammed put a reputed $10m into the founding of the Emirates airline, now famous as the largest customer of the A380 super-jumbo and for having paid pounds 100m to have its name on the new Arsenal football stadium.

The Dubai economy now straddles infrastructure and construction, aviation, tourism, property, energy and financial services.

Behind the growth has been investment, but also aggressive marketing - such as the Arsenal sponsorship and the move on Liverpool FC revealed last week. And then there have been other high-profile deals such as the pounds 800m acquisition of Madame Tussaud's, the construction of luxurious tourist destinations such as the giant palm-shaped islands in the Gulf, the promotion of its golf courses by Tiger Woods, relentless advertising of its sandy beaches, and so on.

Historically, much of the investment in Dubai has been tied to the ruling family. As one businessman in the region says: 'All roads lead to the Maktoums.'

The structure of much of Dubai's industry bears this out. There are independent operators, such as Majid al-Futtaim, an investment, property and retail group that has an alliance in the region with French group Carrefour. And there are major listed companies, such as property developer Emaar, which is quoted on the Dubai financial market.

But groups such as Dubai Holding and Dubai World (DW), both of which are Maktoum vehicles, are dominant. Dubai Holding has some 100 subsidiaries, including hotels group Jumeirah, and DIC, the bidder for Liverpool, which is also owner of Tussaud's and Travelodge and holder of 10 per cent of Daimler Chrysler shares, for which it paid $1bn.

DIC is also a lead investor (along with Emaar) in Dubai Aerospace Enterprise (DAE), which aims to develop a $10bn-a-year aviation leasing, manufacture and maintenance business within five years, and Dubai Energy, charged with building 'a diversified global energy investment portfolio'.

DW owns Nakheel, the developer behind the palm resort - which earned a high profile when Premiership footballers were linked with properties there - and Dubai Ports World (DPW), which hit the headlines in Britain this year because of its acquisition of P&O, the port and ferries operator.

The striking thing about the global 'shopping spree' spearheaded by these groups is how recent it has been, and how determined the Dubai-based companies involved have been to secure what they see as strategic assets.

The companies behind it were formed only recently - DIC itself in 2004, DPW and Dubai Energy in 2005, DAE this year - and the deals have come over a similarly short time. This year we have had, among others, the Liverpool approach, the $1.3bn paid by DAE for SR Technic, a leading aircraft maintenance operator, P&O, Travelodge, and an approach for UK oil independent Premier by Dubai Energy. Last year there was Tussaud's; in 2004 DaimlerChrysler.

And the Dubai groups involved have not wanted to lose - DPW, for example, became involved in a bidding war for P&O, which meant it had to outbid Singapore's Temasek, another state-backed fund, paying in the end what was seen in the City as a massive premium for the business. It justified the move by saying that it had paid for a worldwide strategic presence.

Dubai's aggressive expansion has attracted many western businessmen to head corporations, such as Maurice Flanagan and Tim Clark of Emirates, and Robert Johnson, a former senior Honeywell executive who now heads DAE.

Johnson, who joined the company in August, says: 'I thought: this is a country that is going to grow. It's not just Dubai and the Middle East; it is right next to India and China. You get to have all the exposure to the big growth markets.' He says he was impressed, if not staggered, by the ambition of DAE. 'The vision was to create an industry that has historically been centred in Europe and North America, in this region.'

The plan is to build a global scale group, with leasing, manufacturing, airport development, engineering, consultancy and education divisions. It started in February. Johnson says: 'I want to be a network of businesses generating $10bn of revenues.' He has been given $15bn to build this business, although he says 'I hope I do not have to spend that much.' He is also in a hurry: 'It was originally contemplated that this would take four to five years, but I think I can do it quicker.' There are, he adds, few similar opportunities in global business.

Such plans may sound outlandish, but Dubai and the Middle East, like China and India, have experienced massive growth over the past five years. Williams says that rates of between 15 and 20 per cent within the Gulf Co-operation Council - the organisation of states including Saudi Arabia, the UAE, Kuwait, Qatar, Bahrain and Oman - have been recorded in the past five years, and the GCC itself is now the world's 15th-largest economy. 'Since the rise in the oil price, there has been a huge amount of petrodollars coming into Dubai, financing a vast amount of construction in the country,' Williams adds. 'But these investors are also looking for outlets overseas to diversify.' Dubai has built itself into the leading conduit of GCC funds, he says.

'Dubai has the knack of being very good at business and investment. The people who run DIC have a very good reputation, and they have been good at advertising that - for example through the Tussaud's acquisition. They are very good at marketing the place - getting Tiger Woods was a masterstroke. It attracts a lot of people.'

That does not just mean tourists to fill the Nakheel and Jumeirah resorts. It means people from around the world to run businesses - such as Johnson, for example, who says: 'Before I took the job I spent a week here. It struck me as safe, secure, clean, great infrastructure - golf, recreation, shopping, all the things you want. I realised that this was a kind of city of the future, so I came.'

Building boom: emirate's global reach

Behind the global boom in property is a wall of cash from Dubai. In the past month, Istithmar, the royal family's investment vehicle, spent over £1bn on three landmark central London office blocks - the Adelphi off the Strand, 90 Long Acre in Covent Garden and the Shell-Mex building on the Thames.

But this is just a snapshot of Istithmar's activity. In the US, it acquired 280 Park Avenue last June for roughly $1.2bn. Two days earlier, the Dubai company said it had paid $300m for the Knickerbocker Hotel at 6 Times Square, and Istithmar spent $705m for 230 Park Avenue, the 34-storey Helmsley Building, in November 2005. Pegasus Realty - another royal family offshoot - recently revealed plans to invest an estimated $150m in real estate projects in India.

Several of Pegasus' key properties lie at the Dubai Silicon Oasis and the Dubai Marina. It is in constructing residential towers in Malaysia, for which it is scouting for prospective buyers in India.

Then there is Africa: Dubai World, part of a consortium that has already committed $2bn to the purchase and development of Cape Town's Victoria and Albert Waterfront, is looking at further potential investments in the financial services industry, says chairman Sultan Ahmed bin Sulayem.

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