Middle East buys up Western Finance

♠ Posted by Emmanuel in at 9/20/2007 01:29:00 PM
Two stories are out today in the Wall Street Journal (our favorite Murdoch publication) on how cash-laden Middle East countries are splurging on the Western financial infrastructure. First up is the emerging bidding war for the Nordic stock market operator OMX. The storyline is rather convoluted as it too involves taking out a share in the NASDAQ. As you would expect, the proposed deal is raising a protectionist ire (again) back in the States. In any case, these noteworthy developments showcase how the global political economy seems to be shifting its weight towards the Middle East as well as demonstrating the considerable financial clout of governments in that region. I will reiterate my idea here that developing states appear to be retaking the commanding heights in the perennial states-markets debate. Ultimately, financial access to the now-lucrative Middle East is at stake. Think petrodollar$, lots of 'em...

Nasdaq Stock Market Inc. and Borse Dubai on Thursday agreed to a three-way deal for OMX AB, that involves Borse Dubai taking a 19.9% stake in Nasdaq and buying a 28% stake from Nasdaq in London Stock Exchange Group PLC.

Shortly after the announcement, the Qatar Investment Authority, a rival bidder for LSE, said it had bought a 20% stake in the U.K. stock-market operator. The fund also said that it was evaluating options for OMX, amid traders' talk that it was actively buying up the Nordic market-operator's shares. The moves threaten an all-out bidding war between two rival Middle Eastern state-backed companies as they battle for access to Europe's financial infrastructure.

Nasdaq, under the agreements, said it will acquire all OMX shares through a two-step deal, in which Borse Dubai will purchase OMX through its existing offer of 230 Swedish kronor ($34.68) a share in cash. Borse Dubai will then sell OMX to Nasdaq for 11.4 billion Swedish kronor ($1.7 billion) and a 19.9% stake in Nasdaq, valuing Nasdaq shares at $41.01 a share. Borse Dubai will also take a 28% stake in LSE, paying £14.14 ($28.30) a share for the LSE stake and leaving Nasdaq with about 3% of LSE.

Terms of the Qatar/LSE deal were not disclosed. Saying it intended to be a long-term shareholder, the Qatar Investment Authority said it "sees itself as a shareholder that will provide stability and support for the board's strategy of developing further its business and thereby reinforce the City of London's position as the world's top global capital market." It ruled out a takeover bid for the time being, but said it reserved the right to change that position if someone else announces an intention to bid.

The London Stock Exchange, which declined to comment earlier Thursday about the Dubai deal, welcomed the Qatar investment. It said it had a long-standing relationship with the Qatari investors based on plans to develop the market in Qatar.

Meanwhile, Nasdaq will become a strategic shareholder and the principal commercial partner of Dubai International Financial Exchange, or DIFX. Borse Dubai is the holding company for DIFX and Dubai Financial Market. DIFX will be rebranded with the Nasdaq brand and licensed with market-leading technology from the Nasdaq/OMX combination.

"This is a unique situation that is a pure win" for OMX, Nasdaq and Borse Dubai, said Chief Executive Robert Greifeld on a conference call. "We'll be better able to serve our customers" across the world, he added.

The deal would make Dubai, part of the United Arab Emirates, the first Mideast government to hold a significant stake in a U.S.-based stock-market operator. Borse Dubai would get two of the 16 board seats for the combined Nasdaq/OMX, and its voting power as a shareholder would be limited to 5%. Finalization of a deal isn't guaranteed given the risk of pushback in Washington over giving a Middle Eastern country some influence over the second-largest U.S. stock market. The transaction was being monitored Wednesday on Capitol Hill. "This deal will raise serious questions that will need to be answered," Sen. Charles Schumer (D., N.Y.) said in a statement...

Dubai nosed out rival Gulf state Qatar for the stake in the LSE, underscoring a budding rivalry for dominance in the fast-growing world of Middle Eastern finance. Both nations have grown wealthy behind soaring energy prices, but Dubai could offer Nasdaq more because of the exchanges' mutual interest in OMX. For Qatar, losing the LSE stake represents a sharp disappointment in one of its first major forays into the deal making over global exchanges, and analysts this morning speculated about whether Qatar would start buying up LSE shares or make some kind of move to counter Dubai's latest announcement before the Qatar's announcement later in the day.

Qatar is determined to not let Dubai pull too far ahead of itself in the race to build a global financial center in the Middle East, a person familiar with the matter said. The fund also put out a statement today urging OMX shareholders to take no action with respect of Nasdaq and Borse Dubai's intentions for OMX. "The Qatar Investment Authority is currently evaluating the situation with regards to the OMX," the statement said, pushing OMX's shares higher as investors are seeing a potential bidding war. Shares had initially dropped early Thursday after news of the deal. Midday in Stockholm, they were up 4.2% at 250 kronors.

Nasdaq and Borse Dubai have been locked in a six-week bidding war for control of OMX. Borse Dubai recently built a 5% stake in OMX, with options to increase that stake to as much as 24%. Nasdaq in May agreed to buy OMX, but Borse Dubai came in with a higher bid this summer, giving it leverage in doing a deal with Nasdaq.

The three-way deal will create an exchange group with business that stretches through three regions: the U.S., Europe and the Middle East. Western exchanges are keen to expand their business in the Middle East, where capital markets are developing fast amid high oil prices and changes in corporate governance and regulation.

Dubai's earlier plans to buy OMX will require government approvals to move forward. For Dubai, purchasing the LSE stake and teaming up with Nasdaq on OMX could reflect concern that it couldn't gain approval to buy the entire OMX. A person familiar with the matter said that Dubai was less certain after a recent meeting with Swedish authorities.

Borse Dubai and its predecessors -- the exchange is the result of a merger of two stock markets in Dubai -- have wanted to become a larger player in international finance and have looked at various exchanges in Europe in recent years. In looking at Nasdaq's LSE stake, Borse Dubai had an advantage over Qatar because of Dubai's position in OMX, which Nasdaq wants to buy to expand its international business.

It is unclear whether Dubai has any interest in becoming an active shareholder in LSE, but according to people familiar with the matter, some at the London exchange had preferred the stake to be sold to Qatar instead of Dubai because Qatar had shown fewer ambitions to own an entire exchange. Dubai's stake would shrink to about 20% once LSE completed its own planned merger with Milan exchange operator Borsa Italiana SpA.

Becoming more global was partly how Dubai was selling itself to OMX: join with Dubai and gain access to one of the fastest-growing regions in the world. In particular, Dubai was keen to gets its hands on OMX because it supplied the technology to many of the Middle East's exchanges, making it easier to consolidate in the region.

Stock exchanges in the U.S. and Europe have been consolidating rapidly, after transforming themselves into public companies in recent years from clubby memberships owned by trading and brokerage firms. In the past two years, bidding wars and hostile approaches have characterized a sector where there are a scarce number of prestigious targets.

LSE is one of the most alluring of those targets, sought after by rivals on several continents, but it has fended off several suitors, arguing their bids undervalued it. Nasdaq, led by Mr. Greifeld, built a stake in LSE of about 31% while pursuing its own unsuccessful plan to buy the entire LSE earlier this year.

Since Nasdaq is selling its stake in LSE, the London exchange doesn't have the ultimate say over who buys it. Nasdaq could have used the cash from its LSE sale to improve its bid for OMX, which operates several exchanges and provides technology to dozens more. But instead, Nasdaq pursued a more inclusive approach, possibly giving Mr. Greifeld his first major international merger.

In recent years, other large exchanges from the Chicago Mercantile Exchange to the New York Stock Exchange to Frankfurt's Deutsche Börse completed big deals or international deals to transform their businesses.

Second, the investment authority of Abu Dhabi, Mubadala, is taking a non-voting stake in the storied private-equity firm the Carlyle Group. (As an aside if you're a Formula One fan, Ferrari race car drivers Felipe Massa and Kimi Raikonnen wear Mubadala caps in their post-race interviews if they finish on the podium). On to the second story:

The Carlyle Group is selling a 7.5% stake in its management company to an investment arm of the government of Abu Dhabi for $1.35 billion. The deal represents a 10% discount to a $20 billion valuation on the big, Washington-based private-equity firm.

The sale gives Mubadala, the strategic-investment arm of the small but wealthy Persian Gulf state, no voting rights. But the deal will give Mubadala downside protection. In other words, if -- or more likely when -- Carlyle follows its peer Blackstone Group to the public market, Mubadala will be compensated if the valuation is at a lower level than Thursday's today's price. Mubadala will also invest $500 million in Carlyle's latest flagship buyout fund.

Private-equity firms like to sell stakes ahead of public listings as a way to put a floor under their share price. That logic led the Blackstone Group to sell under 10% of itself to an arm of the Chinese government ahead of its initial offer -- a sale which valued Blackstone at about $30 billion. But the investment was heavily criticized in China as Blackstone's share price dropped steadily through the summer. That led other private-equity firms to seek alternative sources of capital.

Earlier this summer, Apollo Management sold a small stake in itself to the Abu Dhabi Investment Authority which has a mandate from the government to make non-strategic investments, in contrast to Mubadala. ADIA has almost $1 trillion under management. That deal was cut ahead of Apollo's listing on a Goldman Sachs Group trading platform.

The deal Carlyle has struck is the latest example of the huge investment clout of the Persian Gulf emirates. While Dubai is the best known, it also has the smallest coffers. Abu Dhabi is far wealthier but keeps a much lower profile.

Recently the government established the Abu Dhabi Investment Co. to help manage the flood of money that comes in with oil prices at current high levels. Mubadala has stakes in many infrastructure and energy firms such as Dolphin Energy and in some well known brands such as car company Ferarri.

The deal comes as good news to CalPERs, he California public pension fund. In 2000, CalPERs took a 5.5% stake in Carlyle for $175 million, giving it a healthy profit on its position.

Carlyle, which has $76 billion under management, has had the deepest relationships of any of the private-equity firms in the Middle East. Speaking at a Dow Jones conference in New York on Tuesday, Carlyle co-founder David Rubenstein said it was inevitable that in a few years all the major private-equity firms would go public. Carlyle has long toyed with the idea but this summer's turmoil in the market for financing buyouts has led it to put those plans on hold.