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Western EuropeFebruary 4 2008

Deutsche deal on the brink of history

The flotation of DP World last year may prove to be a landmark deal for the emerging markets. Edward Russell-Walling reports on how Deutsche Bank handled the largest ever Middle Eastern IPO.
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History makers: back row (l-r): Iain MacLeod, Marco Schwartz, Nicholas Ward, Derk Ohler. Front row: Melanie Saluja

When historians tell how emerging markets came of age, the DP World initial public offering (IPO) will surely merit a mention. This was the listing that finally put the Dubai International Financial Exchange (DIFX) on the map – or that failed to – only time will tell. What the IPO’s overwhelming success did show, unequivocally, was that by the end of 2007, emerging market corporates were becoming a force in their own right.

The Dubai-based container terminal operator raised nearly $5bn in return for 23% of its shares. As developed markets turned more temperamental, the November flotation became a vehicle for investors’ deepening love affair with emerging markets. The stock’s sparkle was enhanced by its position in the once dull, now sizzling infrastructure sector and the result was the largest ever Middle Eastern IPO, hugely oversubscribed.

Securing a deal

The attractions of the company were many but it was Deutsche Bank that showed them off to best advantage and secured a handsome price in return. The bank has been DP World’s principal adviser for some years now, at its side throughout the company’s transition from regional operator into global force. It was there as sole financial adviser that the company bought 39% of Asian Container Terminals in 2004 – a relatively small deal – and in 2005, when it acquired CSX World Terminals in a watershed transaction.

The $1.14bn CSX deal was itself dwarfed by the £5.2bn agreed takeover of P&O in 2006, with Deutsche, yet again, as sole adviser. Along the way, the bank has also enjoyed mandates to raise much of the necessary acquisition finance. So it was not exactly a surprise when it emerged as primary adviser on the company’s long-awaited IPO.

“Ours was not a new relationship,” says Christopher Laing, Deutsche’s co-head of Europe, the Middle East and Africa (EMEA) equity capital markets. “We had a lot of history, and the IPO was the culmination of three years of working together.”

In the US, the P&O acquisition had caused an outburst of nationalist protectionism, and DP World was obliged to dispose of P&O’s US assets (helped by Deutsche). Even so, it could now realistically claim global status, with container terminal operations across Asia, Australia, Canada, Europe, the Middle East and South America. Since port operators are a proxy for world trade growth, particularly in commodities, investors like the word ‘global’ right now.

Did the company need to float? Not really. It was wholly owned – via Port & Free Zone World – by the state of Dubai, which is not exactly in need of funds. “The company had achieved a certain state of maturity, had integrated its recent acquisitions and was acquiring a credit rating,” says Iain Macleod, Deutsche’s head of transport and infrastructure, EMEA. “It wanted to share its success with a broader international and local investor base – this was the first real privatisation in Dubai.”

And Melanie Saluja, head of equity corporate finance, EMEA, says the timing was auspicious. “The infrastructure sector was performing extremely well, so the backdrop was good.”

Single listing

An IPO had been prefigured in the financing of the P&O purchase. This had included $3.5bn in Islamic bonds (in which, unusually, Deutsche did not play a leading role), partly convertible into DP World shares. The bonds paid 7.125% if there was an IPO within two years, or 10.125% if there was not. The listing almost went ahead in May 2007, but the company decided that it needed more time to bed down P&O. The button was finally pushed in August, with an eye on a November listing.

The challenges were many and various, and most interesting of all was where to list. In fact, this may have been the raison d’être for the entire exercise, although all those involved deny it. DIFX opened in late 2005, shortly before Gulf markets collapsed. It had a dozen listings, mostly moribund and traded more actively elsewhere. Not one of them was listed solely in Dubai. The temptation for the Dubai authorities to use DP World as a liquidity magnet must have been strong.

Everyone assumed that DP World’s shares would be quoted on DIFX. But news that they would be quoted only on DIFX raised more than a few eyebrows, and some thought it would damage the deal. “The discussions lasted several months and we took a lot of soundings,” says Mr Laing. “We felt that [a Dubai-only listing] might mean a small valuation discount, but only a few percentage points. With hindsight, there was no discount.” In other words, the price achieved would have been no higher with a London-listed GDR to protect the Dubai listing, as most had been expecting.

One reason offered for the single venue decision was a desire not to split liquidity across two centres. Whatever the merits of the case, this was DIFX’s first ever IPO, and meant that investors had to be educated about the exchange as well as about the company. In fact, DIFX ran a mini roadshow in parallel with DP World’s marketing programme.

“DIFX may have had a limited track record but its technical platform is extremely strong and robust, and its clearing and settlement mechanisms entirely consistent with international practice,” says Mr Macleod. “Deutsche Bank helped put in links to Euroclear and Clearstream to facilitate access without additional hassles. That made it easy for international investors and was quite a big factor in the offer’s success.”

The portfolio

The intention to float was announced in October and the bankers immediately began testing the waters, familiarising key investors with the company and testing valuation hypotheses. “How we saw the business was not hugely out of line with their perceptions,” says Mr Macleod.

DP World’s recent rapid growth may have appealed to investors but a string of recent acquisitions did not make year-on-year comparisons in the proforma accounts any easier. The prospectus eventually ran to more than 400 pages. A greater challenge was to value the business in the absence of any truly comparable stocks. DP World is now one of the four biggest port operators in the world. Of the others – Singapore’s PSA, Hutchison Whampoa and APM Terminals of Denmark – none is a stand-alone, global and listed player.

The company had operations in 42 ports, but only 22 of those were consolidated. The remainder were joint ventures or associates, whose earnings merited only a single line in the accounts – but these were important lines.

“We did a lot of work explaining the value of a global business rather than a single asset, the value of its portfolio, its platform for winning new concessions and its pipeline of projects,” says Mr Macleod.

Pricing and demand

Before the IPO, trading in the convertible sukuk implied a share price of $1.17. Given the strength of demand, the shares were finally priced at $1.30 by global co-ordinators Deutsche, Merrill Lynch, Millennium Finance and Shuaa Capital.

In another first for DIFX, shares were targeted at the retail as well as the institutional market. No retail banks were DIFX members, so direct market access links now allow them to trade via Deutsche as if they were. The size of the retail tranche was not fixed in advance. “We had three pools of money competing with each other – local retail,

Middle Eastern institutions and international institutions,” says Dr Laing.

This was not a seller’s market. The S&P 500 index fell nearly 6% during the marketing period, and a number of other IPOs were simply cancelled. But the book built to an astonishing $64bn – or 15 times the shares on offer, even after enlargement. The allocation was roughly 60:40 international to Middle Eastern investors, with 10% retail, 25% sukuk holders and 65% institutional.

In terms of earnings multiples, the price received was a record for the sector, and the shares traded briefly upwards. Not for long, however. By early January they had fallen to $1.16. Some local retail stags, peeved that the shares did not produce the immediate 25% profit they have come to expect, have been dumping them. Others say that this is the DIFX-only effect kicking in.

Either way, while DP World’s stock market debut earns its small place in the history books, the stock market in question will clearly have to wait a while.

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