MIDDLE EAST: The Qatari Sainsbury's bid symbolises a new kind of high-profile deal

Less than a decade ago, many Arab Gulf states were in a perilous financial state. Income was falling, unemployment on the rise and governments wrestling with budget deficits. Then the oil price began to rise again, steeply.

The World Bank reckons that oil income from the Middle East and north Africa has grown more than fourfold over the past decade to an estimated $547bn in 2006.

The clearest manifestation of that huge inflow of cash has been the rise of towering new cities such as Dubai. But the tide of petrodollars is flowing outside of the region too.

Gulf states target Britain so they can invest their cash beyond the oil fields

In mid-June, a Qatari investment fund took a 25% stake in Britain's third largest grocer J Sainsbury. On Thursday night, the government backed fund, Delta Two, raised the pressure on the Sainsbury family with a proposal to buy the rest of the company for 600p a share, valuing the business at £10.6bn. The Sainsbury dynasty, which earlier this year fought off another private equity bid, looks to have a fresh tussle on its hands. It is becoming a familiar story. Private and government backed funds from states including Abu Dhabi, Kuwait, Bahrain, Saudi Arabia, Dubai and Qatar have been looking to build a broad portfolio of investments and reduce reliance on natural resources. Last year Delta Two bought the Four Seasons nursing home business for £1.4bn and was among the defeated bidders for Thames Water.

With its historical ties to the Middle East and the relative ease of doing business in London, Britain has been a favourite destination. The Kuwait Investment Office has had a presence in the City since 1953. What has characterised some of the more recent deals though is how high profile they are.

In March, two Kuwaiti investors Investment Dar and Adeem Investment emerged as the chief backers of the deal that brought Aston Martin back under British management. Dubai International Capital paid £800m for the Tussauds Group in 2005 and £675m for Travelodge last year. Arcapita from Bahrain paid £143m for Staffordshire Water in 2004 and added the Northern Ireland electricity supplier Viridian to its portfolio in October for £1.6bn.

Dubai Ports paid almost £4bn for the shipping and ports company P&O last year. In a sign of the region's growing clout, Saudi Basic Industries agreed in May to pay $11.6bn for General Electric's plastics business, the largest foreign acquisition ever announced by a Gulf Arab investor.

Passive investors
"Underpinning all Gulf investment overseas is the need to reinvest their oil income in order to diversify their economic base," says Richard Thompson, editor of the Middle East Economic Digest. "In the past, the Gulf oil producers have tended to be discrete. The likes of Kuwait or Abu Dhabi would take minor stakes and be passive investors. They would also stick to certain favourite sectors like banking, real estate and property. The preferred markets would be the established ones such as London and New York."

Thompson says Middle Eastern investment is different this time around. "First of all there is a lot more money from this oil boom. Secondly they are taking a more strategic approach, trying to tie their economies to the global markets. With Dubai, the P&O acquisition last year was about linking its strategically important ports sector with the international ports market. The Saudi Arabian deal to buy GE Plastics was about tying the Saudi petrochemicals industry to the global plastics industry."

"But there are different factors at play in each country. In places like Qatar and Dubai one factor is the desire to establish an international presence. These are small places and they have to shout louder than others to be noticed. So, in part, these deals are about establishing credibility and positioning themselves in the world. It is a bit like establishing a brand. They are making high-profile acquisitions that are both strategic and opportunistic."

The deals are not restricted to the UK. Last month, Istithmar, backed by the government of Dubai, paid $825m for Barneys, the American department store chain. Since the terrorist attacks of 2001 though, when a lot of Arab money was repatriated, the US has become a more difficult place for Gulf states to invest. There was a huge furore in the US when the P&O deal meant the Dubai government would ultimately control a handful of American ports. Middle eastern investors have also increasingly turned to China, other parts of Asia, north AfricaEurope. and other parts of

Dubai International Capital has been one of the highest profile investors. Established in 2004, the fund is wholly owned by the ruler Sheikh Mohammed bin Rashid al-Maktoum and has more than $6bn under management.

The Tussauds and Travelodge deals are classic private equity investments. Tussauds was merged with Legoland and London Dungeon owner Merlin in March. DIC took out £1bn and retains a 20% stake in the larger group, already a tidy cash profit of £200m. It has also bought Doncasters Group the engineering company for £700m and paid €850m (£573m) for German packaging group Mauser in April. DIC is also taking stakes in public companies. It took $1bn stake in DaimlerChrysler in 2005 (since sold), a substantial stake in HSBC in May and a 3.1% stake in the Airbus maker EADS this month.

What seems clear is that as long as the oil price stays high, the money will keep flowing in. DIC currently has $6bn under management but is targeting $25bn by 2009. Thompson says that the investors from the Middle East have paid for the best advice and appear to be avoiding the pitfalls of the previous oil boom when riches were largely squandered. "Yes they have done a good job but it is still early days," he says. "If energy prices collapse they are not fully up and running yet with mature, diversified economies. But some of them are making enormous strides."

Via: The Guardian
by David Teather

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