After an eight-month-long Mexican stand-off between Shuaa Capital and Dubai Banking Group, both sides fired yesterday. Fortunately for the ongoing health of Dubai Inc, when the smoke clears we are likely to find they both deliberately aimed wide. Shuaa's decision to issue 250 million new shares to DBG yesterday seems to have been partly brinkmanship, and partly spurred by a realisation that after several voluntary extensions to the deadline to convert Dh1.5 billion (US$408 million) into new equity, all formal options should be eliminated before the long summer period of inactivity, when key decision makers are likely to be on holiday outside the UAE.
DBG's reaction in declining to accept the new shares and appealing to the Dubai Financial Market (DFM) not to implement the transaction was inevitable. DBG stepped up the pressure with its notice of redemption, effectively asking Shuaa for its money back, plus interest, but this too was a step triggered by Shuaa's move. It is not especially edifying to see a Dubai government-related company and the region's oldest investment bank playing an equity version of pass the parcel, but it is worth remembering how we got here. Things were not always so frosty between the two sides.
Back in the summer of 2007, when Shuaa was first approached by Dubai Holding entities seeking a closer relationship, they sincerely thought they were on the same side. Dubai Holding was embarked on a consolidation of businesses within the financial sector as part of the strategy to make Dubai the premier regional marketplace of choice. Shuaa was the UAE's oldest indigenous investment bank, with a virtual monopoly of the IPO business in the region, a valuable asset management business and a lucrative brokerage operation. It also had an enviable position as both an onshore and offshore player via its twin membership of DFM and the Dubai International Financial Centre.
For Shuaa to ally itself with the financial arm of Dubai Holding, the business unit of Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai, made sound strategic sense. Three board seats were made available for DBG representatives to give voice to the 32 per cent stake DBG would get on conversion. The cash from the deal would help fund Shuaa's ambitious international expansion plans. It looked like the beginning of a beautiful friendship.
With Shuaa shares trading between Dh4.50 and Dh5, the eventual strike price of Dh6 represented a healthy premium. But that reflected the apparently endless boom in store for the financial sector. To ease the deal through UAE company law, which made formal share issues difficult, a convertible bond mechanism was chosen, exercisable in October last year. Neither side could have foreseen the global financial hurricane of the credit crunch, which by exercise date had torn all these financials to shreds. In the autumn of last year, Shuaa was trading around Dh3.50, and suddenly the deal was a money-loser for Dubai. The market had moved against DBG, as indeed it had against the global financial sector.
This is when the contract and corporate lawyers began to earn their big fees. Whether there is an enforceable obligation for DBG to take the shares, as Shuaa claims, or whether Shuaa must pay back the Dh1.5bn, as DBG asserts, are subjects that would keep learned counsel busy for months, if not years. Arguably far more important for the reputation and well-being of Dubai Inc is where the matter goes from here. Both sides have already shown, by agreeing to extensions to allow negotiation, that there is a willingness to compromise and avoid more damaging confrontation. There have been suggestions of independent mediation, but none so far has been acceptable to both parties. Finding the right mediator, and finding a way of making a decision binding, have proved to be stumbling blocks.
Several practical proposals to resolve the dispute have already been explored, but to no avail. There have been several ineffective attempts to "split the difference" between the 2007 and 2008 share prices. There have been suggestions Shuaa might buy back the shares, but once more the matter of price proved insurmountable. Extending the maturity date of the convertibles has also been examined, again with no outcome.
Third party intervention has also been mooted. But if an international group got involved and took the 32 per cent stake, it would leave Shuaa in breach of foreign ownership restrictions. And even in the post-crisis environment, DBG would not like to hand control of Shuaa over to a global competitor. Despite the financial ravages of the past nine months, Shuaa remains the best the UAE has got. It is not overleveraged, has no "toxic" exposure to complex debt instruments, and is well placed to take advantage of the recovery. With shareholder equity of Dh2bn, it is solvent, even if it had to pay back the convertible money.
But it must be aware that an ongoing confrontation with the Dubai establishment would be to its long-term detriment. So far, its biggest shareholder, Passport Capital of San Francisco, has stood behind its board, which appears to be fully aware of its fiduciary responsibilities. The best practical solution to the issue would appear to be agreement on a mediator and a contractual obligation to stand by his binding decision, in co-operation with the regulatory and ministerial authorities. In time-honoured UAE fashion, it should be resolved in majlis-style compromise and consensus.