An increasingly lucrative gold market is putting the shine back on the prospects of Damas International, the Middle Eastern jeweller nearly forced into financial ruin, with a proposed deal with Mannai Corporation and EFG-Hermes on the table. As jewellery sales grow in the UAE on the strength of increasing tourism, confidence in the industry is booming, leading investors to eye the sector for its strong cash flows and recurring income.
India's Malabar Gold & Diamonds announced last week it would tap investors for US$700 million (Dh2.57 billion) to embark on a global expansion plan aimed at making it the world's largest jeweller.
Malabar joins the UAE's Pure Gold Jewellers, which is looking to invest Dh1bn in new stores and factories during the next five years, and the company has entered into talks with a number of Islamic banks to help to finance the expansion.
Furthermore, Dubai's Joyalukkas said last month that it was confident of raising $100m in a syndicated loan from a consortium of banks to expand its network of stores.
A subdued global economy is forecast to keep gold prices at historic highs, further benefiting jewellers.
Nowhere is confidence in the industry more apparent than at Damas, which despite its recent problems is to be bought by Mannai from Qatar and EFG-Hermes from Egypt, subject to approval.
Mannai is a major conglomerate selling cars, home appliances and other goods. This is the company's second high-profile investment in a UAE retailer after it bought a 35 per cent stake in Axiom Telecom last year for an undisclosed sum.
Valuing Damas at $445m, analysts expect Mannai and EFG-Hermes to inject cash into the company to grow its business and expand further into major markets such as Saudi Arabia.
"Now that Damas has sorted most of the problems, [the bidders] are trying to realise some of the value of the strong cash flows," said Mohammed Ali Yasin, an independent analyst in Abu Dhabi. "They are coming in with cash liquidity, they are not coming in to [dismantle] the company. They see value in it."
The consortium requires 90 per cent shareholder approval to buy out the remaining shares and effectively delist Damas, having received agreement from 77.8 per cent of shareholders.
The current bid of 45 cents per share would probably satisfy shareholders, although a small premium may be required, said Marwan Shurrab, the chief trader at Gulfmena Alternative Investments. "The stock is very illiquid … it doesn't trade hands very much."
Mr Yasin said he would hold on to shares if he was a minority shareholder in Damas, in order to tap into any potential gains and Mannai's experience.
"[The bidders] will look for returns of 15 to 20 per cent," he said. "If somebody comes in and buys, its because they know there's value."
Damas announced a profit of Dh53 million for the year ending March 31 last year, compared with a loss of almost Dh2bn for the previous year. For the first six months to the end of September, Damas increased its profit by more than six times to $26m from $4m.
Despite the strong recent performance, Damas has been plagued by the legacy of its financial ordeal, and analysts say the management team may be under threat. "I see massive management change," said an adviser to the deal, who did not want to be named. "The board of executives is not aligned with the shareholders so there will be negative changes."
Last year, the Damas board of nine executives were paid more than Dh9m - nearly a fifth of the company's total profit that year.
The Abdullah brothers Tawhid, Tawfique and Tamjid were the owners of Damas before it became a public company in 2008 and still own 51 per cent of the shares. They were the subject of the strictest disciplinary action in the history of the Dubai International Financial Centre in March 2010 for "improperly withdrawing" Dh365m of cash and almost 2 tonnes of gold valued at Dh250m from Damas "without shareholder approval".
Analysts believe that the brothers' expertise will be important for investors in the company but that their influence should be diluted. "At the end of the day, they [the brothers] created this business, they will be valuable," said one.