x Abu Dhabi, UAESunday 21 January 2018

Why a rights issue makes sense for UK-bound DP World

The question on the minds of the Dubai financial community is whether DP World is planning a big cash-raising exercise.

Is DP World, the region's premier ports and transport business, planning a big cash-raising exercise alongside the listing of its shares in London in a few months time? That question has been on the minds of many in the Dubai financial community ever since DP World announced its London plans last month. Judging by a recent piece of research by HSBC, the answer is yes, the conglomerate could use the London debut to raise new funds. Furthermore, it has a range of options for liquidity enhancement in London.

The HSBC note went to clients last week, but when word of it seeped into the Dubai market on Sunday, it hit DP World shares quite hard. That was because only the top line of the research got publicised: to the effect that, due to a number of technical factors involving the proposed London listing, the bank was changing its recommendation on the shares from neutral to underweight, and was lowering its target price from US$0.50 (Dh1.83) to $0.38.

That move was surprising, because it was only a few weeks ago that HSBC had upgraded its rating for DP World. The market was puzzled and spooked by the bank's sudden change of heart. Now there is another argument for transparency. If HSBC had put out its research in a media release, with full explanation for its new recommendation, the market would have had a chance to judge the full facts. But you can understand the bank's sensitivity: as a leading creditor to Dubai World, DP World's ultimate owner, it is in a tricky position on this one.

Equity cash-raising exercises nearly always have a negative effect on a company's share price. They involve the issue of new shares, usually priced at a discount to the market price to attract investors to back the issue. It is a simple case of mathematics, rather than any judgement by the market on the fundamentals of the company, that the price of existing shares should fall. In the case of DP World, HSBC sees several options for the London listing. It must be stressed that these are HSBC's views of the scenarios available to DP World, rather than the company's own plans. The final decision rests with the board of the Port and Free Zone World entity (PFZW), itself wholly owned by Dubai World, which holds 80.45 per cent of DP World.

There is some important background information to bear in mind. DP World is excluded from the Dubai World restructuring, which was announced last November. It is regarded as a solid commercial business of global significance, the fourth-largest ports operator in the world, and in normal times a solid earner for Dubai. Times have been tougher since the economic downturn caused by the credit crunch, but the outlook is improving and DP World, with a strong presence in still-booming Asia, remains well placed to exploit global recovery.

But other factors also come to bear. "The reality of the Dubai credit crisis is that the equity market now expects Dubai World to sell some of its assets or holdings in order to restructure debt commitments - There is still a perception by some investors that the shareholding held by PFZW could become part of a solution," says HSBC. PFZW must consider several options. It could opt for a simple introduction of the shares to the London Stock Exchange, with no new shares or any of PFZW's holding sold; it could place about 5 per cent of the existing shares; it could go for a rights issue of up to 33 per cent of the existing shares; it might consider selling some of the 80 per cent stake it currently holds, but not more than 25 per cent more; and it could combine some of these options in a sell-down and placement process. Of these alternatives, HSBC is in little doubt which is the most effective: "A rights issue seems the best solution to us," the bank concludes.

A big rights issue has the advantages of providing a "strategic and stakeholder-friendly way to facilitate a dual listing, in our view. DPW could benefit in the medium term from a stronger capital structure, alleviating 2012 refinancing concerns, and the removal of the perceived threat of a special dividend, which the market may think Dubai World is seeking", HSBC says. The technicalities of a possible rights issue are complex, but the outcome for DP World, and for its ultimate parent Dubai World, are attractive.

Depending on the ratio of new shares to be issued, DPW could raise more than $2 billion in new funds, which of course would go to Dubai World. Such a structure would increase the "free float" of DP World to nearly 40 per cent, thereby increasing liquidity, which is the whole object of the London exercise. Those are the options. If a rights issue is adopted, DP World will be tested in the brutal court of market opinion, which will determine whether the fallout from Dubai's financial problems have affected arguably its most valuable asset. But those arguments are for a later date.