It could well be argued that local firms in the UAE have an easy time of it. Thanks to favorable company laws, a demographic explosion and soaring oil prices, the major groups — which are almost all family-run — have seen their fortunes multiply over the past few years without needing to open their capital to outside investors.
But change now looks to be afoot. A recent amendment to IPO regulations, as well as the prospect of a key commercial law being relaxed, means that the traditional family business model might require some tweaking in the future.
No one believes that the dominance which the bigger family firms still enjoy in the economic landscape of the UAE will be substantially reduced, but for various reasons, that landscape could well look slightly different in five years’ time.
List chance
One key change may start on the country’s capital markets in Dubai and Abu Dhabi. At the end of August, a federal decree amended regulations on capital markets listings to allow family companies to float a minimum of 30% of their capital. Under the old rules, which dated back to 1982, firms had been required to list at least 55%.
“Before the new rules came in, it was somewhat unattractive for certain family businesses to list their capital, as they would have to float a majority stake and lose full control,” says Ahmad Shahin, senior associate in the research department of Shuaa Capital in Dubai. “We now expect to see a lot more IPOs from family-owned firms here.”
In general the move, which had been under discussion for over two years according to local market watchers, has been welcomed in the business community. Although it is too early to judge its impact, a number of large family-owned concerns have already expressed interest in partial listings.
Al Habtoor Engineering, part of the giant Al Habtoor Group, has said that it would consider opening its capital to fund further expansion throughout the region. Another large family-owned company, the Al Fahim Group, issued a press release saying that it would consider listing its real estate and hotel units under the new regulations.
There are also reports that Dubai Ports World, which is part of the state-owned Dubai World group, plans to list 20% of its shares on the Dubai International Financial Exchange (DIFX) before the end of the year.
“There are a lot of key industries that are completely absent from the capital markets in the UAE,” says Shahin. “The retail sector, among others, is one sector that people would really want to tap into, and we hope to see a wider range of listings available for investors.”
Others say that it will take time for newly listed family-owned groups to meet the standards of reporting and corporate governance that outside investors might expect.
“We need to have more liquidity in the market before more family firms can successfully list,” says Ahmed Hamad, a trader with the Prime Emirates brokerage in Abu Dhabi.
“There are already opportunities for foreign or institutional clients, and I think that such clients would be reluctant to invest in family-run firms in which they have no control. It’s more likely that local investors and high net worth individuals from the GCC will invest in these types of companies, should they list.”
Agents of profit
Another potential regulatory change might trigger a different shift in the family business model. Many of the largest such firms in the UAE have built empires around the country’s agency laws, which stipulate that foreign companies wishing to establish new entities, or import and distribute their products on Emirati soil, must do so through a local partner. This partner must control at least 51% of the company.
The laws have been particularly beneficial to local families in sectors like retail and import distribution, where a kind of snowball effect can occur. Foreign firms looking to enter the UAE market are more likely to choose a firm which already has a track record in distributing similar goods, which reinforces their position in the market.
But earlier this summer, the UAE’s Minister of Economy, Sheikha Lubna al-Qassimi, announced the submission of a draft law which would permit 100% foreign ownership in certain sectors.
“The company law has been handed to the justice ministry and could be ready this summer,” said Sheikha Lubna in June. There is no news yet as to what sectors it may apply to, but, “preference will go to companies that help to attract cutting edge technology and bring major benefits to the national economy,” she said.
Such a change has apparently been on the drawing board for some time, although encountered opposition as it could potentially erode the power of influential local groups who play a part in decision making at the highest level.
“There is so much money and power vested in the large local families that any dilution will necessarily be slow,” said one Dubai-based analyst who declined to be named. “There is a lot at stake, and it will not be given up easily.”
The issue is also thought to have contributed towards the breakdown of talks on a possible US-UAE free trade agreement, which faltered earlier this year, whilst the World Trade Organization (WTO) has identified the need to amend the companies law in order to sustain foreign investment in the long-term. In the short-term though, FDI continues to reach new heights, growing from $10.9 billion in 2005 to $12.8 billion in 2006.
Going abroad
“There is so much money and power vested in the large local families that any dilution will
necessarily be slow. There is a lot at stake,
and it will not be given up easily”
Perhaps looking to the longer term, with fiercer competition in their small home markets, some of the UAE’s largest family groups are starting to go regional and even global — a move which might also encourage more firms to list or access the debt markets in order to fund their growth.
Leading this global expansion are the holding groups and investment vehicles which are ultimately owned by the ruling families of the UAE, and particularly those in Abu Dhabi and Dubai.
The Abu Dhabi Investment Authority (ADIA), for instance, is said to boast over $500 billion in assets generated from the Emirate’s oil revenues, which are the largest in the country. The vast majority of its investments are thought to be held outside of the GCC in relatively conservative bets such as treasury bills, prime real estate and financial services.
Dubai has been brasher, with investment arms like Dubai International Capital and Istithmar not afraid to make high-profile purchases in the US or the UK — including bids for football clubs, household-name hotels and major tourist attractions, with the best-known example being Dubai’s bid for a number of US ports, which met major political opposition and was eventually dropped.
Other family companies are following suit. UAE property developers and construction companies have been increasingly active across the Arab World, most notably in building the region’s “mega-projects,” while retail developers tell a similar story. The Majid al-Futtaim Group, for instance, has brought the French supermarket Carrefour to various locations in the Middle East and wants to roll out more malls across the region.
Future horizons
Interesting times, then, could lie ahead for the UAE’s larger family companies. The head of one business intelligence agency in Dubai predicts a merger and acquisition (M&A) boom, a “giant card game” which would see assets swapped and consolidated as family conglomerates streamlined to focus on a smaller number of core activities which they can take regional or even global.
Yet the conclusion that most analysts make, and it’s a fairly natural one, is that any erosion of the families’ power in the UAE will be sluggish, even if the new companies law does come into force. It may in any case be counterbalanced by overseas expansion, through a greater willingness to access debt markets or float portions of their capital under the newly-introduced IPO rules. But as UAE firms continue to make high-profile acquisitions in overseas markets which permit 100% foreign ownership, external pressure is likely to mount on the Emiratis to grant foreign companies the right to do the same in the UAE. The trick might lie in balancing the interests of the wealthy, politically influential local families against the need to further open up the local market and sustain growth.
