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 Having been mooted for a number of years, a merger of the DFM and
the ADX seemed to take an important step closer last year as
investment banks were hired to advise on a tie-up - a move revealed
by Reuters last October.
The state-backed deal, seen as one of the biggest changes in the
country's financial industry in recent years, was expected to
energize financial markets in the United Arab Emirates, making it
easier for investors to operate across the markets, stimulating
trade and attracting more foreign investment.
However, despite a number of key impediments being overcome since
then, talks have stalled and a deal is now unlikely to happen any
time soon.
"It's been shelved," said one Abu Dhabi-based banking source aware
of the matter, adding that reaching an agreement was always going to
be tricky given multiple points of contention, such as valuations,
the location of the merged entity's headquarters, and the board's
composition.
A spokesman for the Abu Dhabi Executive Council, the top
policymaking body in the emirate which mandated Abu Dhabi's
advisers, did not respond to calls and an email seeking comment.
Spokesmen for the ADX and DFM declined to comment.
The sources, who all spoke on condition of anonymity as the
information isn't public, said it was unclear whether the merger
plans were permanently on hold or whether they would be revived
later.
The valuation of the DFM, the Gulf's only listed bourse, has
increased significantly since the advisers were first appointed, as
trading increased during a bull run which saw the value of Dubai's
benchmark index jump 59.5 percent between Jan. 1 and May 6.
Based on a valuation of around 20 times earnings before interest,
tax, depreciation and amortization (EBITDA) used under the merger
plan, DFM's value rose from around 2 billion dirhams ($545 million)
at the end of last September to 4.64 billion dirhams at the end of
March.
The merger plan valuation, conducted by Goldman Sachs, according to
two of the sources, put ADX at about 10-12 times EBITDA.
"They are engaged, the marriage would be good but the dowry is the
problem – Dubai is expensive," said Mohammed Ali Yasin, head of
National Bank of Abu Dhabi's brokerage subsidiary.
POLITICS VS ECONOMICS
Political considerations were always a big obstacle to be overcome,
as they are in many mergers in the Gulf Arab region. Despite
economic pressures for consolidation in a number of industries,
powerful shareholders are often reluctant to cede control in their
businesses and be seen to be losing face - in this case, both
emirates wanted the prestige of running their own bourses.
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But the appointment of advisers for a stock market tie-up, as well
as the merging of Abu Dhabi and Dubai's separate aluminum businesses
into Emirates Global Aluminum last year, raised hopes of a new era
of cooperation.
In April this year, a top Dubai economic policymaker said that an
agreement to merge the two markets had been reached in principle but
was yet to be finalised.
But the impetus at a political level has seemingly waned.
"For the moment it is on hold. The decision makers are waiting for a
better time and to make a thorough assessment on some key issues," a
second source familiar with the matter said, without elaborating on
what the key issues were.
Analysts are optimistic the merger will eventually happen.
"It should not hinge on valuations, profit or loss and such things.
It is a matter of national strategy and national economic
interests," said Wadah al-Taha, chief investment officer at
Dubai-based Al Zarooni Group.
"It will happen, if not now, later. It will be politically driven
and forced to happen."
Abu Dhabi, the richest emirate in the UAE, had hired U.S. investment
bank J.P. Morgan Chase and local lender First Gulf Bank to advise on
the merger.
Investment Corporation of Dubai, the flagship holding company which
owns stakes in many of Dubai's top entities, including DFM's parent,
Borse Dubai, had hired Citigroup.
($1 = 3.6729 United Arab Emirates Dirhams)
(Editing by David French and Andrew Torchia)
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