21 September 2007

Gulf States vie over LSE

In the past three years, Clara Furse, chief executive of the London Stock Exchange, has received and spurned no fewer than five offers from four suitors on three continents. It is safe to say that she and fellow executives at Paternoster Square are used to being an object of affection.

Yet the latest and certainly most intriguing chapter in the saga of the LSE and who, if anyone, will end up owning it, unfolded in extraordinary fashion yesterday when first Dubai, and just hours later Qatar, announced that they had bought major stakes in the exchange. At a stroke, the rival emirates became the top two shareholders in the LSE – controlling nearly half of its shares between them – reducing the London bourse in the process to a £3.3bn chess piece in a battle for regional supremacy in the Middle East. As if to emphasise the point that the battle for dominance between the two Middle Eastern powers will be played out on the world stage, Qatar announced it had been granted access to the books of J Sainsbury, moving a step closer to taking over the supermarket giant.

"The rivalry is very, very real," said Mushtaq Khan, Middle East economist at Citi. "They are both trying to establish themselves as the hub for the region. They are doing these very brash deals outside the region and raising their profile."

Bob Greifeld, the chief executive of Nasdaq, whose decision last month to get rid of his 31% stake in the LSE set in motion the events that culminated yesterday, played a pivotal role. At a press conference, Mr Greifeld and Essa Kazim, chairman of Borse Dubai, unveiled a series of deals that saw Dubai become the single largest shareholder in the LSE with a 28% stake, acquired for £1bn. It also detailed a plan that would make it the biggest investor in Nasdaq, with a 19.9% holding. The latter is conditional, however, on Borse Dubai completing its £2bn takeover of the Nordic exchange group OMX. Until yesterday, Nasdaq had a competing offer. It has agreed to withdraw that bid, clearing the way for Borse Dubai. Once completed, Dubai would then pass the company to Nasdaq in exchange for the stake in the New York bourse and some cash. That drew the interest of the US President George Bush, who said he would take a "good look" at whether it had any national security implications. For Borse Dubai, a company that only formally came into being last month, the deals represent a quantum leap.

Nasdaq will trouser about £1bn from the sale of its LSE stake and has agreed to become a major strategic investor in Dubai International Financial Centre (DIFX), ending up owning a third of the group that controls Borse Dubai. It will also become the linchpin of a triumvirate of exchanges spanning America through the Nordic and Baltic states to the Middle East. DIFX will be rebranded under Nasdaq and, if all goes to plan, will gain access to OMX's technology platform. The OMX chief executive Magnus Bocker acknowledged the developments, but declined to give an opinion on Borse Dubai's bid – now the only one on the table – until the company had a chance to assess it in greater detail. Mr Greifeld called the deals a "pure, pure win every single way you look at it."

Ms Furse, who was on the cusp of bringing aboard a supportive, non-threatening shareholder in the form of Qatar, did not see it that way. Neither did the Qataris. Having spent the best part of a year fighting off Nasdaq, she was keen not to have its stake end up in the hands of another rival exchange. Borse Dubai clearly has serious ambitions, though Mr Kazim said yesterday that the stake in the LSE was "purely financial." He added: "London has become a major global financial centre, and we believe the consolidation in the exchange business will continue and that these assets will continue to be attractive. This is simply strategic financial investment and we'll be in for a long time."

Ms Furse was hoping that Nasdaq's stake would be placed in the open market. Failing that, she was pushing for the stake to be sold to Qatar. Talks between the two sides were well advanced.

Borse Dubai's 11th-hour move infuriated the Qataris. They reacted swiftly. The Qatar Investment Authority first bought a 20% stake in the LSE on the open market at an average price of £15.85 per share, for a total outlay of about £634m. The deal was done with the assistance, it is understood, of Ms Furse. She publicly welcomed the deal. (Both Borse Dubai's and the QIA's stakes will be reduced when the LSE's pending takeover of Borsa Italiana is completed next month.)

A few hours later, the QIA struck again, this time on OMX, buying a 9.9% stake and raising the spectre that they could spoil Borse Dubai's ambitions to take over that exchange. The QIA said: "This purchase is a key step in the QIA's ambitions to take supportive holdings in the European exchange infrastructure. As part of this initiative, the QIA also announced it had taken a 20% stake in the London Stock Exchange. The QIA believes these stakes will help build on the success of Qatar as a strong regional financial centre."

By any measure, the tit-for-tat deals, done seemingly on a moment's notice, were astonishing. Mr Khan said that the developments are not altogether surprising given the nature of the rivalry between the two.

Qatar, led by Sheikh Hamad bin Khalifa Al-Thani, and Dubai, under Sheikh Mohammed bin Rashid Al Maktoum, are vying to position themselves as the regional hub for financial services, on the assumption that gas and oil prices will ease, shrinking the wall of money rushing into the countries.

The six nations that comprise the Gulf Cooperative Council – United Arab Emirates, Qatar, Bahrain, Saudi Arabia, Kuwait, and Oman – have accumulated a current account surplus nearly equal to that of China. Over the past five years, China's account surplus, the difference between export income and spending on imports, was $575bn (£286bn), while the GCC's was $560bn.

Mr Khan said: "The UAE and Qatar are the two most dynamic countries in the region. Dubai has been doing deals abroad for a while. There is perhaps no better foot in the door to the world's financial flow than ownership of a major exchange. Qatar is a little bit of an upstart, and it has all of a sudden realised that it is worth a lot of money. They have set their targets according to what Dubai is doing."

So desperate are they to grab pole position, the two emirates are borrowing additional funds to top up their war chests in a mad dash to get the advantage over the other. Qatar recently raised $3bn through a bond offering that it said would be targeted at making acquisitions abroad. Dubai meanwhile leaked to local press a plan to raise up to $10bn in bonds to bankroll a foreign buying spree.

In November, Mifid, the European directive designed to increase competition among exchanges and make the creation of alternative electronic trading platforms more easy, comes into effect. That cloud looming on the horizon is one reason why activities among the world's exchanges have reached such a frenetic pace. Project Turquoise, an exchange project expected to be launched by a group of major investment banks later this year, is but one example of the changing landscape, one which these fiercely ambitious emirates will have a central role in shaping.

Spare a thought for Werner Seifert. It was, after all, the combative former head of Deutsche Börse who first lit the fire that still burns – now hotter than ever – under the seat of the London Stock Exchange head Clara Furse. It was a few days before Christmas 2004 when he first publicised his 530p-per-share offer for the LSE, thought by many at the time to be a stonking price for the bourse.

A vociferous few, namely Christopher Hohn, the head of The Children's Investment Fund, thought it was in fact too much; the high price a disservice to shareholders. Mr Hohn incited a rebellion not just against the deal, but against Mr Seifert himself. The fall-out led to his sacking six months later, and inspired the now infamous public tarring of hedge fund managers and other financiers as "locusts". Mr Hohn may have emerged victorious, but not everyone was convinced of his arguments. Other LSE suitors followed. Macquarie of Australia offered 580p per share. Nasdaq bid 1,243p. All of them were summarily batted away by Ms Furse. The exchange's price move inexorably skyward.

After yesterday's dual raids on the stock by Qatar and Dubai, LSE shares closed at a new record of 1,691p, bestowing it a market value of £3.37bn, more than three times the amount Mr Seifert offered. It hasn't been all bad for Mr Seifert, though. He moved to Ireland, where he could spend more time indulging his love of jazz. He wrote a book called Invasion of the Locusts, in which he railed against hedge funds and still seemed incredulous that he was ousted by a few noisy investors. Indeed, three years on, 530p doesn't look like a steal.

© Graham Bishop