By Mike Caggeso
And William Patalon III
Just two days after Dubai Aerospace Enterprise offered to buy Auckland International Airport in New Zealand for as much $2.1 billion, the government-run aviation investment group announced a week ago that it is scouting airport projects in Europe.
Only three months ago, Dubai Aerospace Enterprise, or DAE, agreed to pay $1.8 billion for two U.S. aviation-maintenance companies owned by The Carlyle Group, the noted Beltway buyout firm. DAE’s goal: To build a $15 billion global aerospace enterprise that will link established markets with their newly emergent counterparts, and to streamline travel both into and out of Dubai, which is establishing itself as the epicenter of the Middle East.
These latest deals also position Dubai at another epicenter: State-run equity funds, and “strategically focused” financing funds – two of the newest trends in the private-equity and venture capital realms.
Private Equity: The “Dot-Com” of the Present
The term “private equity” has been one of the major buzzwords of the past two years, assuming a position of importance like that of the term “dot-com” in the late 1990s, or LBO (leveraged buyout) in the late 1980s. And private equity has been as crucial to market’s record-breaking run this year as its brethren were to the major market surges of their time.
According to one market researcher, the announced private-equity transactions for this year’s first half already exceed the dollar value of deals for all of 2006: $330.3 billion through the end of June this year, compared with $329.4 billion for all last year. And though 2007 is only half over, the $555.5 billion in mergers-and-acquisition deals announced in the first six months of this year is only a third less than the $847.5 billion in deals announced for all last year.
Even during a stretch of admittedly tepid earnings, with money flows this powerful, it is no surprise that stocks have posted one record after another. Think of it this way: It took the benchmark Dow Jones Industrial Average more than two years to pierce the 11,000 level. After that, it took only eight months to surge from 11,000 to 12,000, six months to move from 12,000 to 13,000, and then only three months to make the jump from 13,000 up through the 14,000 level.
While market surges of this magnitude – and even better elsewhere in the world – stock market profits have literally poured into shareholders’ brokerage accounts the world over, an overseas export boom has flooded the coffers of national governments in China, Russia and the Middle East with foreign-currency reserves beyond anything they’d ever need to run their countries. In pursuit of larger returns – and for other reasons, as well – many governments have established state-run venture funds as a vehicle to deploy some of these currency assets.
But, as is often the case when governments try to make a splash in a private-sector venture, these state enterprises are rather late to the party, as a myriad of problems are increasingly manifesting themselves in the private-equity and venture-capital markets. That party isn’t over, by any means, but the competitive stakes are clearly escalating. For insights on the problems state-run funds face, and what those issues mean for investor, click here
In response, some of the leading funds are adopting a more-focused approach – a move that in industry lexicon is known as “” With a strategic – or highly focused – approach, a fund has the rare opportunity to add marketplace heft at the same time as it spotlights substantial cost-cutting opportunities, which will boost profits for itself and its shareholders. It does so by combining two or more firms that operate in similar, or highly complementary, businesses, which adds market share, boosts its product coverage, and increases sale opportunities. And, because it allows for the combining of such functional operations as human resources, finance, public relations, and others, the parent company can streamline these units and reduce overhead costs in kind.
As an example, consider the newly public Blackstone Group (NYSE: BX). With its recent proposed purchase of DJO Inc. (NYSE: DJO), the maker of orthopedic sports-medicine products. After it completes the $1.6 billion buyout of DJO, Blackstone will merge it with its own ReAble Therapeutics, another orthopedic-device company, and one that it acquired last year.
Other buyout firms are looking to do similar things: For instance, the private-equity firm Apollo Management last month agreed to buy specialty-chemical producer Huntsman Corp. (NYSE: HUN) which it intends to combine with its existing Hexion Specialty Chemicals business unit.
Now Dubai is following suit. And it’s focusing on the aerospace and airline sectors. Earlier this summer – in a deal that new French President Nicholas Sarkozy helped engineer – Dubai International Capital, a unit of the government-owned Dubai Holding, ponied up $850 million to purchase a 3.1% strategic stake in the European Aeronautic Defence and Space Co. NV, or EADS (EPA: EAD.PA), the troubled parent of European airliner-maker Airbus SAS.
Dubai’s announcement a week ago that it’s scouting airport projects in Europe was essentially that – an announced plan, but one that’s largely bereft of specifics, with officials not saying where, or when, this would get done. Even so, Dubai’s DAE officials made sure to underscore the venture’s commitment during interviews with the global business-news media. “There will be something in Europe,” Sheikh Ahmed bin Saeed al-Maktoum, a member of Dubai’s ruling family and chairman of DAE, told Bloomberg News a week ago.
In Auckland, however, much has been said and written about DAE’s proposed purchased of AIA, the international airport located at strategic halfway points between Dubai and North, Central and South Americas. AIA directors unanimously approved DAE’s bid. But in an eerie reminder of a Dubai-fund debacle involving U.S. port management a little over a year ago, Auckland’s local government and some national political parties are opposed to overseas control of New Zealand’s largest airport, which receives 70% of the country’s incoming international flights.
Businesses that touch on national security may be one area where state-run equity funds from a foreign market may find their efforts blunted time and again. For this New Zealand deal to go through, 75% of AIA shareholders need to approve the sale. And Auckland and Manukau city councils together own 22.8% of AIA’s shares. The mayor of Manukau said he opposed the proposal and said he will work with Auckland’s City Council to defeat it.
Shareholders will vote on DAE’s proposal in November.
Dubai’s Shifting Economy
DAE’s airport proposals and projects tell a larger story about Dubai. The emirate’s economy was built on the oil industry in the early 1970s. And now oil and natural gas account for less than 3% of its revenues, USA Today reported.
Now, the Emirate’s revenues are primarily garnered by its Jebel Ali Free Zone, an economic zone with lucrative business and tax incentives. Increasingly, however, the Emirates are evolving into a tourism destination.
A typical Dubai vacation (or business trip) can include indoor skiing, sand dune cruising, swimming in the Persian Gulf and shopping during the heralded month-long, citywide Dubai Shopping Festival.
Instead of oil, the economy shifted its focus to services, and real-estate prices cycled higher, in kind. The value of its real estate is today evident in Dubai’s enormous skyscrapers and hotels. Earlier this month, Dubai grabbed headlines by proclaiming that the Burj Dubai is officially the world’s tallest skyscraper — and it’s not even completed yet. Add to that Dubai’s proclamation that it has the world’s only “7-star” hotel, and you’ll see the image of inviting opulence that the country is trying – brashly – to cultivate.
But to nurture this vision of a global destination for international tourists and globe-trotting business types, Dubai city needs to make itself much more accessible. And that’s where the worldwide airport network comes into play. Indeed, unlike other funds that “get strategic,” Dubai is approaching this both as a business, and as a means to an end – a business double-play that’s virtually certain to make it a winner with one or both of its strategic mandates.
The New Zealand Herald reported that the DAE sees AIA as the first of many airports that will eventually serve as network hubs for worldwide travelers, while also acting as a jumping-off point that serves newly capitalist markets in such countries as China and India.
Why Auckland, and not Sydney or Melbourne? Because Australian laws forbid foreign control of major airports.
A key beneficiary in all this is Emirates, the Dubai-based and government-owned airline that is currently the eighth-largest international passenger carrier, with 20 million a year. Emirates’ five-year plan is to expand its fleet by 157 planes, and to double the number of its destinations.
By capitalizing on the two latest trends in the private-equity sector – government support in the form of a state-run fund, as well as a carefully chosen strategic focus – it certainly seems to face favorable odds. “You will see in the future we have plans to serve New Zealand from Far East points in our longer-term plans,” Gary Chapman, head of Emirates’ ground-services company, Dnata, told the New Zealand Herald. “That will happen. There is always the possibility of going beyond, going east, beyond New Zealand, to the Americas.”