DP World said on Thursday it would pay $2.6 billion to major shareholder Dubai World for its EZW logistics infrastructure firm, easing the burden on the state conglomerate ahead of a $4.4 billion debt repayment next year.
The deal is the latest example of Dubai’s ‘asset shuffle’, where profitable state-owned firms have bought assets from those still struggling after the emirate’s debt crisis at the turn of the decade.
Dubai World is due to repay $4.4 billion in May, but is in negotiations with creditors to bring this payment forward in exchange for more time to meet a much larger payment scheduled for 2018, as well as other inducements.
The conglomerate, which agreed a $25 billion restructuring in 2011, has struggled to meet an asset sale plan underpinning the original debt deal because it was hard to find buyers in the wake of the global financial crisis.
Most of the sales completed since then have been with other Dubai entities, most notably the luxury Atlantis hotel sold to Investment Corporation of Dubai in December.
The cash from the Economic Zones World (EZW) deal, coupled with other sales, should mostly cover the May payment, a source with knowledge of the matter said.
Yuvraj Narayan, DP World’s finance head, defended the deal when asked if it had been pressured into buying EZW.
“It is no secret they (Dubai World) were going to do some degree of sale of assets at prices which were both responsible and attractive,” Narayan told reporters.
The asset shuffle also keeps Dubai in control of its ‘crown jewel’ assets. The emirate has been highly protective of state companies such as DP World and Emirates airline, which could have been privatised to raise the cash to repay its full debt burden estimated at $85 billion between 2015 and 2019 alone.
Narayan said a sale, which includes the Jebel Ali port and about $859 million of EZW’s debt, to someone else would have been a “strategic risk to DP World”.
“So we preempted any such move and made a compelling case to Dubai World this asset is best placed in the same ownership as DP World.”
The acquisition, which needs shareholder approval and will be funded from cash reserves and existing loans, would increase the port operator’s earnings by 15 per cent and generate a return of more than 7 percent on capital employed in its first full financial year.
Shares in DP World, 80.45 per cent owned by Dubai World, closed 2.7 per cent higher.
DP World may explore financing options for debt belonging to Jebel Ali Free Zone, including a $650 million bond.
Separately, DP World will seek shareholder assent to delist from the London Stock Exchange due to the thin trading on its stock there. The move, to take effect around Jan. 21 if approved, comes three years after it sought the London listing to improve trading volumes of its shares.