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For cash-laden Emirates, no price tag is too large

Groups run by royals flush with oil money are snapping up flashy investments, but with an eye to the future.

October 06, 2008|Borzou Daragahi | Times Staff Writer

ABU DHABI, UNITED ARAB EMIRATES — No, no, no, he assured one of the businessmen buying the ailing Manchester City soccer club. The price tag for the British team wasn't $4 billion, but a mere $400 million.

Anil Bhoyrul, editorial director of Arabian Business magazine and a confidant to some of the Persian Gulf's super-rich and powerful, thought the Abu Dhabi investor would be pleasantly surprised.

He was wrong.

Even as the United States and much of the world reels from a succession of financial crises that are squelching access to credit and hampering economic growth in what a quarter of Americans are calling a depression, the oil-rich royal families of the Persian Gulf are bursting with cash they're not afraid to spend.

The investor, an Abu Dhabi royal who had earned billions last year, was not interested in a bargain -- he was looking for a huge deal to make an impressive splash internationally. A multibillion-dollar price tag, easily within his group's means, would cause far more jaws to drop than anything in the millions.

"When he thought it was $4 billion, he was really excited," said Bhoyrul, who declined to name the individual. "When he found out it was $400 million, he was disappointed."

Bhoyrul added, "There's a pressure to spend."

As experts warned of a coming credit crunch that could put a damper on the gulf's real estate boom and the regional stock markets careened wildly in tune with the U.S., the Emirates' central bank governor Sultan al-Suwaidi said last month that his nation's banks "had virtually no exposure" to the collapse of institutions such as Lehman Bros.

The region's economy hinges far more on the price of oil than the value of capital markets, which remain relatively small in the gulf states. Cash, rather than credit or clever financing, is the preferred financial instrument for transactions big and small.

Abu Dhabi, the richest and most powerful of the seven kingdoms of the United Arab Emirates, has spread its wings the widest, plunking down cash for businesses and real estate across the world, including far-flung corners such as Africa, the Balkans and Central America. The deal-making has continued even after the global financial meltdown, with the Abu Dhabi Investment House, a sovereign wealth fund, agreeing to a $6-billion real estate joint venture with China.

In the U.S., the Abu Dhabi Investment Authority, controlled by the royal family, agreed in January to buy a $7.5-billion chunk of Citigroup in a deal that saved it from collapsing under bad real estate loans. The authority is estimated to control cash and holdings worth between $420 billion and $875 billion.

A separate sovereign wealth fund, the Abu Dhabi Investment Council, bought a majority stake in Manhattan's Chrysler Building in July.

And while xenophobes may bristle at the idea of sheiks in white robes owning venerable Western institutions and brands, more astute observers see a maturation of the gulf states from the quick-hit, cash-and-carry business culture of yore to a more sophisticated view of the world economy.

Indeed, the oil-rich gulf states have long conducted business with the West. Now instead of just trading barrels of oil for Western goods and services, they are investing in those businesses, figuring out how they work and bringing the knowledge back to the gulf.

For example, some scoffed when Abu Dhabi's Mubadala Development Co., a sovereign wealth fund, bought a 5% stake in Ferrari, the Italian car maker. There go the Arabs, some snickered, foolishly spending their money on flashy toys.

But the chuckles petered out after Abu Dhabi announced the creation of the Ferrari World theme park, featuring rides, roller coasters and a race track, as well as the first Abu Dhabi Grand Prix, both sure to draw big tourist dollars from the Arab world as well as Europe and South Asia. Mubadala also invested about $620 million in U.S. chip maker Advanced Micro Devices last year.

"Abu Dhabi has a more sophisticated vision than just making more money," said Edward Borgerding, an ex-Disney executive who is chief executive of the Abu Dhabi Media Co., which recently signed a deal to spend $1 billion over five years to finance Hollywood projects. "It wants to invest in businesses that in 10 or 20 years will flourish and continue to sustain the economy of the UAE."

Investments that might not hold up on their own often have other long-term strategic implications.

"The people here are extremely intelligent. They know business," Borgerding said. "They know the value of money. They're not unsophisticated investors spending their money in a random way."

Evidence so far shows that the gulf states have mostly spent their oil windfall wisely, especially when compared with what even the U.S. presidential candidates are describing as the reckless behavior on Wall Street over the last few years.

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