Citi deal opens floodgates for Gulf investment in US

Citi could book $17.8 billion in second-half credit-market losses due to US mortgage crisis. (Getty Images)

A $7.5 billion Abu Dhabi deal to buy Citigroup shares may have created a model for acquisitions by Gulf and other emerging-market investors scouring the ruins of the US mortgage crisis for bargains.

The Abu Dhabi Investment Authority (ADIA) sought no role in managing Citi, allowing the world's wealthiest sovereign fund to invest as a saviour of the largest US bank without the risk of being perceived in the US as an Arab predator.

Investors from Dubai to China could be considering similar deals with cash-strapped US banks, hoping to ride a recovery in their stocks and avoid the political barriers that could have been thrust in their path in better times, analysts said.

"There will be more such investments," said Giyas Gokkent, head of research at the National Bank of Abu Dhabi (NBAD). "The other buyers will likely play the same white-knight role," he said of other Gulf Arab investments in Wall Street firms.

Citi, which could book $17.8 billion in second-half credit-market losses, said ADIA would buy 4.9% of stock, eventually becoming the largest shareholder of a bank that has lost 42.5% of its market value in the past five months.

Other Gulf investors, backed by $1.2 trillion in state reserves, say they could follow, depending on when they expect the worst of the crisis triggered by defaults on high-risk home loans to have passed.

Investment Corporation of Dubai said on November 20 it was looking to benefit from the US crisis, but judged shares of Citigroup to be too expensive as were those of Merrill Lynch & Company, which reported the biggest credit losses after Citi.

DIFC Investments, the Dubai government agency that bought into Deutsche Bank this year, said last week it could invest in banks and property among other US assets.

Minority stakes

Dubai's state-owned private equity firm Istithmar said in September it was considering buying into two US companies hit by exposure to subprime, or high-risk, mortgages. It did not name them.

These investments would likely be minority stakes that offer the buyers no say in how the banks are run, said Gokkent. Sovereign funds such ADIA, with an estimated $650 billion in assets, lack the expertise or desire to run a bank, he said.

"The idea is to capture growth for their investment portfolio," Gokkent said.

Funds and firms in the world's biggest oil-exporting region have been snapping up assets from Japan to Africa as their government-owners reap the windfall from a fivefold increase in crude prices since 2002.

Gulf investors have spent more than $70 billion on foreign acquisitions this year, twice as much as the record set in 2005, to reduce reliance on oil revenue.

Increasingly Gulf buyers are running into resistance from governments wary of allowing foreigners to control assets they say could affect their economic interests and national security.

Dubai's DP World relinquished control of US ports after lawmakers threatened to block its 2006 acquisition of British rival P&O on national security grounds.

The failed attempt by Dubai Aerospace Enterprise (DAE) to buy New Zealand's Auckland International Airport and Borse Dubai's offer to takeover Nordic exchange operator OMX encountered political opposition this year.

The growing power of sovereign wealth funds is raising concerns in the West, with the Group of Seven industrial nations calling for greater scrutiny of their role this year.

Still, the initial response to the Citi investment was different, even though it came from the largest and most secretive of these funds.

US Senator Charles Schumer, who opposed the DP World deal and raised questions about Borse Dubai's plans to swap stakes with Nasdaq Stock Market, said ADIA was helping New York retain its status as the world's financial centre.

The US mortgage crisis could hold similar opportunities for investors from other emerging markets, especially China, which is still smarting from Washington's opposition in 2005 to CNOOC's bid for US oil firm Unocal.

"Emerging economies have welcomed Chinese investors with open arms but acquisitions in developed markets have been more problematic for them so far," Flemming Nielsen, Asia economist at Danske Bank in Copenhagen.

"It may still be a problem but my guess is pricing and banks' liquidity problems may make it more possible," he said.

Bear Stearns Cos agreed a $1 billion equity swap with China's CITIC Securities last month and industry sources said China Jianyin Investment Securities, controlled by an arm of the central bank, was eyeing a tie-up with a global brokerage, possibly Merrill Lynch. (Reuters)

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