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Sun 4 Jun 2006 04:00 AM

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DIFX plots US$2.7bn takeover of DFM

The Dubai International Financial Exchange (DIFX) is considering an audacious takeover of the Dubai Financial Market (DFM), Arabian Business can reveal.

The Dubai International Financial Exchange (DIFX) is considering an audacious takeover of the Dubai Financial Market (DFM), Arabian Business can reveal.

Executives at the DIFX, which only went live last September, met last week to consider proposals that would see the DFM completely amalgamated into the DIFX, making it the only stock exchange in Dubai.

At least one major investment bank has already been asked to put together a detailed valuation of the DFM. It has estimated that the DFM will bring in annual revenues approaching US$200 million, and has put a minimum US$2.7 billion price tag on it. A deal could be made within the next six weeks.

Earlier this year, former HSBC boss David Eldon was brought in to head up the Dubai International Financial Centre (DIFC). Since his arrival, Eldon is understood to have been frustrated by the lack of growth at the DIFX, which now has just two listed securities – compared to 35 at the DFM.

In April, the DIFC took a stake in European stock market operator Euronext, fuelling speculation of an imminent full bid. Now, according to sources close to the DIFC, Eldon has signaled his approval for a takeover of the DFM, which would give the DIFX instant credibility as an international stock exchange.

A senior Dubai-based analyst told Arabian Business: “For the market having both merge will make it easier for the DIFX, which will as a result have the established brokers and people of the exchange. It’s a good way for them to grow quickly. For market participants there are no implications really.”

The DFM has suffered hugely from the recent market crash, although it still contains some of the world’s most prestigious stocks including Emaar – at US$9 billion on the DFM - which remains the world’s most valuable property developer.

The DFM has eight banking stocks, two in general industry, ten in insurance, four in investment and eleven in services (including property).

Shehab Gargash, managing director of Dubai-based Daman Asset Management, told Arabian Business: “Their earnings last year were one point something billion; and that was a bit of an extraordinary year, but if you take a 30% discount on that, you have earnings of 700,000 million dirhams net profit (US$191 million). If you take it by a public companies market capitalization multiplier, as they are going public soon, it is worth 10 billion dirhams (US$2.7 billion).”

He added: “Effectively it is the DFM making much use out of the DIFX. The DIFX has failed to attract the critical mass that it had hoped to very early on and therefore it makes more sense to look at both these exchanges as a single exchange.”

One of the first companies to obtain a license at the DIFC was Credit Suisse. Last week, managing director Burkhard Varnholt told Arabian Business: “It is confusing having two markets and I think this kind of consolidation is only right. I think such a merger will happen soon, and it will be to everyone’s benefit.”

He added: “I don’t think people should be concerned by the recent falls in the market. After every market correction, the air is now much cleaner and clearer.”

Only last week the DFM launched a “founder committee”. His Highness Shaikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, issued a decree forming the founders committee to transform the DFM into a joint stock company.

The DFM will offload 20 per cent of shares in the initial public offering. It is not yet clear whether the DIFX will attempt to buy these shares as part of a takeover.

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