Sunday, July 18, 2010

ESCA Gives Aabar Shareholders a ham sandwich.

I once walked into a classroom in college and was startled by something written on the board. Someone from the last class had written the following elegant proof (apologies to the Shariah compliant, I'm trying to be true to the facts):

Nothing is better than happiness
A ham sandwich is better than nothing
A ham sandwich is better than happiness

I’d like to offer my own proof for in honor of the ESCA decision on the IPIC de-listing.

Nothing is better than the rule of law
Half a Dirham is better than nothing
Half a Dirham is better than the rule of law.

What I mean by this is that while 1.95AED is certainly a better price than 1.45AED the shareholders have no say in the decision either way. Whether IPIC or ESCA decide the price it is still a take it or leave it deal for the shareholders and they have no choice but to accept what is, in the end, an arbitrary decision which differs only who is making it and at what level. The wishes of the minority shareholders themselves are never taken into consideration. You have to remember the context, 1.45 AED is 50% of book, 1.95 AED is still only 67% of book. Usually holding companies like Aabar trade at about 1 times book in other markets. KKR for example is trading just under 1 times book as of Friday. Even though the shareholders are getting a better deal than the one IPIC offered them, it’s still not a great deal.

I could make the counter-argument against myself that the market had never priced Aabar at 1x book beforehand which may well be what has spurred this in the first place. I could do that, but then I would also be compelled to make the counter-counter argument that because under the UAE/ESCA regime it was always possible that the minority shareholders would be arbitrarily stripped of their value (as they have been) and so the shares should trade at a discount (which they did.) But this soon becomes kind of a circular argument, a sort of Inception style dream within a dream.

So this outcome is not ideal but I must say that it is a step in the right direction. A strong step. I would have bet a substantial sum that ESCA would have validated the IPIC price and actually, given the trading history of Aabar notwithstanding the book value, I would say the 1.95 price is aggressive. This is unequivocally good for the shareholders but I think it goes a bit far to declare this a “milestone for investors rights.” The investors were never consulted and therefore could not exercise their rights nor do they have a forum within which to express their views. The decision of ESCA, while a good one, was still arbitrary and therefore investors in other companies can take limited comfort from it. What is necessary is for ESCA to promulgate rules as to how minority shareholders should be treated in the future and under what circumstances, if any, the shareholders can contest actions against their interests by the majority shareholders. ESCA has announced that it is working on a large number of new rules which it hopes will further refine the markets. If ESCA can succeed in empowering the shareholders to secure for themselves the justice they have just been granted by ESCA fiat, then that will indeed be a milestone for investor rights.

Given my obsession with the Damas Heist I can’t help but think of the outcome for Aabar shareholders vs. the outcome for Damas shareholders (a fate which seems sure to spread to the creditors as well.) My nitpicking notwithstanding, the domestic regulator has done a massively superior job of looking out for shareholder rights than has the regulator operating according to “international standards” over in the DIFC. I think ESCA should use its jurisdiction over the DFM which is now the owner of NASDAQ to bring the kind of justice to Damas that they have just brought to IPIC. At the very least the entire staff of the DFSA should resign in shame. The organization is clearly unnecessary as ESCA can obviously do a better job.

1 comment:

Anonymous said...

This posts makes me hungry. Also, does anyone remember a couple of years ago, when one of the more humble members of the Abu Dhabi ruling family decided to write his name in water, by digging huge canals on an Abu Dhabi island? Thanks to Google earth's slowness in updating it's images, the words HAM were spelled out for the world, and astronauts, to see. (Now says Hamdan, sadly)