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UAE bourse merger seen likely as deals slump

Dubai, March 25, 2010

A slump in trading revenues and Dubai's parlous financial state could lead to a merger of the United Arab Emirate's two main stock exchanges, analysts said.

The country has three bourses -- the Abu Dhabi Securities Exchange (ADX), Dubai Financial Market (DFM) and Nasdaq Dubai -- each fighting to draw liquidity.

'The UAE is a small country with a very small population, so having three exchanges is totally absurd and defies logic,' said Shakeel Sarwar, head of asset management at Sico investment bank in Manama.

'A merger would improve liquidity and be more attractive to regional and international investors, as well as local traders, who wouldn't have to use three different accounts and deal with different brokers as well different regulators, which right now is a cumbersome process.'    

Dubai's two exchanges are already moving towards a single trading platform and synchronised trading hours. In December, Borse Dubai, which is majority owner of the DFM and Nasdaq Dubai, agreed to buy Nasdaq OMX's remaining stake in Nasdaq Dubai.   

Abu Dhabi, home to 90 percent of the UAE's oil reserves and owner of the world's largest sovereign wealth fund, is likely to be the driving force behind a merger.

ADX deputy chief executive Rashed Al Baloushi was coy when asked on Wednesday about plans to merge the ADX with the DFM. 'I cannot confirm nor deny. But it would be a positive move if it happens,' he said in Abu Dhabi.   

A spokesman for the DFM declined comment.   

The DFM's annual turnover fell to a five-year low of $47.24 billion in 2009, down 43 percent from the year before, while ADX turnover dropped 70 percent last year to $19.06 billion.

On Nasdaq Dubai, just one of its 16 equity listings - DP World - trades daily and the ports operator is seeking a London listing, saying it is unhappy with its market valuation.   

'Exchanges are the epitome of a scale business and so the big catalyst (to merge) would have been the drop in volumes,' said Robert McKinnon, ASAS Capital chief investment officer.   

Political pride among the emirates -- part of the seven-member UAE federation -- has meant there was scant chance of either giving up its exchange.
    But Abu Dhabi's ascendancy in the wake of the Dubai World debt crisis, which saw it bail out its neighbour, improves the chances of such a merger, analysts said.

'The growth potential of the UAE markets is limited without such a move,' said Mohammed Yasin, Shuaa Securities chief executive. 'What doesn't make sense is for the markets to stay the same - the financial crisis has made for less resistance to consolidation. It has been discussed a few times and I think the political will is there.'    

Valuing the bourses could be a problem with Borse Dubai owning 80 percent of DFM and 20 percent held in free float, while ADX is wholly owned by the Abu Dhabi government. '(It) will be a tough sell for DFM shareholders, which has a pretty rich valuation when compared to international exchanges,' said McKinnon.    

Borse Dubai's 19.9 percent stake in Nasdaq OMX and 22 percent stake in London Stock Exchange could be ringfenced in a merger, Sico's Sarwar said, although Abu Dhabi may be looking at these assets as a pay-off for providing Dubai with further financial support.   

A single market would boost the UAE's chances of being upgraded to emerging market status by index compiler MSCI. Such a move would push major emerging market players such as pension funds to hold UAE equities, boosting liquidity and with it valuations. Greater scale may also reduce trade fees.

'Transaction costs are high and are prohibitive in terms of attracting liquidity -- trading costs on developed markets are around a tenth of those on UAE markets,' said McKinnon. - Reuters




Tags: UAE | Dubai Financial Market | bourse | ADX |

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