DP World's long shadow

Investment by Gulf states in America is picking up, but Europe and Asia beckon





WITH Saudi Basic Industries buying General Electric's plastics unit recently for $11.6 billion, and Dubai Aerospace Enterprise snapping up Landmark Aviation and Standard Aero Holdings from the Carlyle Group for $1.8 billion, it appears that direct investment in America from the Middle East has rebounded. Neither deal caused a ripple of protest, in marked contrast to the outcry from American politicians that greeted last year's attempt by DP World, a company based in the United Arab Emirates (UAE), to buy a British firm that operated several ports in America. The storm abated only when DP World agreed to sell the American operations to an American-owned firm to assuage concerns over national security.

That episode caused investment from the UAE alone to fall by over $1 billion last year, according to America's Commerce Department—at a time when Gulf states, flooded with petrodollars, have been on a spending spree. But even if investment in America is picking up again—this week Istithmar, the Dubai government's investment arm, was said to be close to an $825m deal to buy Barneys New York, a fashion retailer—doubts remain and investment opportunities elsewhere beckon.

According to the International Institute of Finance, a global association of financial firms, more than half the foreign direct investment from members of the Gulf Co-operation Council—Qatar, Bahrain, Saudi Arabia, the UAE, Kuwait and Oman—has been in Europe. In the past few months Dubai International Financial Centre bought a 2.2% stake in Deutsche Bank; Maan Abdul Wahed Al-Sanea, a Saudi investor, acquired 3.1% of HSBC; and Delta Two, a property-investment group backed by the Qatari government, bought 17.6% of J. Sainsbury, a British supermarket chain. Georges Makhoul of Morgan Stanley, an investment bank, notes that Europe has traditionally been more receptive to foreign acquisitions than America.

Money from the Gulf has also been flowing east to Asia. Last week Saudi Basic Industries and China's Sinopec Corporation agreed to invest over $1 billion in a petrochemicals plant in Tianjian in northern China. Etisalat, a telecoms operator based in the UAE, plans to increase its 26% stake in Pakistan Telecom, which it bought in 2005 for $2.6 billion, to 51%.

American officials have taken notice of this trend. Legislation to reform the Committee on Foreign Investment in the United States, which reviews the national-security impact of investments and was at the heart of the DP World controversy, will probably be passed within the next few weeks. The new rules will increase the transparency of reviews and should help to thwart any future backlash in Congress. But they include an automatic 45-day investigation, on top of the normal 30-day review, for firms wholly or partially owned by foreign governments. This will catch many Middle Eastern firms.

For their part, investors have also changed their approach. Todd Malan, president of the Organisation for International Investment, which represents the American subsidiaries of foreign firms, notes that Dubai Aerospace Enterprise has been very open with Congress and co-operative with the review process—a striking difference from the way DP World conducted its acquisition last year. And the UAE has launched a public-relations drive to bolster its image and support for acquisitions.

Most of the money flowing outwards from the Gulf Co-operation Council still goes towards buying debt and equities in America. But when Saudi Arabia's King Abdullah chose China and India for his first state visits outside the Middle East in 2006, he made it clear where the future for Gulf investment lies.