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Drewry Analysis: DP World decides to delist

Wednesday, 26 February 2020 | 00:00

On 17 February 2020, DP World (DPW or the company) announced its intention to delist from Nasdaq Dubai citing the board’s decision that the disadvantages of remaining listed outweigh the advantages. The top management was of the opinion that:

The company needs more flexibility to react to industry changes driven by consolidation of shipping lines.
Long-term investment cycles of the industry diverge from public shareholders’ shorter-term perspective.
Listing has not provided the anticipated access to capital or other funding.
Understanding the corporate structure
Port & Free Zone World (PFZW) is a majority shareholder of DPW, holding ~80.5% of its shareholding with the remainder issued to various market participants. PFWZ in turn is a wholly owned subsidiary of Dubai World, a conglomerate with interests in ports, real estate and hospitality.

Details of the purposed transaction
PFZW has offered to acquire ~19.5% shares of DPW traded on Nasdaq Dubai for USD 2.7bn (~29% premium on the closing price of USD 13 per share on 16 February 2020), placing the overall company valuation at USD 13.8bn. PFZW further plans to pay a dividend of USD 5.1bn to its parent Dubai World so that the company can implement its strategy without any restrictions from Dubai World’s creditors.

With regards to the offer and all the associated payments, the company will borrow and guarantee a new debt of USD 8.1bn. The company also plans to deleverage with funds mainly sourced from existing acquisitions and disciplined capex. Also, in the medium term, PFZW and the company will target below 4.0x Net debt / Adjusted EBITDA, and until then Dubai World will receive no dividend from DPW and PFZW.

DPW’s acquisition drive – A historical view
DPW aims to become an integrated provider of supply chain solutions to owners of cargo and aggregators of demand on both sides of the trade. The UAE port operator has swiftly emboldened its position in the non-container segment by acquiring logistics providers and by entering into short-sea feeder business (by acquiring Unifeeder and P&O Ferries – discussed later). Since the beginning of 2018, DPW announced more than 10 acquisitions, mainly in logistics and maritime services, with a total enterprise value of about USD 6bn. However, the company’s stock fell 47.5% (before the announcement was made) during the same period, indicating investors’ anxiety over the results. In the week starting 17 February, the stock jumped 26%, virtually equalling the offer price of USD 16.70 per share.

Our view on the delisting
We share the views of Bin Sulayem, DPW’s chairperson, that port assets are capital-intensive and have long gestation periods. Therefore, investors need to consider the long-term view which can be materially impacted by short-term market fluctuations. DPW has over the years diversified its revenue stream away from the Middle East and towards Asia Pacific and Australia, both of which generate higher ROIC. The company has also focussed on becoming a logistics provider, which means it has made significant investments in sectors that generally operate at relatively lower margins but contribute a larger proportion to debt. The combination of the two has eroded DPW’s value.

Purely from the financial perspective, one should note that:

Looking at the revenue trend, management has increasingly diversified its revenue stream with a greater focus on higher value- generative markets.
Despite recent efforts to diversify, Jebel Ali port’s significant contribution to DPW’s consolidated volume (~35% in 2019) highlights material geographic concentration in Dubai. There has been some concern here as COSCO and MSC – two of the largest carriers – have invested in Khalifa port, Jebel Ali’s main regional competitor.
On the leverage front, as of 1H19, the company had a Net debt/ LTM EBITDA of 4.1x vs 3.0x and 2.7x in 2018 and 2017 respectively, affected by a string of acquisitions. The total debt increased to USD 14bn in 1H19 (vs USD 10.6bn and USD 7.9bn in 2018 and 2017, respectively).
However, the low interest rate environment has worked in the company’s favour and it raised USD 1.3bn in July 2019 (USD 300mn bond and USD 1bn sukuk) and another USD 1bn (USD 500mn bond and USD 500mn sukuk) in September 2019, proceeds of which will be used to redeem the existing debt, fund acquisitions and extend the debt maturity profile.
With the company’s recent addition of USD 8.1bn to its already high debt, we believe a lot depends on its ability to generate significant synergies from its recently concluded bolt-on acquisitions.
Source: Drewry

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