Articles
The National discusses the unique benefits of the first Business Bazaar in the Middle East with Capital Street founders
Source: The National, 28 May 2009
When a private equity firm made an unsolicited bid to buy Pritvi Rajkumar’s family business, he was dismayed by the brash way in which the offer was made – and the apparent lack of places for small businesses to turn for help in considering such offers.
Mr Rajkumar, 32, said the virtual absence of advisory and consulting services for small and medium-sized businesses has allowed bigger players to dictate terms, especially in acquisitions.
“Here, most of the private equity firms will knock on the door, tell you, ‘Give me a 90-day exclusivity, I want to open all your books and at the end of it I may want to offer you something’,” he said.
That was what happened with his family’s business, the Dubai-based Koohiji Group, a holding company with annual revenues of US$300 million (Dh1.1 billion). Koohiji turned down the offer.
Mr Rajkumar said the private equity firm approached Koohiji directly in part because there had not been a vehicle in the market to list companies up for sale. If private equity firms had an easy way of finding out what local businesses were for sale, he thought, and if services existed to give businesses that wanted to sell better representation, transactions might proceed much more smoothly.
“If I’m a large family-owned company in Dubai, like Rostomanis, I already have my investment bank, like Chase or HSBC, and if someone contacts me I tell them talk to my investment bank,” he said.
“When you go down the market there is not a lot of representation.”
To help fill that gap, Mr Rajkumar decided to start a company to broker the sales of businesses. He called Steve McIntire, a friend from his university days in the US, to join him. But at the time, in the middle of last year, the economy was red hot and they felt they needed to wait.
“We said we need to time this in a way when the real estate itself as an asset becomes less attractive and people start saying, ‘What do we invest in?’” Mr Rajkumar said.
They did not have to wait long. By late last year the once booming UAE economy had been shaken to the core as stock and property prices plummeted. The slowdown became a reality, and Mr Rajkumar believed the new environment would compel more owners to sell their businesses and swing bargain hunters into action.
Sensing that the time was right, the two graduates of the Wharton School at the University of Pennsylvania launched Capital Street Partners late last year.
The firm, Mr Rajkumar said, makes the bidding process more competitive for small and medium-sized companies and does the advertising and legwork to find buyers.
Third-party brokers increase the price of buyouts because of the bidding process, which can make acquisitions less attractive, according to Karim el Solh, the chief executive of the Abu Dhabi private equity firm Gulf Capital. But the owners of Capital Street still thought they had a valuable proposition to offer.
Mr Rajkumar says Capital Street has already helped start one deal, a minority acquisition of a manufacturing company by one of its suppliers. He said the seller and buyer are going through the legal work of transferring ownership.
Capital Street lists 11 other companies for sale in four emirates on its website, www.capitalstreet.net, including manufacturers, a nightclub, a hotel, and water-bottling, consulting and limousine companies. The website does not name the companies.
“Part of our engagement with the seller is not to disclose the names at all,” Mr Rajkumar said.
Another benefit of using Capital Street to list businesses, he said, was that it opened the UAE market to global entrepreneurs and allowed them to buy an established company.
Starting a company from scratch, after all, is never an easy task. Entrepreneurs must find capital, space for the business, possibly hire employees, and find the right advisers, such as lawyers and an insurance company.
In the UAE, foreign entrepreneurs have the additional burden of getting the necessary clearances to register a company and securing an Emirati to be a majority shareholder.
Mansukh Kanbi, who launched Icon Emirates Flooring in 2006, said registering his company was the hardest task involved in operating his business.
“We had to run from office to office just to figure out what to do, whereas in the UK you can set up a company online within 24 hours,” Mr Kanbi said. “Even choosing a name was a hassle. We had to give six or seven names. They said if there were any companies that started with ‘Icon’ we wouldn’t be able to use it.”
Setting up his office and showroom near Umm Sequim Road also took months longer than he had thought it would.
Mr Kanbi said his company logged about Dh4m in sales last year, and he does not regret starting his business. But he didn’t always feel that way.
“I remember those times, it was very hard,” he said. “It was one disaster after another. That was the worst six months of my life. I would sit in this office and think, ‘We shouldn’t have done this’.”
Of course, buying a company can also be a long process not without its share of red tape, said Ben Gillespie, a partner in the law firm Clyde & Co’s Middle East office.
In the UAE, Mr Gillespie said, the process to transfer ownership takes longer than in western countries because it requires multiple approvals.
“In other countries, you can have a one-page stock transfer transferring the shares. Here that can’t be done,” he said.
“In the UK you sign the share purchase agreement and it is possible to execute the stock transfer simultaneously. Here you would sign the agreement and then start the legal transfer process by signing documents before the notary, and then there is a process you go through before the share transfer process is complete.”
But Mr Gillespie said the advantage in buying a company, as opposed to starting one, is that it gets you into business straight away.
“In a region where relationships are important, obviously there can be a great deal of benefit in buying an entity with an existing client base, employees, contacts and a revenue stream,” he said.
That is, in part, the process Capital Street aims to facilitate. Capital Street typically takes on sellers of businesses with valuations of Dh1m or more, although Mr Rajkumar said the floor price was “not a fast and hard rule”.
The company offers interested buyers a summary of each business up for sale, which includes the seller’s financial statements and a history of the company.
It begins the client relationship with a consultation and a questionnaire asking about the seller’s assets, market, competitors, financials, management, employees and the ownership structure.
“This is so the seller does not have to answer the same questions 20 times,” Mr McIntire said.
The next step is to determine the listing price. Capital Street has dropped at least one client because the seller had unrealistic expectations on price, Mr McIntire said.
The firm’s commissions are between 6 and 10 per cent, depending on the value of the company. It collects 10 per cent of the expected commission upfront to cover marketing costs.
The firm markets the listings to its more than 600 contacts, as well as to a seller’s competitors, suppliers and clients.
Capital Street would not disclose the names of its potential buyers but said they form a diverse group that includes regional and global companies and individuals, Mr Rajkumar said. “They’ve all got various reasons for wanting to be in this region,” he said. “Some of them, like a Norwegian, want to be here because it’s tax-free here and he likes the weather nine months out of the year. He is young and doesn’t want to just sit around; he wants to have a business.”
Still, complications can arise in any transaction. Mr Gillespie said the UAE laws protect existing contracts, and foreigners cannot acquire a company to bypass a service that is already contracted to another.
A foreign company, for instance, may not be able to buy a distributing company in the UAE when it already has another local distributor.
“If a company has got the rights to sell your products here, then you may not be able to buy another to do that for you because it could be in breach of agency deals,” Mr Gillespie said.
Another critical factor for buyers is to consider how long the organisation has been in business.
“If the company was set up a year ago or two years ago, they would be paying very high rents compared to today’s market,” said Aamir Khan, a management consultant at Dubai Business Advisors, the consulting firm.
“But if they were set up three to four years ago, it would be a different scenario,” Mr Khan said. “This absolutely would make a difference because rents have doubled in that period.”
Mr Rajkumar also said legacy rents would be an issue, and that companies that entered into rental agreements before they peaked are in better shape.
Economic uncertainty is also a serious concern for potential buyers. Mr Khan believes the outlook for recovery is still far from a sure thing.
“Basically, if I had money, if I had $1m, I would still wait,” he said. “Because after the boom it would still take time for things to settle. It’s unknown which sectors will grow again.”
Mr Rajkumar predicted that in Dubai all sectors, except property, which was very bloated until last summer, will recover in fairly short order. The UAE’s population, he said, will grow and the cost of doing business will decrease because of greater housing inventory and better infrastructure.
“I don’t think real estate will ever come back to the levels of 2008 and 2007,” he said.
“But the positive outlook is that Dubai has fundamentals: the place is safe, it’s tax-free, people like to live here because of quality of life.”
And that’s the outlook Capital Street hopes to capitalise on.
