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foreign tie-ups

Oman-based companies have emerged as hot picks for cash rich foreign companies
Mayank Singh

As Vinita Bali, managing director, Britannia Industries, sat in her Bangalore office going over the details of the company's global sourcing strategy in early 2007, she felt that the company was missing a trick or two in the fast growing Middle East market. Britannia, a US$481.11mn (RO185mn) company, the market leader in the biscuits category in India, has aspirations of becoming an international player. Bali realised that without a firm foothold in the Middle East her plans may end up as a pipe dream.

It was time to scout for alliances. Going through a list of prospects in the region, the company's search ended with Al Sallan Food Industries, a part of the Khimji Ramdas Group, Muscat. In March 2007, Britannia acquired a 70 per cent stake in Al Sallan and Dubai based Strategic Foods International for US$38.48mn (RO14.81mn). Says Bali, "The joint venture will provide us an opportunity to have a bigger international footprint by leveraging the complementary strengths of the two partners."

Britannia's case exemplifies a growing trend – companies both from the Middle East and beyond are vying to take a strategic stake in publicly listed companies in Oman. It is essential to make a distinction between foreign direct investment (FDI) coming into mega infrastructure projects like Sohar Aluminium or The Blue City and relatively smaller private companies like Al Sallan Foods or Composite Pipes Industry. The former is an endorsement of the country's policies, the latter reflects the promise held out by corporate Oman.

The enablers
The FDI policy of the sultanate has proved to be a magnet in attracting foreign participation. In 2000, the government allowed 70 per cent foreign ownership in local companies. A royal decree in July 2004 increased this limit to 100 per cent for privatisation projects (conversion of state owned companies into private firms. Since 2003 a national tax treatment (a tax of 12 per cent tax on net profit) has been extended to all companies regardless of foreign ownership. Today, Oman boasts of one of the most liberal investment regimes in the region.

While the change in the regulatory regime has been an enabler, a bigger change has been a shift in mindset. The fear of losing ownership and control was something that made most businessmen uncomfortable. The fear of being owned by a person or company of a different nationality was a sensitive issue. But things have changed in the last few years. Says Anees Sultan, division manager, investment banking, National Bank of Oman (NBO), "The resistance levels to foreign ownership would have been more five years ago. But as investors (owners) have matured, companies are opening up." There are companies which have not only allowed foreign stakeholding but are also open to the idea of ceding managerial control to foreign companies even with a less than 50 per cent stake. When Commercial Bank of Qatar (CBQ) took a 35 per cent stake in NBO in 2005, the latter accepted CBQ's suggestion of allowing someone from its ranks to head NBO. Andrew Duff, the CEO of NBO came from CBQ, though he resigned from the latter once he took over the reins at NBO.

Regional drivers
In the foreign ownership sweepstakes in Oman, GCC owned companies emerge as hands down winners. The reason for this can be summed up in one word: petrodollars. A report in May compiled by the Washington-based Institute of International Finance (IIF) estimated that the six GCC countries of Saudi Arabia, Kuwait, Qatar, UAE, Bahrain and Oman earned more than US$1.5tn from oil and gas exports from 2002 to 2006. With the region being flushed with cash, a lot of money is chasing investment opportunities. And Oman has a lot going for it. Says Sanjeev Chadha, CEO, Taageer Finance, "Oman offers safety of investment, high corporate governance standards and investor-friendly policies."

The returns earned by companies, which have taken a stake in Oman-based companies in the past, have encouraged others to follow suit. Netherlands-based Draka Holding, one of the first movers, took a 34.78 per cent stake in Oman Cables Industry (OCI) for RO800,000 in 1997. The company has had a veritable windfall. Its investment in OCI is today worth RO48.66mn.

Similarly, Arab Company for Investment of Jordan, which invested RO1.5mn in Taageer in 2000, has seen the net worth of its investment almost double to RO2.90mn. Draka and Arab Company hit pay dirt as the market capitalisation of the companies in which they invested grew rapidly. Despite a growth in the market value of Oman-based companies, the valuations of local companies are still far more attractive than their counterparts in other countries in the region.

Beyond greenbacks
Having a foothold in a region gives stakeholders other strategic benefits. Going back to Britannia, its acquisitions in Oman and the UAE adds leading regional brands like Nutro, Family Choice and Bakers Pride to its product portfolio. Compared to importing its products into the Middle East, the acquisition gives Britannia access to Al Sallan and Strategic Foods production facilities and their distribution network cutting its operating costs. "A strategic stake reduces the opportunity cost of replicating a process," says Sultan. Local associations with bankers, investors and the government are an added bonus.

This is not to imply that these deals are a one-way street. Local companies too derive a number of benefits from such stakeholdings. A number of these strategic investments are made in companies that are in financial doldrums and need an external partner to bail them out. Alliance Housing Bank saw its net profit drop by 11 per cent to RO3.9mn in 2006. The bank was also looking for a partner which could do some handholding while it transited from a housing finance bank to a commercial bank. Their association with Ahli United Bank has given them the requisite wind below their wings. Britannia is expected to do something similar with Al Sallan, which reported a loss of RO344,000 in 2006.

The collaboration works wonders not just for loss-making entities but also for better run companies. A number of these foreign companies are world leaders, bringing in superior technology and better know how. Composite Pipes Industry's (CPI) collaboration with Saudi Amiantit Group, one of the biggest manufacturers of pipe systems in the world, is a case in point. Says Youcef Fartas, executive vice president, CPI, "We wanted a partner who could add value to our operations and not just bring in money." Amiantit has lived up to that promise. The technological help given by the group has helped CPI in improving its productivity. While it took CPI factories an hour to make a standard GRE pipe, with suggestions from Amiantit engineers this has been cut down to 45 minutes.

Draka helped OCI in implementing its ERP system, BANN, in 2006. Says Mohammed al Lawati, deputy general manager, OCI, "Knowledge sharing is a constant process that goes on between the two companies." An internationally recognised name also helps in opening up new doors while marketing one's product. Though eventually a company has to prove its mettle, having a big name as an associate helps in making an initial impression.

Cautious approach
A strategic stake thus adds value to both the partners and is a win-win deal. Given the promise that such deals present, companies may be too eager to jump into such an arrangement. It is instructive to point out that companies need to be extremely cautious while looking for prospective collaborators, as the risk quotient in such deals is quite high. The first is the legal risk. Foreign investors are usually not aware of the laws of a country, so there is a need to do a thorough due diligence through either a law firm or an audit firm. The second is the financial risk. A number of companies up for sale are loss-making entities and may look like attractive buys at first but a stakeholder should work out the business and turnaround risk before signing on the dotted line. Finally, the terms of the merger or how the alliance will play out needs to be worked out, as these can create disruptions later on. "A purchaser needs to come in with his eyes open," says Diwakar Agarwal, senior corporate solicitor, Trowers & Hamlins.

A number of these problems can be avoided by signing a 'constitutive contract.' Says Agarwal, "In any jurisdiction, a constitutive contract is a shareholders agreement that spells out the terms and conditions of a strategic stake upfront." Once agreed upon, the contract is then signed with the ministry concerned. In case of any dispute, the dispute settlement mechanism ('deadlock provisions' in legal parlance) worked out by the contract comes into play. These could be arbitration, referring the matter to a higher office or filing a suit.

Will more foreign companies be queuing up to take a stake in Oman-based companies? Trying to forecast the future of this trend on current numbers may be wrong.

As this story is being written, the biggest cross-border deal in the banking industry in the region has been signed between Dubai Financial Group and BankMuscat. This may well turn out to be the benchmark for all subsequent deals from now.