The long-awaited merger of the UAE’s two main exchanges – the DFM and the ADX - appears to be nearing reality. What benefits can fund managers expect from the proposed deal, and where does it leave the UAE’s third exchange, Nasdaq Dubai?
If consolidation of the UAE’s exchanges has been on the table for some time, the main players have certainly kept their cards close to their chest; yet the last few months have suggested that they may finally be about to show their hands.
Merger talks between the Dubai Financial Market (DFM) and the Abu Dhabi Securities Exchange (ADX) first took place in 2010, only to stall on the issue of valuations. Further talks took place in 2012, leading to the plan being formally revived. Then in June this year, it was reported that the deal had progressed and was awaiting approval at the highest levels, with the valuation and structuring of the deal largely agreed upon. The Emirates Securities and Commodities Authority (SCA) is believed to be working on the development of regulations for listing of private companies and trading on a combined market.
The exchanges declined to comment on whether an announcement is imminent, but MSCI’s upgrade of the UAE - and the inflow of institutional portfolio investment which is expected to follow that decision - means that the timing for such a move would now be particularly opportune.
Walid Hayeck, managing director of asset management at Abu Dhabi’s The National Investor (TNI), says that the main advantages of the merger from the fund manager’s point of view would be a reduction in brokerage fees and regulatory bureaucracy.
“Brokerage fees are very high in the UAE – each trade has a round trip of 54bps, which is the most expensive fee structure in the Mena region – while brokers have to report to many different regulatory bodies,” says Hayeck.
The merged entity would provide a single platform for institutional investors and a larger pool of liquidity, adds Tariq Qaqish, deputy head of asset management at Al Mal Capital. “It would also have unified regulations that would be easier for investors, especially foreign investors, to follow and help reduce the cost of doing business for brokers and investment managers. We see minimal risk for such a transaction.”
Amer Khan, director of Shuaa Asset Management, adds that a combined UAE bourse would figure more prominently among the world’s exchanges and would be a draw for a different class of international investor.
He observes that since the DFM is a publicly traded company while the ADX is private, bringing them together with different ownership structures is likely to be challenging. But the end result would “almost certainly” encourage more companies to list in the UAE.
“With a single exchange, uniform listing and reporting requirements would likely come into effect and the investor base would be broader. Both are key factors for companies considering IPOs in the UAE,” says Khan.
Wafic Nsouli, executive director of institutional sales at Arqaam Capital, says enhanced liquidity levels would strengthen brokerage companies working in the UAE, enabling them to produce more in-depth research and provide better insight into the market as well as encouraging product development.
The successful merger of ADX and DFM may lead to calls for the UAE’s third exchange, Nasdaq Dubai, to join the consolidation, but Nsouli believes such a development would be too problematic.
“As for the merger of all three exchanges, the main obstacle would arise from the fact that Nasdaq Dubai is not Sharia compliant. We do not see a scenario where all three exchanges could merge successfully.”
He agrees that the DFM-ADX merger could lead to more companies listing their stocks on the exchange, but adds that listing requirements would have to be revisited to ensure they are market-friendly and competitive with other global exchanges. “For example, the SCA’s mandatory listing of 51% of shares would require rehashing, in order to encourage additional companies to become listed.”
Saleem Khokhar, head of equities for the National Bank of Abu Dhabi (NBAD), describes DFM and ADX as natural partners in aspects ranging from alignment of cultural interests to federal laws. “As an exchange grows in size and dominates a region it would undoubtedly attract more companies, both in the UAE and across the GCC. Generally exchanges that have high stock market capitalisation attract larger companies as they have the ability to provide liquidity for listed shares as well as enhancing capital raising capabilities.”
“Taking this a step further, a unified GCC stock exchange would generate even greater benefits, although political resistance is likely to make this a longer term project. The barriers to consolidation between all three UAE exchanges include agreeing valuations and perceived loss of independence.”
A DFM-ADX merger would simplify investing in the UAE, in particular the setting up of accounts to invest, suggests Oliver Bell, portfolio manager T Rowe Price. “Ultimately, whether it would encourage more companies to list on the UAE exchange would depend on whether the listing requirements are more attractive than the current requirements.”
Hayeck expects the deal to happen soon, but warns that on its own the merger of DFM and ADX would not be enough to increase liquidity in the UAE. “The market also requires a willingness from the various industry sectors to take companies public and more institutional money in the market,” he concludes.
Where would a combined DFM-ADX exchange leave Nasdaq Dubai?
Nasdaq Dubai, the capital markets section of the DIFC, is the third of the UAE’s exchanges and is subject to the DIFC’s offshore regulatory regime.
According to TNI’s Walid Hayeck, it would be left in a challenging position by the DFM/ADX deal. “Nasdaq Dubai has failed to attract any issues for a number of years and there are few stocks traded. It might focus on offshore companies that want to list in the DIFC, but do we want one market for onshore and one market for offshore?” he asks.
However, Al Mal Capital’s Tariq Qaqish believes it would remain viable as long as it provided different product ranges to investors. For example, its lower minimum listing requirements mean it could continue to appeal to smaller and/or newer companies.
Nasdaq Dubai occupies a niche as a gateway for international players to access the UAE market as well as for derivatives and bonds, says NBAD’s Saleem Khokhar. “It would benefit from access to the unified exchange with a likely increase in volume as ADX listed companies could then be traded seamlessly and efficiently.”
Oliver Bell of T Rowe Price is least optimistic about the prospects for the UAE’s third exchange. “The original advantage of listing on the Nasdaq Dubai has been the ability to list a lower percentage of your company, the ability to ‘book build’ in the IPO process and for foreigners to have the ability to clear the trading through Euroclear.”
Despite these advantages - some of which have been eroded by subsequent changes to the DFM/ADX listing requirements - Nasdaq Dubai is unable to attract further listings as the experience of those companies that have is very poor, suggests Bell. “DP World, Depa and Damas have all suffered from extreme illiquidity and lack of retail interest. Given this experience I believe foreign institutions are very wary of any company that wants to list on Nasdaq Dubai.”