Jeremy Warner's Outlook: American aversion to inward investment from Dubai only harms its own interests

Macquarie quits Stock Exchange bid; Private-equity tax perks under attack
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The Independent Online

If they weren't so rich, one might even feel sorry for the royal family of Dubai. Not only have they been forced to pay far more than they intended for the ports operator P&O, but they now find themselves the object of a vicious political backlash in the US from congressmen who think that an Arab nation with financial links to the September 11 hijackers, however tenuous, an inappropriate owner of the company's US ports.

At this late stage, it's hard to see what harm this xenophobic nonsense can do to a deal which has been approved both by shareholders and all relevant regulatory authorities, including the US Committee for Foreign Investment.

Condoleezza Rice, the US Secretary of State, has vigorously defended approval against the onslaught of recent days. To reverse that decision now would require a change in the law to force DP World to divest its US assets. Even if this were forthcoming, it wouldn't undermine the takeover, the attractions of which lie mainly in P&O's Far Eastern ports, not its US operations. P&O doesn't in any case own the US ports, which it only runs under licence.

So the deal itself looks safe. More disturbing is the message this outpouring of ill-informed, semi-racist hostility sends to the Middle East. One of the hijackers came from the the Emirates and it is certainly true that some of the money to fund the September 11 terror attacks was funnelled through UAE banks. Yet to want to use these coincidences as a pretext to block the involvement of DP World in American ports beggars belief.

What do these congressmen imagine will happen? That the ports will become a conduit for terrorist bombs? It's no wonder that so much Middle Eastern money has been repatriated from the US since 9/11. The environment in the US for Arab businessmen and financiers has become so hostile that it's scarcely worth the hassle of staying. Nor is it any wonder that these regions have become so determined to build rival centres of commercial, industrial and financial power.

Dubai's latest plan is to funnel $15bn of its oil swelled coffers into developing a leading position in the global aerospace industry following its success in building what will soon be the world's largest airline. And why not too? By the look of it, they wouldn't be allowed to invest in these industries in the US.

Macquarie quits Stock Exchange bid

Now there's a surprise. With the shares trading at 832p in the stock market, investors in the London Stock Exchange couldn't have found it very difficult to reject an offer from Macquarie which would have been pitched at about £7 a share had it ever seen the light of day.

It would have been fun to have been a fly on the wall as Jim Craig, the Australian investment bank's head of European operations, did the ring around leading shareholders to sound them out on this no-hope offer.

Imagine the conversation: "Now look, we've crunched the numbers and although we are prepared to offer more than our opening bid of 580p, we cannot make the market price. On reflection you'll come to realise that ours is the correct valuation and accept a bid which is at least 132p a share lower than what you could sell for in the stock market".

A tough call, that one, but even the considered reply couldn't have amounted to much more than "stick it up your proverbial".

Joking aside, Macquarie's bid wasn't quite as ill-conceived as you might think, and if nothing else, it has made investors concentrate anew on the annuity value of dull old utility style businesses.

The Macquarie strategy was to pitch low, then as everyone came to see that there would be no rival bids, to come in at a more reasonable level which investors might in the absence of anything better think acceptable. It didn't work out that way. From the start, the valuation moved sharply away from the Australian pretenders.

What entirely put the kibosh on their endeavour was comments from John Thain, chief executive of the New York Stock Exchange, to the effect that the NYSE would like to take a pop too, even though at present it is no position to do so. A trade buyer will always be in a position to pay more than the private equity player because of the synergies.

Whether the Exchange can in practice justify the increasingly heady valuations which are being placed on it remains to be seen. Further consolidation of stock markets, particularly at an intercontinental level, must also be open to question.

Stock exchanges may be more cyclical businesses than they seem, while any attempt to expand by cross selling other business services to listed companies is just as likely to prove a disaster as an outstanding growth opportunity.

Yet perhaps the most potent difficulty faced Macquarie is that its bid coincided with a sudden upsurge of interest in infrastructure companies and others investments such as the LSE with similar characteristics in terms of quasi monopoly and perceived dependability of revenue. Macquarie's very interest in the LSE has alerted investors to the previously unappreciated value of these assets. Investors are becoming that much less willing to sell. Much the same difficulties face Grupo Ferrovial and its partners in bidding for BAA, owner of some of Britain's most important airports.

Private-equity tax perks under attack

What is it about business success that the Revenue regards it as some sort of unearned "windfall" and therefore a legitimate target for taxation? The latest battlefield is private equity, which all of a sudden finds its supposed tax advantages under scrutiny.

This is odd because one of the main tax perks - that private equity houses and their managers can charge shares in the businesses they run as capital gain, subject to only 10 per cent tax, rather than income, which would be subject to 40 per cent tax - was the subject of a relatively recent memorandum of understanding between the private equity industry and the Treasury.

This understanding now appears to be under review. This is not the only tax advantage enjoyed by private equity. The capital structure of many private equity deals is also deliberately designed to minimise tax, especially where the debt is provided by offshore concerns.

Interest on debt finance is a chargeable expense, which means that the more debt used to finance the private equity transaction, the less profit the enterprise will make, at least in the short term, and the less tax is paid to the Revenue. Taxable profit is thus transferred from the Revenue to the financiers.

As far as we know, this particular tax advantage is not yet under review, nor would it be easy to attack, since any company, privately owned or publicly quoted, is free to gear itself up in this way by replacing equity with debt. To make bank interest a below the line charge would certainly boost the Revenue's coffers, but it would bankrupt large parts of corporate Britain.

Nor too should the Revenue be tampering with taper relief, despite pressure from the rest of Europe to disallow it for private equity. The perk is in truth no better than that enjoyed by entrepreneurs and their backers.

To remove it would deal a body blow to much private equity investment. Private equity is not just one of Britain's biggest sources of employment and economic growth; the private equity houses are themselves a vital part of the City's success as a financial centre, with many foreign owned concerns now basing their entire European operation here in London.

This is not a flower lightly to be trampled. If the pressure is coming from Europe, jealous of our thriving venture capital industry, it should be resisted, and if the Treasury, then officials really ought to know better. Many of the companies rescued by private equity would otherwise have gone to the wall, and would be paying no tax at all, let along providing any employment.

j.warner@independent.co.uk

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