Business Review Weekly

October 5, 1990

WHO SHOULD INHERIT KUWAIT'S ASSETS?

Eric Ellis, London

Sir Ron Brierley is used to closing controversial deals, and the $140-million transaction he made in London last week was no exception.

But Brierley himself was really of only secondary importance to observers of his purchase of a 10% stake in the Mount Charlotte hotel group, one of Britain's biggest. The focus of interest was provided by the seller, the Kuwait Investment Office, custodian of a 70-billion global investment portfolio, ownership of which has come under legal scrutiny.

The City of London is getting increasingly tetchy about the problems of harboring the world's first economy-in-exile, the billions of dollars belonging to the deposed Kuwaitis. Two months into the Gulf crisis and with no solution in sight, London is considering the myriad legal and financial dilemmas posed by the freeze on Kuwaiti assets implemented after the August 2 invasion by Iraq. Of paramount concern is the stability of financial markets, which have been unsettled not only by the oil price spiral and 3-billion equity portfolio.

The Kuwaiti Government has been one of the most influential global investors. In its bid to lessen its dependency on oil, it began in the 1950s to diversify its petroleum earnings into a vast array of holdings. Today its main London-based vehicle, the secretive Kuwait Investment Office, is easily the biggest foreign investor in Spain and Japan, and is believed to be among the top three in Britain, West Germany and South-East Asia. In Frankfurt, for example, it owns 25% of chemical giant Hoechst and 15% of Daimler-Benz. Its $750-million Australian portfolio includes big holdings in Brambles, Western Mining and Pacific Dunlop, and in London its 3-billion-plus portfolio includes prime stakes in British Petroleum (9.9%) and the Midland Bank (10%).

A measure of the Kuwait office's power in the London market was seen last week in the events that included Brierley's move. The Kuwaitis owned 10.1% of Mount Charlotte until stockbroking firm Hoare Govett offered it to Brierley, who already controlled a passive 29.9%. Brierley picked up the stake, thereby triggering a mandatory bid.

The market was thrown into a panic. Small though the deal was by the Kuwaitis' standards, it was nevertheless the first tangible sign that the office was cashing up for a long seige.

The deal came just days after Kuwait's exiled Government announced that it would contribute $US2.7 billion to the US-led drive against Iraq. The money would be raised by liquidating bonds and foreign reserves, not equities. "We were all convinced the KIO would not be a seller, and then out of the blue came this deal," Mount Charlotte's chief executive, Robert Peel, says.

Nudged, it is believed, by the Bank of England, Kuwaiti Finance Minister Sheikh Ali Khalifa al-Sabah moved to calm nerves by saying the confusion about the freeze on Kuwaiti assets had given rise to a "misinterpretation" by the market. There was no question, he said, of equity stakes being unloaded.

However, many observers are unconvinced. "There remains considerable dismay and nervousness about their true intentions, particularly as the crisis drags on," Peel says. The Mount Charlotte deal highlights some the problems facing Kuwait and the British authorities.

For example, who should inherit Kuwait's assets? The deposed Kuwaiti royal family? Iraq? Kuwait's displaced people, some of whom are now in London? Or the Bank of England, the effective administrators of the frozen wealth?

The business editor of the Guardian newspaper, Alex Brummer, likens the Bank of England to receiver-managers and the Kuwait Government to founding directors of a company that is now out of their control. "Could Kuwait become the first non-territorial state -- a kind of Euromarket nation that exists on paper but belongs to no single territory?" he asks. "Such a concept is entirely possible in an age of electronic transfers and instant communications."

Foreign banks are already moving to protect themselves. Some Japanese banks have reportedly offset potential losses from Kuwait by laying claim to Kuwaiti assets and deposits. Other banks are expected to follow suit.

"This has opened a minefield of potential legal problems," a lawyer for the Kuwait office says. "Of course, officially the KIO has to say normality will soon be restored, but the reality might well prove different and there is really no precedent for this sort of situation."

The special problems posed by the Iraqi invasion have sent the boards of a number of Kuwaiti investment targets into emergency discussions with the Bank of England, whose nominee companies are used by the office to disguise its investments.

One such company is the Midland Bank, which is vulnerable to takeover by the Hong Kong and Shanghai Banking Corporation, which in turn has a special problem of its own -- China's takeover of the colony in 1997. The Kuwait Investment Office owns 10.2% of Midland, a stake that is now eminently buyable, subject to approval by the Bank of England. No formal offer has been made so far but one may come in December when a three-year acquisition moratorium expires. Even if Hongkong Bank were allowed to buy Midland, it is not clear whether the Kuwait Investment Office, as a major shareholder, would be allowed to sell.

The Midland has also had problems disbursing its recent interim dividend, of which Pound 8 million was due on the Kuwaiti stake. Because of the Kuwaiti asset freeze, Midland could not make the payout directly. An escrow account held in trust by the Bank of England has been proposed, but lawyers foresee headaches and inertia caused by the freeze.

"We are sorting out the dividend problem," Midland's chairman Sir Kit MacMahon says. Such matters are the least of London's concerns.