In June 2008, when the family-owned jewellery company Damas International announced it would sell 28 percent of its shares for $1-$1.14 a piece, Dubai was in the midst of its heyday. Property prices had yet to reach their peak, the region was flush with cash and initial public offerings were almost always oversubscribed.
The largest jeweller in the Middle East raised $270.6m from the sale of its stock. While the final figure was at the lower end of expectations, it nevertheless gave the 104-year old company the capital to expand its store network into new markets.
Just fifteen months later, though, things not only looked decidedly different for Dubai but also for one of its most successful jewellery exports. In October 2009, it’s CEO and member of the founding family, Tawhid Abdullah, was forced to resign following a series of unauthorised transactions.
It later emerged that Abdullah, along with his two brothers, Tawfique and Tamjid, had withdrawn an estimated $96.6m of cash and nearly two tonnes of gold valued at $68m from Damas without shareholder approval.
The company’s share price plummeted in the wake of the news and has failed to gain any momentum since. On 11 May 2011 each share was valued at $0.11 compared to $1.05 on 8 March 8 2008, representing more than a 90 percent decline in value.
The firm’s new CEO, Anan Fakhreddin, cites the brothers’ failure to understand the new regulations that governed the once-privately-held company for the predicament it found itself in. “I think there was failure in terms of understanding how the company was listed and [that] they don’t have full ownership of it [anymore],” he tells Arabian Business.
Damas, under new leadership and the watchful eye of the DIFC’s regulator, DFSA, has spent the last 20 months restructuring $872m of debt. Its three former executives were banned from the board of any DIFC company for ten years and fined a total of $3m for “failure to exercise appropriate corporate governance over the company”. They were also ordered to repay $165m in “unauthorised transactions” in the toughest ruling the DFSA has made since its founding.
Last week, following several delays, Damas announced the details of a three-year cascade agreement, which will see the Abdullah brothers sell around $167.2m of assets in order to repay their outstanding debt.
The properties, which include the former Angsana Hotel& Suites on Dubai’s Sheikh Zayed Road, were bought at the height of the region’s property boom. Property prices in Dubai have declined more than 60 percent since their 2008-peak in the wake of the global financial crisis, leaving many of the assets at distressed prices. “This period of three years has been given to maximise the sales during this period of three years,” says Fakhreddin.
But the question on everyone’s lips is whether or not Damas can ever really fully recover. Fakhreddin certainly seems to think so. “On the sales front I think we have managed to recover the business. Consumer confidence, which in my opinion is our greatest asset, was never harmed,” he explains.
“At a corporate level, there was some negative PR, which we cannot deny,” he continues. “I hope with the introduction of the new board, the new committees of the board that are supervising the business under new management, and with the continuous reviewing of the DFSA… we will turn that page very soon.”
There is already some light at the end of the tunnel. In March, the company reached a final agreement with all 25 of its lenders and completed the restructuring of its $872m debt. Three months earlier it reported a net profit of $1.15m, representing a major turnaround from the same period in 2009, when it posted a loss of $194.21m.
Damas has already repaid $54.4m of loans and will pay the remaining debt off with operational revenues, up to three years ahead of schedule, says Fakhreddin. “We are 100 percent confident that all the obligations that we have to the banks will be paid on time. Our internal plan — tranche one, which is AED1.1bn ($299.4m) — [will] be paid hopefully within three years. We have six years to pay it [but] the plan is…we are gearing up to pay it within three years,” he says.
“According to the facility agreement and the restructuring of our debt, Damas will have the ability to repay all the excess debt from operational revenues,” he adds. “So all the extra money whether it’s from the cascade agreement or exiting certain markets is not taken into consideration.”
In addition to its financial restructuring plans, Damas is also embarking on a reshuffle of its operations across the world to focus on its core business, jewellery. News of a lawsuit in Sudan suggests it will be pulling its operations out of the country to focus on more profitable regions such as India and Saudi Arabia. Indians are the world’s biggest buyers of bullion, buying 960 tonnes of gold in 2010 while the kingdom holds the largest reserves of gold in the Arab world, according to the World Gold Council.
“There are certain markets wherein we have been in the past, which do not currently form a part of the core strategy. We will be adding or we may be adding a market going forward and then exiting from certain markets,” says Sanjay Kalsi, COO of Damas.
In April, the firm increased its stake in its Saudi Arabian joint venture, Damas Saudi Arabia Company, from 49 percent to 98 percent, enabling it to take over full operational control of the company. Damas will shrink the number of retail outlets in the kingdom and rebrand them as specialist boutiques with an aim to increase its sales in Saudi Arabia by fifteen percent in 2011.
In India, where Damas has a joint venture with the Indian retailer Gitanjali Group, the company is reorganising its operations. The firm had said it had planned to open 100 stores in the world’s largest gold market but is not happy with the current operational structure and is in talks with its partner.
“Obviously India is one of our core markets. There are a lot of similarities between the market in the GCC and the Indian market in terms of jewellery preferences. We had a certain existence in the Indian market, which does not satisfy the requirements that we have for the future. That is why we are in discussions with our partners to reengineer our presence in the Indian market,” says Fakhreddin.
In spite of the significant progress Damas has made since October 2009 there will inevitably be some stumbling blocks in its recovery. A weaker dollar has pushed the cost of gold, a traditionally safe investment in times of turmoil, to record levels. The price of the yellow metal has reached $1,540 per ounce in recent weeks, only marginally declining following news of Al Qaida leader Osama Bin Laden’s death.
Fakhreddin is quick to brush concerns over its rising cost aside, insisting interest in the precious metal remains high. “Gold prices for us are not very crucial for two reasons. First of all, we are well diversified when it comes to our total portfolio; we exist in all gold products, watches and also diamond jewellery, so sometimes, yes, we lose some business in certain segments, but we still gain somewhere else.
“Secondly, because of the brand equity that we have it’s not always about the commodity that we sell. The power of the brand name that we have also helps us during difficult times. We have seen this during Diwali and last week with Akshaya Tritiya (a Hindu and Jain holy day) that in spite of the high gold prices we’ve been able to increase sales compared to the previous years.”
Then there is the fact that the Abdullah brothers remain integral to Damas’ recovery. The cascade agreement relies heavily on the appreciation of their assets, most of which are held in real estate that is unlikely to ever return to its peak values. Fakhreddin says that property has been revalued according to current market conditions and its sale will be reviewed by a divestment committee. “The whole idea is to sell only when the assets are realising their full potential in the market,” he says. “The payment expires in three years.
We have to assume that within three years we’ll be able to liquidate the assets at the best market [price].”
Looking ahead, some shareholders may also have some concerns over the appointment of the brothers in June 2010 as senior advisors. Fakhreddin says their input remains crucial to its future. “This was a family business for a huge amount of time, the company is 104 years old [and] has been listed for less than ten years,” he explains.
“The history of the company is with them so until today there are lots of areas where the documentation is not sufficient and we have to rely on their knowledge and history of things to basically to run the business,” he says, adding that the relationship remains under constant scrutiny from the DFSA.
Whether or not this relationship will continue once the assets have been recovered remains to be seen. One thing that is for sure is that life at Damas is certainly looking up.