Arab Assets May Seek Other Ports in Storm

For people alarmed by a Dubai-based company’s failed bid to take over operations at key U.S. ports, consider this: During the last few years, Arab investors have sunk billions of dollars into American business, including technology firms, a fried chicken chain and the building that houses Coast Guard headquarters in Washington.

Middle East experts said congressional outrage over Dubai Ports World’s $6.8-billion purchase of a British port company that operated in five U.S. cities could scare off foreign capital and lead Arab investors to shift their money to such booming economies as India and China.

In an effort to quash the political firestorm, Edward Bilkey, DP World’s chief operating officer, announced Thursday that his firm would “fully transfer” the U.S. operations of Britain’s Peninsular & Oriental Steam Navigation Co. to an American entity. Republican lawmakers said the firm agreed to completely divest itself of the U.S. operation. The news came shortly after the state-owned United Arab Emirates firm closed the P&O; deal.

DP World’s retreat, however, is unlikely to end the controversy about what foreigners should be allowed to own in America. This week, House Armed Services Committee Chairman Duncan Hunter (R-El Cajon) introduced a bill barring not just the DP World transaction but all foreign ownership or management of “critical infrastructure” such as ports.

Foreign companies that already own such assets would be forced to sell them.

Hunter dismissed claims that his measure would alienate foreigners and constrict a U.S. economy that has become increasingly globalized.

Congressional critics from both parties, calling the UAE a country with a mixed record on terrorism, said the Bush administration had done a shoddy job of vetting the deal.

But some business leaders said unease with Arab investments was frightening away foreigners and would make it harder for U.S. firms to raise capital. They also argued that the U.S. was alienating a region awash in dollars thanks to America’s voracious appetite for oil.

Foreign investment is critical to the U.S. economy, which needs billions of foreign dollars daily to cover its budget and trade deficits.

“We have to ask ourselves, do we want that capital to leave here and never come back?” said Charles Ogburn, executive director of Arcapita, a Bahrain-based investment firm. “Or do we want it to come back in this form of investment, recycled back into the U.S. economy?”

Arcapita has invested more than $1.3 billion in 21 U.S. companies, including Church’s Chicken, Loehmann’s, Caribou Coffee and Southland Log Homes.

Investors from the Middle East accounted for $8.2 billion, or less than 1%, of the $1.5 trillion in direct foreign investment in the U.S. in 2004, according to the U.S. Commerce Department. But experts say that much more Arab money is invested through stock purchases, limited partnerships and offshore entities, making it difficult to track.

The latest controversy hit just as Middle Eastern investors flush with oil money began to step up their purchases in the United States, analysts say. Last week, Arcapita closed a $90-million deal for Bijoux Terner, a Miami-based travel goods retailer.

In February, Bahrain-based Investcorp paid $496 million for Chicago-based CCC Information Services Group Inc., a leading insurance technology company.

Investcorp’s U.S. holdings include Saks Inc. and Los Angeles-based TelePacific Communications, a provider of long-distance voice communications.

With prominent U.S. politicians calling for stricter controls on foreign investment, Arab capitalists are on the defensive.

This week, Saudi Arabian Prince Alwaleed bin Talal, one of the world’s richest people, bought full-page ads in major newspapers touting his global investments, which include large stakes in Citigroup, News Corp. and Four Seasons Hotels & Resorts.

Some Arab businessmen and many supporters, including President Bush, believe that the opposition to the DP World deal had taken on racial overtones. They point out that P&O; is a foreign firm and the majority of port operators in the United States are foreign-owned.

“The language being used in this debate is, ‘We don’t want this company specifically because it is Arab,’ and that smacks of outright bigotry,” said Nidal Ibrahim, the Huntington Beach publisher of Arab-American Business magazine, which has 5,000 readers in California.

James Zogby, president of the Arab American Institute, a Washington think tank, said dismayed Arab investors might may start shifting their money to more hospitable economies.

“Capital doesn’t like risk and it doesn’t like controversy,” said Zogby, who recently returned from a trip to Saudi Arabia and the UAE.

Rochdi Younsi, a Mideast analyst for the Eurasia Group, a global political risk consultancy, said the escalating tensions could make it more difficult for U.S. firms to sell their goods in the Middle East. That’s an important market for American farmers and large manufacturers, including Boeing Co. and Lockheed Martin Corp.

Experts believe the dispute could imperil U.S. efforts to negotiate a trade pact with the UAE, part of a broader agenda to encourage economic development in the troubled region. The volume of U.S. trade with the Middle East is small but growing rapidly, in part because of previously negotiated trade pacts.

“I personally feel this could provoke some type of long-term backlash throughout the [Persian] Gulf region and possibly the Middle East,” said Younsi, pointing to widespread consumer boycotts prompted by the recent Muhammad political-cartoon controversy.

This isn’t the first time that Middle Eastern investment has set off alarms in the United States. During the region’s oil boom in the 1970s, fears of key U.S. industries being taken over by oil-rich investors led Congress to establish a system for reviewing sensitive foreign deals. That led to the creation of the interagency Committee on Foreign Investment in the United States, currently the target of congressional criticism for its handling of the Dubai transaction.

The worries of the 1970s were never realized. The foreign investment debate was reignited in the 1980s by a surge of high-profile Japanese purchases and again last year, when China’s state-owned CNOOC bid for El Segundo-based Unocal Corp. CNOOC eventually withdrew the proposal amid U.S. pressure.

But for Gulf investors, the U.S. real estate market is too hot to ignore. After pulling out of the United States after the 9/11 attacks, Global Securities House of Kuwait returned to pay nearly $100 million for the Transpoint Building in Washington, home of the U.S. Coast Guard.

The idea that a large Kuwaiti investment firm would become the landlord for the agency that polices America’s coastal waters didn’t sound any alarms.

Global Securities House’s parent firm has sunk nearly $600 million into U.S. real estate, according to Fahed Boodhai, a deputy managing director at the firm. He said his publicly traded company likes to buy properties with government tenants because they are creditworthy and stable.

Cmdr. Jeff Carter, a Coast Guard spokesman, said the nationality of the building’s owner wasn’t a concern, and his agency was very pleased with Securities House’s extensive renovations, including new carpeting and an upgraded security system.

Boodhai, a graduate of UC San Diego and Loyola Marymount University in Los Angeles, said he believed the ties between Kuwait and the United States were strong enough to weather any political storm.

“I don’t see any problem with a country trying to defend itself or having laws or regulations in some strategic areas,” said Boodhai, who served as an interpreter for U.S. forces during the first Gulf War and has a photo of the first President Bush in his home. “I really don’t blame the U.S. for doing this.”

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A bit of the Middle East in the U.S.

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Here are the regions whose investors poured the most money into U.S. real estate in 2005 and the largest recent transactions with Middle Eastern connections.

Sales of U.S. real estate in 2005 by country or region

(In billions)

Australia ($6.1)

Germany ($3.4)

Middle East ($1.7)

Pacific Rim ($1.5)

Canada($1.1)

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Recent sale of properties to Middle Eastern interests

(In millions)

Helmsley Building, New York ($705)

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Civica Office Commons, Bellevue, Wash. ($141)

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The Lingerie Building, New York ($94)

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Hackensack University Medical Plaza, Hackensack, N.J. ($88)

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The Park at Sawgrass Mills, Sunrise, Fla. ($74)

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Source: Real Capital Analytics