How First Abu Dhabi Bank pursued Standard Chartered and ‘opened Pandora’s box’

In November, the world’s tallest tower, the Burj Khalifa in Dubai, was lit up in the colors and logo of Standard Chartered.

As the bank’s chief executive Bill Winters and chairman José Viñals see, messages such as “together we are here for good” and “harmonized ambitions” spark in life.

While in Dubai, the two executives held a full board meeting and met senior figures in the region. But two months later they were blindsided when news broke that First Abu Dhabi Bank, the UAE’s largest lender, wanted to buy Standard Chartered.

“It was a complete surprise to the board,” said one person familiar with the matter.

However, it is no secret that the oil-rich Emirates is in an acquisitive mood.

First Abu Dhabi Bank, or FAB, was born in 2017 when the UAE merged its first and third lenders to create a national champion. But the scale of its international ambitions was only revealed alongside the news that it has been working for almost a year to buy StanChart and create a lender with more than $1tn in assets operating in more than 60 markets – a first for the Middle East.

“The region is saying ‘here we are’. The center of the world has shifted,” said one senior figure advising the FAB. “They see themselves as the center of major activity and not just the oil economy.”

“The banking sector is ripe for the next step,” said Gary Dugan, chief investment officer at Dubai-based Dalma Capital and a former executive at FAB, the National Bank of Abu Dhabi.

After the news leaked, the FAB quickly said it was no longer evaluating the bid, starting a six-month time limit for it to act again, unless there was another bidder.

But several people close to the lender said the deal could be revived after the cooling off period ends in July. FAB and StanChart declined to comment.

“The region certainly has the firepower to make a statement about it. We deserve to be taken more seriously,” said a government minister from another Gulf state.

Companies and funds in the UAE, Saudi Arabia and Qatar have more than $3tn in assets and cash under management, fueled by a boom in energy prices amid the war in Ukraine. Saudi Arabia’s $620bn Public Investment Fund has bought companies from electric vehicle start-up Lucid to football club Newcastle United as Crown Prince Mohammed bin Salman looks to diversify the economy away from oil.

But cross-border banking takeovers are rare due to cost, complexity and risk. Previously Middle Eastern investors preferred to take shares in troubled foreign creditors.

The Qatari fund led an £11.8bn emergency fundraising for Barclays in 2008 and the Middle Eastern investor now owns five times that of Credit Suisse.

Demonstrating the size of the capital it can handle, the chairman of the Saudi National Bank dismissed the new $1.5bn investment in Credit Suisse as “just another cheque”, barely more than 2 per cent of its $68.7bn investment portfolio.

“It’s a 166-year-old brand, so 30 cents on the dollar?” he added.

StanChart, 169 years old, is trading barely higher at 42 pence in the pound.

FAB is also deep-pocketed and intrinsically linked to the country. The chair is the UAE’s national security adviser and businessman, Sheikh Tahnoon bin Zayed al-Nahyan, who is the younger brother of the president and ruler of Abu Dhabi, Sheikh Mohammed bin Zayed al-Nahyan.

Abu Dhabi’s $284bn state investment fund, Mubadala, owns 38 per cent of FAB and is the driving force behind the StanChart effort, according to people familiar with the process. Mubadala said it would not comment on market rumors about the publicly listed institution.

FAB shares have risen 72 percent since the pandemic in March 2020, giving it a market value of $43bn, almost double StanChart’s $25bn.

While dominant domestically, FAB’s international network is minimal. More than three quarters of the revenue is generated in the UAE and to grow it needs to diversify.

In 2021, FAB bought the Egyptian operation of the Lebanese bank Audi. Then last February, it got bolder, making a bid for Egypt-based regional broker and adviser EFG-Hermes to strengthen its weak investment banking arm.

Advisers said the offer was withdrawn months later due to Egyptian resistance. But disappointment has been sidelined as the FAB turns its attention to StanChart, several people involved in the process told the Financial Times.

Early last year, chief executive Hana Al Rostamani hired New York boutique investment bank Moelis & Co to help identify and analyze transformation targets, the people said. StanChart is at the top of the list.

Founder Ken Moelis – once nicknamed ‘Ken of Arabia’ because of his connections in the region – helped out and explained his reasoning to government officials and technocrats who had to sanction anything.

StanChart offers direct expansion outside the saturated home market into Africa, India, Southeast Asia and China, as well as exposure to Europe and the US. With FAB trading at two to 0.4 times StanChart’s book value, it also looks affordable, the person added.

Performance in StanChart has lagged friends. Winters, who took over in 2015, has overseen a decline in operating income while competitors in key markets, such as DBS in Singapore, have grown. Despite announcing several cost-cutting programs, costs remained roughly the same as in 2015.

Various other targets are being discussed, such as Barclays and BNP Paribas, the resident added. Acquiring a series of smaller lenders was considered, but this was thrown out because it would be “a very difficult process with no certainty of success and huge integration challenges”, another person said.

Earlier in the summer, the board gave the green light to a £30bn-£32bn all-cash offer aimed at undermining opposition from StanChart.

FAB’s deal team pushed for the deal, but some government entities demanded more scrutiny of the deal in early fall, one adviser said. The FAB would have to rely on funding from funds such as the state-owned ADQ, which is also chaired by Sheikh Tahnoon, and especially Mubadala, the adviser added. ADQ and Mubadala declined to comment.

Backing may come from the $240bn Abu Dhabi-listed conglomerate International Holding Company – another business that Tahnoon chairs, one of the people said. IHC declined to comment.

Citigroup, Bain, Deloitte and Linklaters were brought in to increase operational capacity and conduct studies on synergies, audits and legal issues.

FAB or its advisors do not approach shareholders or boards, nor broker StanChart JPMorgan or Goldman Sachs.

In the end, it didn’t matter. Due diligence on the deal had not been completed before the news leaked – something that advisers could not do. “Too many cooks spoil the broth before it’s ready,” said one adviser.

FAB is considering several options when the cooling period ends, two people involved told the Financial Times.

It could choose to approach StanChart’s existing large shareholders and ask them to retain a substantial stake in the expanded group, making the $30bn to $40bn cost more digestible.

One top 10 shareholder told the FT that a cash offer of a third above the trading price meant “arguments” internally over a takeover.

“We think the bank is trading at a big discount,” the man said. “It will be tempting to take it, but we feel it will give us a lot of value.”

The most important shareholder is Singapore’s state investment fund Temasek, which owns 16.4 percent of the shares. A cash offer will allow the funds to exit after having built shares at a higher value, but any deal will also face political ramifications given the expected exodus of thousands of StanChart roles from Singapore to the UAE’s capital.

Temasek said it does not comment on market speculation, but people briefed on the fund’s thinking said it may consider selling part or all of its shares if another higher bid comes along.

FAB can also try for friendly transactions; However, there is a risk that this will lead to a bidding war as the Board will be duty bound to seek competing bids.

A major obstacle to any transaction is the need to obtain approval from numerous regulators. The hardest hit is the US, which must allow the fifth largest dollar clearing bank regulated by the UAE central bank, itself under heightened scrutiny by the world’s anti-money laundering watchdog.

Another question is whether FAB’s executive team will be considered experienced enough to lead a globally systemically important financial institution, leading to the prospect of StanChart’s existing management being asked to remain in place, said a senior figure at StanChart.

Winters and Viñals both said at the recent World Economic Forum in Davos that they had not spoken to FAB since the news broke.

“This is not something we have either been involved in, or have been interested in,” Winters said.

The top 10 shareholders suggest Winters still wants to turn the bank around, which has become easier to do as rates rise and China’s zero-Covid policy ends.

“Winters does not want his reputation to be tarnished,” the man said.

Fearful of being misled again, StanChart executives scoured the UAE for intelligence on Abu Dhabi’s intentions. But they also know that FAB’s approach may exclude other applicants.

“Now it’s public interest, it’s opened Pandora’s box,” said a senior Middle Eastern banker in a rival. “If it’s not FAB, it’ll be someone else.”

Additional reporting by Mercedes Ruehl