The emirate of Dubai has purchased $1 billion in shares in Germany's DaimlerChrysler, becoming the company's third largest shareholder. The purchase may lead to Daimler investing in a Dubai-based manufacturing facility.
Two of its three biggest shareholders are Middle Eastern
The purchase was made through Dubai International Capital, the investment arm of the wholly government-owned Dubai Holding set up in 2004. Dubai Holding manages large-scale investment projects for the emirate, which is seeking to diversify its oil-based economy as crude reserves begin to dwindle.
With the purchase of the Stuttgart-based carmaker's stock, Dubai is thought to have about a 2.2 percent stake in the company. That puts it only behind biggest shareholder Deutsche Bank, which had a 10.4 percent stake at the end of September, and Kuwait, which owns 73.5 million shares, according to Bloomberg.
"We welcome Dubai as a long-term investor, which shows it believes in DaimlerChrysler's potential," a DaimlerChrysler spokesman told CNN.
A processing plant in Jebel Ali Free Zone in Dubai
Several oil-rich Middle Eastern states have been increasing and diversifying their portfolios after record crude prices last year resulted in a windfall for them, boosting the amount of money they have to invest.
Change of fortune
DaimlerChrysler shares jumped as much as 2 percent on Sunday's announcement of the stock buy, after falling 5.3 percent in 2004. DaimlerChrysler, which was created after Daimler-Benz agreed to buy US automaker Chrysler in 1998, has failed to keep pace with stocks of other car manufacturers. DaimlerChrysler investors have lost 9.9 percent annually since November 1998, as the company has been dragged down by Chrysler's stumbling performance.
But last year, Chrysler's fortunes began to turn around and in the third quarter of last year, Chrysler outperformed the luxury Mercedes division, leading to a profit of €951 million ($1.24 billion), compared with a loss of €1.65 billion a year earlier.
"This is a perfect time to acquire shares in DaimlerChrysler as the company begins to bear the fruits of its merger with Chrysler," Mohammed Al Gergawi, chief executive of Dubai Holding, told CNN.
Investment tit for tat?
Dubai's modern face
Analysts say the deal may lead to DaimlerChrysler investing in a production facility in Dubai. In 2004, the emirate announced it was creating an industrial hub which it hopes will attract foreign and domestic investment and in the fall, DaimlerChrysler's CEO Jürgen Schrempp visited Dubai.
"It might be in exchange for DaimlerChrysler establishing an industrial presence. This may be similar to the deal in Abu Dhabi, where VW is going to create a production line," Walid Shihabi, an analyst at the Dubai-based investment bank Shuaa Capital, told Reuters.
In November 2004, a consortium led by Volkswagen bought a European vehicle leasing company for €2 billion. The Mubadala Development Co., owned by the government of Abu Dhabi, the capital of the United Arab Emirates, had a 25 percent stake in the deal.
One month later, VW announced it would build an assembly line for heavy trucks in Abu Dhabi.
DaimlerChrysler already has its Middle East headquarters in the emirate, in the Jebel Ali Free Zone, where it employs around 100 people.