Can This Man Save Damas?

Anan Fakhreddin is tense. His wide eyes are the mark of a man who has been handed one of the UAE’s most difficult challenges: turning around the fortunes of Damas International, the Middle East’s largest and most beleaguered jeweller by equal measure.

When the CEO joined the firm from The World Gold Council 16 months ago, Damas was mired in the biggest scandal to hit a UAE-listed company to date. The firm’s three Abdullah brothers were convicted by the Dubai Financial Standards Authority (DFSA) of withdrawing some $167 million in ‘unauthorised transactions’ from the century-old family company having effectively used public funds as a personal bank account, for everything from petrol receipts to real estate purchases.

The DFSA ordered the brothers to pay suspended fines totalling Dhs11 million, asked Damas to dissolve its board, and banned the Abdullahs from residing on any board for up to 10 years.

“I’ll be very honest with you, it’s been difficult. The amount of work in the first few months was unbelievable,” says Fakhreddin, speaking from the firm’s new and gleaming headquarters in Dubai’s Jumeirah Lake Towers – a symbolic world away from the historic but dusty confines of the family’s former office in Deira’s Gold Souk. “There was a vacuum of power before the new board was put in place and, yes, we were firefighting.”

There were many fires: the firm’s plummeting share price, which, at 10 cents, is still 90 per cent less than the IPO price; international luxury jewellery brands were fleeing Damas representation; and the company owed $872 million to around 25 banks, including French behemoths BNP Paribas and Credit Agricole.

One of Fakhreddin’s biggest achievements to date is clawing in a six-month profit for the first half of last year. Damas reported a net profit of Dhs4.24 million ($1.15 million), a major turnaround from the same period in 2009, when the retailer posted a loss of Dhs713.3 million ($194.21 million). The CEO has also successfully brokered a deal with the firm’s sea of lenders to pay back its debt over a six-year period.

“We’ve recently paid back Dhs200 million as a scheduled repayment under the financial restructuring,” says Fakhreddin. “The banks approved our business model and they have full confidence in our ability to repay the excess debt. There’s no haircut, they are getting 100 per cent on the dollar, and they get full interest. They are getting all of that from the proceeds of our operations, we are not liquidating our assets and we are not adjusting the structure of the company to repay the banks.”

Then there’s the reclaiming of the debt owed to Damas and the banks by the brothers, which has been signed as a cascade repayment. The Abdullahs’
assets, which lie largely in real estate, will be divested to pay back the debt over three years.

“The brothers owe Dhs640 million to us. The point of the repayment period is that, if you look at the whole portfolio that the brothers have, the fire-selling of these assets is not realistic and will not serve the purpose of anyone,” the CEO says.

“We decided we will sell these assets in a gradual manner so that we recover the full market value without having to minimise the prices and the proceeds will be distributed to all lenders in a cascade manner. We have sold a few assets and, on average, we are getting around 20 – 30 per cent more than the valuations at the peak of the crisis.”

The painstakingness of the agreements, both with the banks and the brothers, is not to be underestimated. The negotiations were complex because of criss-crossing of guarantees, varying ownership structures and a mix of secured and unsecured debt arrangements.

“Most of the family-owned businesses globally… they are not famous for their corporate governance or documentation,” says Fakhreddin. “We inherited a situation where a lot of our money was in the hands of overseas partnerships and JVCs. There were even retail partners and JVCs in the UAE without the proper documentation.”

After their dramatic acquittal, Damas controversially brought back the founding brothers as ‘senior advisors’ to the company – leading to media cries that the DFSA had ‘no teeth’. But Fakhreddin defends the decision.

“Bringing the brothers back was the only method we had for recovery. We had to create a proper plan and pursue this money using the help of the previous directors – this is their biggest input to the company now.”

Aside from recovery, the CEO’s biggest challenge has been keeping up morale in the company and hiring new talent with the aim of getting back to the company’s core proposition: selling quality jewellery.

“It was a big task to turn the culture around. There was a time when we were losing talent on a daily basis because there was a sinking ship mentality,” he says. “We want to get back to core business. We need to maximise sales year-on-year so that we have more money to pay back to the banks.”

The CEO adds that the soaring gold price, which has just pipped the unprecedented $1,600-an-ounce mark, is unlikely to affect sales in his core markets because it’s the “perception of the upward price direction” that spurs sales, particularly in KSA and the Asian markets.

Damas, which now has more than 300 stores in 11 countries, has launched more than 100 new product designs in the last year, along with more than 59 company promotions. In a bid to streamline its operations, the CEO has acquired full ownership of Damas in Kuwait and Saudi Arabia, two of the firm’s core markets, and sluiced off smaller operations and joint ventures in the UAE and internationally. For now, Fakhreddin’s steely focus is fixed on cleaning up and maximising GCC operations.

“Damas was in 14 overseas markets when I took over and the first thing we did was develop a country evaluation strategy. There are markets where the industry is thriving but, unfortunately, the business conduct is designed in a way where corporate governance compliance is not possible,” says Fakhreddin. “Saudi Arabia is the fourth largest jewellery market in the world. We have started already on improving our penetration, profitability and compliance there… and I can tell you that we have succeeded on all three counts.”

In the next 12 to 18 months, KSA and Kuwait are both pitted to contribute larger shares to company revenue than they do currently. In the short-term, the CEO will also be focusing on sales in the UAE, which currently account for around 78 per cent of the firm’s business. Previous plans to open 100 stores in India have been waylaid for the time being, but the company will widen its focus to India, Turkey and Egypt within a three to five year timeframe.

“I am hoping to achieve a solid brand that is recognised internationally with presence in many countries on a franchising basis – the future of Damas lies in the franchising model. This is completely different to the expansion model that was followed in the past. We were directly in markets that we didn’t have too much experience in and we spilled our resources outside the UAE. We will not allow that to happen again. By the end of 2011 or early 2012, we will be piloting the franchising model overseas. The pilot will be Mediterranean-based and the outcome will help us decide on the next moves.” Fakhreddin says.

While Damas is unequivocally moving in a more positive direction under the new CEO’s shrewd stewardship, the company remains under the watchful eye of the DFSA. Having been ordered to dispense of its board last year, Damas now runs the most active set of corporate governance initiatives on the bourse. The firm now has the chairman, the CEO, six independent non-executive directors, and one non-executive director on the board – a marked change from the nepotistic post-IPO days of 2008.

“Damas completed its turnaround in terms of corporate governance and this was a big priority. We need to admit that this was the cause behind most of the issues that we’ve faced in the last two years. Corporate governance was not only an issue for our relationship with the market, or the media, or even the regulators, it was a survival issue,” Fakhreddin says.

“We had to change the culture within the company from a family-one to a listed-one. We reviewed every procedure to ensure that corporate governance is always being obeyed, whether it’s a small deal or a $1 billion deal. What happened two years ago… it would be impossible for it to happen again. We deserve a second chance. I think we’ve secured that.”

“It’s very difficult to speculate on when and if the brothers will come back and what form Damas will have then. But Damas has crossed a bridge when it comes to being a family company, we have gone beyond that.”

The CEO’s next big test is the Damas full-year 2010 results, which were pending release as Gulf Business went to press. But there’s a trace of a smile – and some respite in his wired posture – when the CEO says he can’t talk about the new figures just yet. In the world of Fakhreddin, it’s not a matter of whether he will succeed in reversing the fortunes of Damas – but when.