Alexander Smith

-- Alexander Smith is a Reuters columnist. The opinions expressed are his own --

Abu Dhabi is not going to crow publicly over Dubai's troubles. But it will use the opportunity to assert control over its upstart neighbor. The price for Abu Dhabi's help could be prize assets like airline Emirates. Dubai has little choice but to do what it is told.

Dubai is unable to service the $80 billion debt it has amassed during its meteoric rise to wannabe global financial hub. Oil-rich Abu Dhabi holds the political and financial trump cards. Not only is it the capital of the United Arab Emirates, its ruler is head of the UAE's seven desert states -- squeezed between Saudi Arabia and Oman.

Dubai's success threatened the balance of power between the two emirates. Abu Dhabi has developed quickly, but not at the speed of Dubai, where until a year ago new skyscrapers popped out of the desert every few days.

A property market crash and the end of free-flowing credit have taken their toll. Abu Dhabi has already lent Dubai at least $10 billion and another $5 billion indirectly via two of its banks. That won't be the end of it. Dubai has nowhere else to turn, particularly now it has alienated the international capital markets by admitting it can't meet the debts of flagship holding company Dubai World. Abu Dhabi can afford to bail out Dubai, but it has not been immune to losses itself and won't be signing blank checks.

Abu Dhabi won't want to see its neighbor sink -- after all they belong to the same country. But it will feel Dubai needs to be taught a lesson.

One particularly painful punishment would be to force Dubai to hand over control of its prized Emirates Airline through a merger with Abu Dhabi carrier Etihad Airways. Global ports operator DP World is another asset Abu Dhabi should think about laying its hands on. Indeed, ownership of such assets may already have changed hands without anyone other than the royal families knowing about it.

Other changes will be more subtle. Dubai has attracted overseas financial services companies with tax breaks and the relative freedom to do business in the way they are used to in Western countries.

Curbing some of the excesses which have accompanied this influx of people and money will also be on the agenda.

With the two cities an hour or so apart along the coast of the Persian Gulf, greater cooperation and coordination on development and direction should ultimately be beneficial to them both. Dubai's moment in the sun has passed, now is Abu Dhabi's chance to move out of its shadow.

At long last, Dubai has admitted what has been obvious to everyone else for months: it can't pay its debts.

This painful admission of reality, the signal to Dubai World's creditors that they won't see any of their money until at least next May, pulls the magic carpet out from under companies investors had thought would not default.

The straw that broke the Dubai camel's back is a $3.5 billion sukuk bond. It had been due to be repaid on December 14. It won't be.

The government's argument will be scant comfort to bondholders. The plan is to restructure the emirate's flagship firm and its sprawling portfolio, which includes plum assets like ports operator DP World, as well as a few dogs like the bizarre Palm developments built in the sea off the Dubai coast.

The task of unpicking this web falls to Deloitte partner Aidan Birkett. Sheikh Mohammed bin Rashid al Maktoum, Dubai's ruler, may find himself making up the rules as Birkett goes along, since nothing as remotely embarrassing has been seen in Dubai before.

He will have his work cut out, and the indication that he can do this by next May looks like wishful thinking. Dubai World's debts total $59 billion, including the borrowings of its Palm-owning subsidiary, Nakheel.

Dubai's own restructuring is only just beginning. Some estimates put the emirate's total external debts at almost $80 billion, money spent to finance its extravagant attempt to build a financial metropolis in the Gulf desert.

Dubai was already struggling to find external sources of new finance. Wednesday's shock news will effectively close the markets, leaving it dependent on its petrodollar-rich neighbour Abu Dhabi. Abu Dhabi has already stumped up $10 billion. Only hours earlier on Wednesday, two of its banks had subscibed $5 billion for new bonds. Presumably, they did so in the knowledge of what was about to happen.

Investors are finding out the hard way about the risks of buying into a city state built on shifting sand that is not underpinned by oil. Dubai's lot now rests entirely on the firmer foundations of its neighbours.

Japan Airlines needs a new flight path. It has no hope of breaking even without jettisoning huge debts, massive pensions obligations and a bloated cost base. Even a last-minute deal with its pensioners will not solve its problems. JAL should opt for bankruptcy.

JAL's troubles are not new. It has reported losses in four out of the five past years. And in the first six months of 2009 alone it was some 131 billion yen ($1.5 billion) in the red.

Its shares are in a downward spiral. They have lost more than half their value this year as investors have baled out rather than wait for a government-engineered restructuring plan to deal with the losses, debts of $15 billion in debts and a $3.7 billion pension shortfall.

The only reason JAL is still flying is thanks to a 100 billion yen credit line from the state-owned Development Bank of Japan. This is meant to tide JAL over until a state-backed turnaround fund decides whether or not to support it. This could take between one and three months.

JAL's pension hole is a major sticking point, with JAL's president Haruka Nishimatsu warning pensioners and staff that unless they accept an average 40 percent cut in their pension payouts, the carrier will be forced into a court-led restructuring.

Faced with inevitable opposition from 9,000 pensioners and 17,000 JAL employees, the Democratic Party government of Prime Minister Yukio Hatoyama is considering legislation to implement such cuts.

Even if such a change in the law were possible, JAL's problems require more drastic action. With too many planes, too many routes and a heavy cost base, the airline desperately needs to slim down.

JAL had cash reserves of just 95 billion yen at the end of the first half. It has admitted to problems meeting its loan obligations and its ability to continue as a going concern. JAL's biggest creditors include the country's three top banks.

JAL is trying to cut costs, but this will not be enough to see it through one of the toughest periods in airline history.

While there is value in JAL's network in Asia -- it is being courted by Oneworld alliance partner American Airlines, rival SkyTeam member Delta Air Lines and private equity firm TPG -- only once it has been freed from the weight of its pensions and debts, will it be able to take-off again.

Given the rate of descent of its shares, investors are right not to wait for a long-winded government-led restructuring.

There are good reasons for Italian chocolatier Ferrero to consider a combination with Cadbury. The British group, fighting a hostile takeover from Kraft, is also bound to welcome any suggestion of a rival bid. But an alternative deal looks a long shot.

It's perhaps surprising that Ferrero's name has not surfaced earlier in the speculation about counter-bidders for Cadbury. The family-owned group -- whose delicacies include Ferrero Rocher, Kinder, Tic-Tac and Nutella -- is in some ways a natural fit for Cadbury.

With revenues of 6.2 billion euros in 2007-2008, Ferrero's sales are on par with Cadbury's. And they are concentrated in Germany, Italy and France, with little overlap in Britain.

Little more is known about the secretive group's finances. Although Michele Ferrero has handed over the running of the Piedmontese company to his sons Pietro and Giovanni, he has so far eschewed acquisitions.

Even so, there is some logic to a combination. Analysts at Nomura estimate the two companies could deliver savings of 350 million pounds ($587 million), some 3 percent of their joint sales -- not far behind Kraft's $625 million synergy target.

These savings could be worth 140 pence per share for Cadbury shareholders, assuming that the British company ended up with half of a merged entity. The question is whether it is possible to structure a deal that makes sense for both sides. A full takeover by Ferrero looks far-fetched. An offer at 8 pounds per Cadbury share -- the price shareholders appear willing to accept -- would cost Ferrero close to 11 billion pounds. It would also have to assume Cadbury's net debt of 1.8 billion pounds. That would have been a stretch even at the height of the credit boom. Today it is verging on the impossible -- especially as nine of the world's largest banks are already financing Kraft.

A more credible alternative would be for Ferrero to team up with another bidder. However, an alliance with Hershey would be tricky because both companies covet Cadbury's chocolate
business. Joining forces with Nestle, which could be interested in Cadbury's chewing gum brands, would make more sense. But a carve-up might be too messy for the Swiss group to take seriously.

The most feasible option would be for Cadbury to merge with Ferrero, leaving the family with a large shareholding in the combined business. Even assuming the Ferrero's were willing to give up control, however, it seems unlikely that Cadbury shareholders would choose this deal over the alternative of selling out to Kraft.

Cadbury shareholders have so far been left cold by reports of Ferrero's interest. The shares, which are trading at a 7.5 percent premium to the implied price of Kraft's cash and share bid, have not budged much above 7.80 pounds in the last month.

Cadbury will welcome any talk of a rival bid as it seeks to squeeze a better offer out of Kraft. But it is hard to see Ferrero coming to its rescue.

Vivendi  is making a bold statement in emerging markets by paying a hefty $4.18 billion for Brazilian telecom GVT. If combined with the sale of its 20 percent stake of NBC Universal, the move could help shake off its persistent conglomerate discount.

The GVT price tag is anything but cheap. A counter-offer by Spain's Telefonica forced Vivendi to increase its original agreed 42 reais per share bid to 56 reais. Including debt, this equates to around 9 times earnings before interest, tax, depreciation and amortisation (EBITDA). The average for emerging market telcos is around 5 times.

Vivendi also faces a tough competitive environment in Brazil. Unlike Telefonica, it has no synergies to milk from the deal with GVT. And as analysts at Berstein point out, it may have to defend the fixed-line business it is buying within a few years by moving into mobile -- adding to the cost.

The deal has inevitably raised questions about whether the French conglomerate has abandoned the discipline it has until now shown over telecoms assets elsewhere. With the ghost of former chief executive Jean-Marie Messier's disastrous spending spree still haunting Vivendi, none of this will have been lost on current CEO Jean Bernard Levy, who is sticking his neck out with the GVT move.

Vivendi has consistently told investors it won't endanger its investment grade credit rating or put its dividend policy at risk through acquisition, something Levy will have factored into the GVT purchase even at the elevated purchase price.

Key to this is likely to be the sale of Vivendi's 20 percent stake in NBC Universal. General Electric and Comcast Corp are finalising a joint venture involving the U.S. media group. Selling its stake, estimated to be worth as much as $6 billion, will largely pay for Vivendi's Brazilian move.

Swapping a minority holding in a media company for a controlling stake in a telecoms business should go some way to addressing the conglomerate discount which has dogged Vivendi's shares. But the 3 percent stock price drop after Friday's announcement shows that shareholders will take some persuading.

The dangers of not establishing itself in Latin America's largest market outweigh the short-term costs of paying up for one of the few opportunities to do so. Vivendi will have to make Brazil a central pillar of its business over time. But at least it now has a solid platform to build it from.

British Airways and Iberia are right to merge: 400 million euros of synergies will go some way to help them survive dreadful conditions in the airline industry. But the combined group will need more than cost savings and revenue benefits to lift it out of the red. And BA's pension fund deficit could yet derail the long-awaited deal.

 There is no sign of the clouds that have engulfed the world's airline industry lifting quickly. With losses of almost 600 million pounds forecast for this year, BA is not expected to return to pre-tax profit before 2012. The outlook is only slightly brighter for Iberia, with a return to the black in 2011. As synergies will take up to five years to achieve, these won't provide any immediate relief.

BA's chief executive Willie Walsh and Iberia chairman Antonio Vazquez -- who will be CEO and chairman of the new company respectively -- are banking on better use of their London and Madrid hubs to increase revenue. The airlines will concentrate on North American and Asian routes from BA's base at Heathrow, with Madrid's Barajas acting as the gateway to Latin America.

BA and Iberia are probably underestimating the benefits. Indeed, Walsh's external advisers have apparently told him that the revenue synergy targets should be exceeded. Air France <AIRF.PA> and KLM identified 385 to 495 million euros in annual synergies when they merged in 2004. That figure has increased since.

The big stumbling block is BA's huge pensions hole. This totalled 3 billion pounds at the end of the first half, but is likely to rise as a result of the latest actuarial review, which should be completed before Christmas. BA will then spend several months thrashing out with its pension trustees just how much it will have to contribute and over what timeframe.

BA will presumably argue that it is stronger with Iberia than without and therefore represents a lower risk. But under the convoluted holding company structure proposed for the merged group, the pension fund's claim will be on the British subsidiary, not the merged group. Discussions with the trustees have to be concluded by June next year, and Iberia can walk away if it doesn't like the outcome.

Given the uncertain outlook for asset prices and the airline industry as a whole there is some serious horse trading to be done. In the meantime, both airlines  will have to keep up the cost cutting. This is needed just to survive the downturn and the fierce competitive threat posed by the low-cost carriers in their home markets. Further battles with unions in both companies are inevitable -- regardless of whether the merger happens or not. A deal is better than BA or Iberia continuing to fly solo. But they are nowhere near cruising altitude.

Reed Elsevier has parted company with its chief executive Ian Smith after only eight months. Smith appears to be in part paying the price for Reed's unpopular share placing. Other CEOs who were forced to go cap in hand to investors for cash may also be living on borrowed time.

Despite a long list of rights issues and placings this year, very few heads have rolled. That's not to say they won't. Ousting a CEO at the same time as trying to persuade investors to stump up more cash is a non-starter. But that doesn't mean it won't happen later.

Investors can expect to exact a price for coughing up the cash companies have needed to pay for their past mistakes. And while nobody is willing to say so publicly, there appears to be a tacit agreement with a company's chairman or board that top management will have to take full responsibility in the medium term.

Of course, there are other factors at play. Smith may have surprised the market with Reed's 1 billion pound equity raising in July. But his swift departure appears to have been in part due to his ambitious investment plans, particularly in the U.S. legal publishing market. The earlier defection of chairman Jan Hommen, who oversaw Smith's appointment, to run Dutch financial group ING will not have helped.

So far those CEOs who have fallen or been forced onto their swords have been limited to a handful. Other than Smith, the exceptions in the UK include building supplies company Wolseley. It parted company with CEO Chip Hornsby two months after its rights issue.

And Hammerson boss John Richards -- who in February launched the first rights issue among indebted British real estate blue-chips -- announced he was taking early retirement in September.

Other companies -- from Germany's HeidelbergCement, France's Saint-Gobain and Lafarge and Switzerland's Holcim to Rio Tinto -- have all made large cash calls during the course of the year. But even after bringing out the begging bowls, the top brass at most of the corporates remain in their posts, for now at least.

Reed says Smith was the wrong man for the times. So far, he is the exception. But there are other CEOs with a rescue fundraising behind them who must be hoping shareholders will forgive and forget. Unless they can engineer a rapid turnaround of their companies, the clock may be ticking for many of them.

Volkswagen's merger with Porsche has exposed a bizzare quirk in the Deutsche Boerse's index requirements, which could allow the carmaker's preference shares to replace its ordinaries in the flagship DAX equity index.

Preference shares have no place in blue-chip equity indices. Their dividends must be paid before any distribution to ordinary shareholders, but they have no right to anything further, often lack voting rights, and escape most of the disclosure requirements imposed on ordinary shareholders.

 The latest twist in the VW/Porsche road trip is Qatar's sale of half of some 50 million VW preference shares it has accumulated. It is concentrating its investment on VW's ordinary shares, where it is aiming to achieve a holding of 17 percent.

This will mean more than 90 percent of VW's voting shares will be held by the Porsche clan, the state of Lower Saxony and the Qataris. With a free float of less than 10 percent, the ordinary shares will no longer qualify for DAX inclusion.

But VW's preference shares could then qualify under the Deutsche Boerse's rules, assuming their market capitalisation is larger than that of other German companies and the stock is liquid.

However, Qatar's revelation that it held almost 50 percent of the prefs and is now selling half of them, makes that prospect less likely. The pref shares fell by more than 13 percent as a result of the sale by Qatar Holding, the investment arm of of the country's sovereign wealth fund.

This has reduced the market value of the prefs for now and would put the prefs behind other prospective DAX entrants such as HeidelbergCement in terms of market capitalisation.

This could give the authorities the chance to amend the rules to keep prefs out of the index in future. Unfortunately, the VW prefs could yet make it into the index. The company plans to raise the money it needs to buy Porsche's sports car business by issuing up to 135 million new preference shares, thereby enlarging the free float and potentially the market cap.

Deutsche Boerse must be secretly hoping that VW pref shares fall further, saving them further embarrassment. If nothing else, the possibility should spur them into changing the index rules before someone else invents a better measure of the German equity market.

It looks as though General Motors will soon be looking for a new executive to run GM Europe, which includes its troubled Opel unit.

The U.S. carmaker needs someone with credibility within Germany as well as within the car industry if it replaces GM Europe head Carl-Peter Forster.

There are a few German industry heavyweights about who could do the job.

How about former Continental CEO Manfred Wennemer, who knows a lot about tyres and auto parts? Or Porsche's former boss and golden-boy Wendelin Wiedeking? Or Daimler's Wolfgang Bernhardt, who recently took over running the Mercedes-Benz van unit?

All have the right credentials, although Wiederking may have too much baggage (and too much money after his pay-off from Porsche to want to do the job).

Bernhardt would be a good bet, but what would GM have to offer him to lure him away from his vans?

General Motors' decision to scrap the sale of Opel rests on the carmaker's calculation that the hole in its European unit's finances is not as deep as previously feared.

Governments should welcome the lower demands on taxpayers with open arms. But there is still some horse trading to be done to get everyone on board. 

GM's chief executive Fritz Henderson is due to present his plans for Opel next week. He has good reason to be bullish.

GM's previous forecast that Opel needs $3.3 billion to keep going until 2011 appears to have been sharply revised. Some in the industry think the amount required could be nearer 60 percent of that figure -- some $2 billion.

Like other carmakers, European scrappage schemes and improved economic conditions have allowed Opel to significantly reduce its inventory. Cars that were sitting on the tarmac have been sold, putting much-needed cash back into the carmakers' coffers.

Moreover, GM itself is doing better than originally expected in the United States since emerging from bankruptcy in July. This has given it the confidence not only to scrap the sale of Opel to a consortium led by Magna, the Canadian auto parts maker, but also to repay the remaining 900 million euros on a  bridge loan from the German government.

Earlier concerns about GM using U.S. taxpayer funds to prop up its units overseas seem to have eased. Henderson is now confident he can dip into GM's U.S. pocket to shore up Opel.

This can be achieved without wiring cash across the Atlantic. One possibility raised by Henderson is to waive some of the royalty payments Opel makes to GM. The U.S. parent could also use other accounting tricks and cross-subsidies within the GM empire to oil the wheels.

Even so, the GM team will still need substantial loans from European governments, including Germany, to help Opel through the next few years.

While the U.S. carmaker can to some degree play the various interested parties off against each other as they bid to preserve jobs with the offer of government loans, it needs to tread carefully.

German politicians and unions are particularly angry about the way GM has played its hand and will need lots of reassuring before the carmaker regains their trust.

GM must present a joined-up restructuring plan to have any credibility with Opel and GM workers in Germany, Britain, Spain and Belgium.  It will also need to convince the European Commission that the plans make economic sense.

Opel isn't out of the tunnel yet, but the fact that the cost of getting there should be less than originally feared has to be good news all round.