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Abu Dhabi tries merger to end property mess
With Abu Dhabi trying a new property bailout tack with the potential Aldar-Sorouh merger, will consolidation be enough to fix the capital’s ailing property market?
March 12, 2012 3:10 by Reuters
Aldar has already sucked up $10 billion in emergency funds, equivalent to the amount funneled to Dubai at the height of its debt crisis. Creating a single developer could make sense, depending on the terms of the deal. But in any case Abu Dhabi, which also owns 20 percent of Sorouh, will have to work hard to protect its majority independent shareholders.
Two successive lifelines have left Aldar 49 percent owned by state-investment vehicle Mubadala, which is eager to ease the developer off its books. Putting it together with Sorouh would reduce Mubadala’s stake and create a developer with $15 billion worth of assets.
The hope is clearly that the new enlarged company will be better run than Aldar. Furthermore, both companies would stop competing for the same projects, most of them government contracts.
Yet uncertainty over the structure and terms of the deal makes shareholder enthusiasm for a government-blessed merger at least premature. Based on Sunday’s closing price, a share swap would result in a 60/40 split of the new company in favour of Aldar. But a split of 44/56 in favour of Sorouh, which is more conservatively-run than its rival, might be more appropriate based on 12-month fair value estimates from EFG-Hermes.
A merger will also ease Aldar’s short-term financing position and give it a broader asset backing for its debt. The enlarged balance sheet would have had net debt worth 108 percent of equity at the end of 2011, compared to Aldar’s current net debt worth around 200 percent. Aldar expects its net debt would fall to around one sixth of its current level by 2015, once the full impact of the government bailouts has kicked in.
But the deal wouldn’t be enough to fix Abu Dhabi’s ailing property market, where prices continue to fall amid fresh supply. To achieve that, Abu Dhabi would need to extend the merger to include other smaller developers.
In the meantime, the majority owners of Sorouh, who won’t really have the option of opposing a merger, don’t have much to grasp in the way of protection. But given that foreigners account for around 12 percent of the register, Abu Dhabi has a serious incentive to not run rough-shod over independent shareholders.
— Abu Dhabi’s Aldar Properties said on March 11 that it was in talks to merge with local-rival Sorouh Real Estate in a state-backed deal.
— A merger of the No. 1 and 2 developers in the emirate will create one of the largest property firms in the region by assets with more than 54 billion dirhams ($15 billion).
— The companies said a special team will study a merger and provide recommendations to the senior management of both companies within the next three months.
— In 2009, debt-laden Dubai Holding was in talks to merge four local real estate companies including Emaar Properties, Dubai Properties, Sama Dubai and Tatweer. The merger wasn’t completed after studies by the board of Emaar Properties questioned the economic feasibility of a tie-up.
— Last year, Dubai lender Emirates NBD took over smaller troubled rival Dubai Bank under orders from Dubai’s ruler.
— Shares in Aldar and Sorouh rose 10 percent on Monday, following the announcement. Aldar is 49 percent owned by state-owned investment vehicle Mubadala. Sorouh is around 20 percent owned by government entities.
— Aldar/Sorouh statement (Arabic): http://www.adx.ae/English/Pages/default.aspx
(The author, Una Galani, is a Reuters Breakingviews columnist. The opinions expressed are her own. Editing by Pierre Briançon and David Evans)