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Rare gulf cash call built on shaky foundations

Gulf Capital Markets

Arabtec is planning to raise up to $1.8 billion to fund its expansion drive, from two rights issues and a $450 million bond.

May 30, 2013 1:06 by

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own)

By Una Galani

Rights issues are a rarity in Gulf capital markets but the drought is about to end with a flash flood from a single issuer. UAE construction group Arabtec wants to raise $1.3 billion in two stages to fund an aggressive expansion.

That is more than two-thirds of its market value, and exceeds what the local market has raised through rights issues in the past eight years, according to Thomson Reuters. Yet the firm which helped raise the world’s tallest tower has built its cash call on shaky foundations.

When companies ask shareholders for cash, they need to provide a robust explanation of how it will be spent. Arabtec says it needs funds for a five-year plan to harness the industry recovery. Over half the fundraising would go on establishing itself in oil and gas projects where margins are higher than in its core business of affordable housing. The rest will go to expanding existing operations.

Even if the strategy makes sense, it lacks sufficient detail. The contractor talks vaguely about acquisitions, having already picked up a minority stake in interior contractor Depa . It doesn’t provide firm targets for its planned joint venture with Korea‘s Samsung Engineering.

There are also questions about the solidity of the management team. Arabtec’s biggest shareholder, Abu Dhabi state-linked fund Aabar Investments, has used its recently acquired 22 per cent stake to lead a shake-up that has seen the founder retire from the chief executive position and given the fund strong influence on the board. The newness of the top team, still without a chief financial officer, heightens execution risk.

The cash call might struggle if this were any other company. But support from Aabar is a critical factor. The fund’s links to oil-rich Abu Dhabi may help win state contracts. The worry for ordinary shareholders is that Aabar may hold too much sway, with the risk that future growth comes at the expense of profitability.

While the share sale gives investors pre-emption rights, local rules mean that shareholders cannot sell these separately to their shares. Investors must either accept savage dilution or stump up to travel alongside Aabar. Whatever its flaws, the issue will probably succeed.

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