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Monday, 11 January 2010

Paying the piper

Dubai-based Arabtec is among the bigger construction companies in the United Arab Emirates. It worked on Burj Khalifa skyscraper and many of the region’s other iconic projects.

But over the weekend control of the company was effectively transferred to Abu Dhabi in a complex deal that will see investment fund Aabar emerge with a 70 per cent holding in the company.

Now the deal — one of the first since Abu Dhabi’s ‘loan’ to Dubai — is being struck at a 26 per cent discount to Thursday’s closing price and will result in significant dilution for existing Arabtec shareholders.

Even so, this looks like an offer Arabtec shareholders, who get a vote on the deal, cannot refuse.

It also shows how power is shifting in the UAE, according to analysts at Nomura:

Dubai has received some support, but now it is time to ‘pay the piper’.

Arabtec has agreed to transfer 70% control to Aabar by issuing a mandatory convertible at a strike price of AED 2.30, raising AED 6.4bn. This is expensive capital representing a working capital lifeline with long term strategic value, in our view. Deploying the capital could double the current order book and profitability – but is 40% (at best) dilutive to current shareholders.

The challenge for management is to now sell the strategic equity story to shareholders, but we think there may be enough long term positives to outweigh short term negatives.

The maturity and coupon (assuming the convert is not taken immediately) of the mandatory convertible bond has not yet been disclosed and we expect a prospectus to be issued. The deal terms appear more attractive to Aabar shareholders than to Arabtec shareholders, in our view. We do see a number of longer term positives however:

While we accept that significant dilution to shareholders is inevitable, the future deployment of capital proceeds is clearly the more important strategic driver. The stake should open up additional opportunities in Abu Dhabi, which is clearly understood and the larger balance sheet will support a higher value order book and/or the potential for future acquisitions. This is in a period where construction multiples are historically cheap. To gain shareholder support, we think Arabtec needs to be able to outline the current set of opportunities.

Dubai Index Drops to 2-Week Low on Concern About Arabtec Deal

Dubai shares slid to the lowest level in almost two weeks on investor concern that shareholders will not benefit from a planned purchase of a 70 percent stake in Arabtec Holding Co. by Aabar Investments PJSC.

Arabtec, the United Arab Emirates’ biggest construction company, fell for a second day to a two-week low. Emaar Properties PJSC, the U.A.E.’s biggest developer, dropped to the lowest this year. Sorouh Real Estate PJSC, Abu Dhabi’s second- largest property developer, retreated the most in more than two weeks. The DFM General Index lost 1.4 percent to 1,788.85, at 1:08 p.m. in Dubai, the lowest intraday level since Dec. 30. Abu Dhabi’s measure dropped 0.3 percent.

“Arabtec is being punished and is dragging the market with it,” said Rabih Sultani, a fund manager at Duet Mena Ltd., a unit of Sydney-based Duet Group, which oversees about $2.1 billion. “The deal offered very little in terms of shareholder value and was tainted with flagrant insider trading.”

Oman Banks Have ‘Lot of Liquidity,’ Central Bank Governor Says

Oman’s banks have “a lot of liquidity” that should be used for different sectors in the country, central bank Governor Hamud Al-Zadjali said.

“Banks are ready to finance feasible projects,” al- Zadjali said in a statement on the Economy Ministry’s Web site today. “If a feasibility study for any project is confirmed, I don’t think the banks will turn down funding the project because banks need borrowers and investors to invest the surplus they have at the present time.”END

NCB Capital Raises Saudi Arabia Growth Forecast to 4 Percent

Saudi Arabia’s economy will expand 4 percent this year due to government spending and an increase in oil prices to an average of $80 a barrel, NCB Capital, the Riyadh-based investment company, said.

NCB Capital increased its growth forecast from 3.8 percent and its oil price assumption from $73. Inflation will average 5 percent this year as compared with 4.4 percent last year, chief economist Jarmo Kotilaine said in the e-mailed report.

Saudi Arabia, the world’s largest oil exporter, forecast a budget deficit of 70 billion riyals ($18.7 billion) this year as the government plans to spend 540 billion riyals, 14 percent above its target for last year. The government said last month that the economy grew 0.15 percent in 2009.END

New media office follows Dubai debt crisis PR disaster

The poor handling of the public relations surrounding the Dubai debt crisis has been followed by a shake-up at the top with the creation of the new Dubai Government Media Office with the Media Escort to the Ruler of Dubai, Sheikh Mohammed bin Rashid Al Maktoum as director general.

This brings the Dubai Press Club, Falcon and Associates and Dubai Brand under one new office. A statement issued on WAM said ‘the media office will mobilise necessary resources and coordinate with government bodies to provide media outlets with accurate news and information on the activities of Sheikh Mohammed and Dubai Government’.

Public anger

There has been considerable public anger about the city’s inability to defend its reputation, particularly in international media where the government cannot exert the same kind of influence as over the local media. A centralized PR office with access to the top is a good start, but an infusion of global PR best practice is also advisable.

The ill informed critics of Dubai are not about to shut up. For example, local businessman Mishal Kanoo defended Dubai’s reputation in the Doha Debates aired by the BBC on Saturday night. His opponent was the former editor of The Times, Simon Jenkins, author of one of the least accurate recent articles on Dubai who has only visited the city once for a couple of days.

But it is important for local media personalities to try to put the record straight, and not to leave it all up to the new media office.

ArabianMoney is taking part in an hour-long BBC Arabic documentary on Dubai to be broadcast in March. Correcting the misperceptions about Dubai is an ongoing process, and will be helped if global and local media have a clearer line from the government. But we all need to speak up to defend the reputation of the city we live in, and not stay silent.

Business reality

In terms of PR image the Dubai boom created the vision of a business paradise in which anybody could make a million, and from that high point there is only one way for an image to go. The problem is that having created this nonsense the global media then feels duty bound to kick it to bits.

The distortion then swings from one extreme to the other. So far the response from local media has been largely a risible attempt to pretend that nothing has happened, and that is also hopelessly inadequate as it leaves the door open for the global media to do their worst. Dubai has learnt a painful PR lesson from this experience.

Emerging World Economies to Outperform, ADIA Tells Handelsblatt

Abu Dhabi Investment Authority, one of the worlds’ largest sovereign wealth funds, raised investments in emerging markets where it sees greater growth opportunities, the fund’s managing director told Handelsblatt.

“Emerging market economies are likely to outperform those of developed economies over the medium-to-long term,” Sheikh Ahmed Bin Zayed Al-Nahyan said in an interview with German newspaper Handelsblatt. “This has been reflected in our asset allocation.”

The investment fund, which rarely discloses its strategy or size of its investments, said it has deployed between 15 to 25 percent of assets to emerging markets. The U.S. remains ADIA’s biggest investment destination accounting for as much as 50 percent of investments. U.S. Treasuries “will remain an important diversification tool,” Al-Nahyan said in the interview released to media today.

Kuwait's NBK says no decision on capital hike

National Bank of Kuwait, the country's largest, is considering raising its capital but has yet to make a decision, the lender said on Sunday.

NBK's statement on the Kuwaiti bourse website came after local daily al-Watan said in an unsourced report that the bank is discussing raising its capital by 20 percent for 700 fils a share. There are 1,000 fils to the dinar.

"In relation to increasing the bank's capital, the bank is still discussing this issue and has not made a decision yet," NBK said in the statement.

NBK's stock was down 1.79 percent by 0752 GMT.

Abu Dhabi Fund Sees 'Substantial' Risks to Global Economy

Abu Dhabi Investment Authority (Adia), considered the world's largest sovereign wealth fund, still sees big risks to the global economy and plans to refine its investment approach to cope with downturns.

In an interview published in German business daily Handelsblatt on Monday, Sheikh Ahmed bin Zayed al Nahayan, Adia's managing director, also said U.S. treasuries were still the most liquid benchmark, and will remain an important diversification tool.

The sovereign wealth fund, believed to have assets around $500-$700 billion, rarely details its investment strategy or investments.

Gulf investors buy into US property

A US fund targeting distressed property in American cities has generated almost half of its US$100 million (Dh367.3m) in commitments from Gulf investors.

Tate Capital Real Estate Solutions, a US-based property firm, plans to acquire apartment buildings for a deep discount after a year that saw foreclosure proceedings started against about 3.9 million homeowners in the country.

About 45 per cent of the money that has so far been deployed by the fund originates from Gulf investors, according to Mark Desario, the chief executive of LRIM Investment Management, a private equity research firm in Dubai.

Dubai’s free zones feel the pinch

The economic free zones that helped Dubai establish itself as a regional business hub are under pressure to reduce registration fees and other restrictions to reverse a drop-off in uptake.

Two years ago, new businesses were clamouring to set up in one of Dubai’s 16 free zones to take advantage of laws allowing 100 per cent ownership and full repatriation of profits.

Now, many of them are leaving because of the high cost of doing business there, said Shehla Anwar, a business consultant at Global Resources, which helps businesses set up in free zones.

Arabtec faces share inquiry

The Dubai Financial Market (DFM) is reviewing what it considers abnormal share price movements in Arabtec Holding before Aabar Investments said last week it would acquire 70 per cent of the company.

Rumours of the deal helped to send Arabtec’s stock more than 30 per cent higher in the two weeks before the planned acquisition was announced.

But shares in the UAE’s largest construction company fell 6.9 per cent yesterday amid investor concerns that the company could be hurt by future losses on contracts as a result of the slowdown in the region’s building industry.

A call to lift immunity of Dubai officials

The Dubai police chief has called for officials under investigation for corruption to be stripped of their immunity, and for the formation of a special panel to enable authorities to fully prosecute all suspects.

Lt Gen Dahi Khalfan Tamim said yesterday that the emirate’s current wave of corruption investigations had reached its final stages.

He urged the Government to strip those officials allegedly involved in the cases of their immunity. The cases could come to a deadlock if his request was refused, he warned.

Arabtec's Aabar Deal May Signal Looming Losses

Dubai-based Arabtec Holding may need a $1.7 billion investment by Abu Dhabi's Aabar Investments to cope with future losses, analysts said on Sunday, as its shares fell 6.9 percent.

On Friday, investment firm Aabar, 71 percent owned by the UAE federal government, offered to buy a 70 percent stake in Arabtec through a convertible bond at 2.3 dirhams per share, in a deal valued at $1.7 billion.

The deal, at a 20.4 percent discount to Arabtec's closing price on Thursday, could signal more trouble in coming quarters.

Lending slowdown, provisions hit Saudi banks

Three Saudi banks posted fourth-quarter earnings below forecasts, hit by a slowdown in lending growth and higher provisions, with Saudi Hollandi Bank making its first quarterly loss in two years.

The earnings could reignite investor fears over the impact of the global crisis and a multi-billion dollar default by two family-owned businesses although local officials said the Saudi financial system has withstood these with little damage.

Saudi banks also bore the brunt of a slowdown in lending in 2009 after years of fast credit growth that brought the domestic banking system to its limits.

Dubai’s First Foreclosure May Open Floodgates in Worst Market

Dubai’s housing rout sent prices down 52 percent in the past year, prompting some homeowners to abandon their cars and mortgage payments and flee the country. Not one received a foreclosure notice.

Until now.

Barclays Plc won the sheikdom’s first foreclosure cases in court, clearing the way for lenders holding about $16 billion of Dubai home loans to take action when borrowers don’t pay. Islamic lender Tamweel PJSC, the emirate’s biggest mortgage bank, has several of its own foreclosure claims pending and estimates about 3 percent of its mortgages are in default.

“Banks will be more aggressive in pursuing legal action if they see the process is efficient,” said Dubai-based Antoine Yacoub, a banking analyst at Moody’s Investors Service Inc. “They were trying to avoid the courts and restructure most of their loans, but once they see a precedent has been set, they will be encouraged to push more cases through.”