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.

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