Dubai-based Arabtec Holding
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.
The fact that the offer entails a discount ... could be seen as an indicator of a larger than previously anticipated hit on Arabtec's Dubai receivables, said Shuaa Capital analysts who estimated that the 2.3 dirham price implied additional impairments of 1.7 billion dirhams for Arabtec.
A Dubai-based analyst who asked not be identified: said The implication is that the liquidity situation with Arabtec was worse than the market had assumed, because this is a big capital injection.
Abaar's investment is also seen by analysts as a sign that the center of decision-making in the United Arab Emirates is shifting further to Abu Dhabi from Dubai, a move that may be accelerated with the latter emirate's debt trouble.
We note that the deal could be led by the Dubai government, as part of some assets reshuffling with Abu Dhabi, Deutsche Bank analysts said in a research note.
While Dubai has no equity stake in Arabtec, it is the largest debtor through the receivables, they said, estimating those at 1.9 billion dirhams.
Arabtec -- which has ventured into new markets such as Russia, Qatar and Saudi Arabia as the global downturn hit business at home in Dubai -- has said it will turn its main focus to other locations including Abu Dhabi where it won contracts last year.
Aabar's investment will help Arabtec weather future liquidity concerns, analysts said.
The size of the funds that Arabtec would receive would be useful to tide through any liquidity concerns that may worsen, which have already affected Arabtec in 2009, said EFG Hermes.
Arabtec officials in interviews with local papers said they would use the Aabar cash to finance expansion plans.
(It could be) acquisitions, investments or taking equity in major developments where we feel we can then improve our chances of being involved in those projects, Arabtec's chief Riad Kamal told The National.
Three quarters of Arabtec shareholders must still approve the sale to Aabar, which is not a done deal, analysts said.
Since 89 percent of the capital is free float, management will have to provide more clarity to investors regarding the rationale of the deal, Deutsche Bank said.
The UAE real estate sector has been severely hit in the downturn, and its recovery could be delayed as Dubai struggles with a debt pile estimated at up to $100 billion.
Arabtec shares closed 6.9 percent lower at 2.69 dirhams.
It (Aabar deal) solves any short-term liquidity issue, which is obviously a positive for the stock and will probably bring long-term synergies for the company's order book, but in terms of dilution it seems like a very high price to pay for existing shareholders, said the Dubai-based analyst.
(Additional reporting by Matt Smith; Editing by Thomas Atkins and Dan Lalor)