Abu Dhabi's move to merge builders Aldar Properties and Sorouh Real Estate is geared towards shoring up sovereign wealth fund Mubadala and stabilising the emirate's brittle real estate market.
Bankers say that a deal is likely to be effected through a share swap, which would dilute Mubadala's sizeable stake in Aldar, a developer hit by stagnant sales and falling asset prices, and improve its ability to tap capital markets.
"Mubadala will emerge as the winner in this merger ... the terms of the deal are not clear but it's likely that the merger will reduce Mubadala's stake and its exposure to Aldar," said an Abu Dhabi-based property sector analyst.
Aldar has swiftly become a millstone around the neck of Mubadala, a fund with $46 billion in assets and investments including stakes in Carlyle and General Electric , and a year ago, Mubadala had to come to Aldar's aid by subscribing to the developer's $2.8 billion bond.
Sources have said that attempts have been made for the fund to sell its Aldar stake or set up a new holding company that could take over the equity, a move denied by Mubadala.
Talks for the merger, announced on Sunday and which would see the formation of a property firm with $15 billion in assets, have been styled as having "the blessing of the Abu Dhabi government", widely seen as code for a government-enforced deal.
"Mubadala's role was that of a stop-gap entity who would shoulder the Aldar responsibility for a while. It was never the perfect solution," said a Dubai-based investment banker.
The state fund's stake is expected to go up to 60 percent from 49 percent when it converts the remaining portion of its Aldar bonds into equity.
"Any deal will be in the form of a share-swap agreement," said an Abu Dhabi-based source who is aware of the talks.
"I am sure there is no discussion of exchanging cash in the current market. Mubadala's stake will be diluted if the merger goes through but they will retain a stake in the combined entity. What the share-swap ratio will be and what percentage Mubadala will retain after the deal is all under discussion."
Mubadala, for its part, stuck to a one-line statement.
"As a long-term shareholder in Aldar, Mubadala is supportive of efforts to increase value to Aldar's stakeholders," it said, declining to give any further details.
While a real estate crisis in glitzier neighbour Dubai brought it to its knees in 2009, the deterioration in Abu Dhabi property has been gradual.
The oil-rich emirate has given Aldar nearly $10 billion in bailout funds, almost equivalent to the amount it extended to rescue Dubai just over two years ago.
Shares of Aldar and Sorouh jumped 10 percent on Monday as investors welcomed signs of consolidation in the Abu Dhabi real estate market, which is set to record a further 11 percent fall in prices this year, according to a Reuters poll.
WORKING GROUP
Aldar's Deputy Chief Executive Mohammed Khalifa Al Mubarak said efforts to appoint a working group had begun but banks were not part of the committee.
"At this point, we expect the working group to only comprise representatives from both companies," he said, adding that he hoped the group would be set up this month.
"There is no talk at the moment on staff cuts or anything like that," he said.
No mandates have yet been handed out to investment banks to assist in the transaction, according to people close to the deal.
Aldar's $1.25 billion 10.75 percent bond maturing 2014 rallied slightly in Monday's trade. It was bid at 109.400 on Monday afternoon by BNP Paribas to yield 6.2 percent, down about 9 basis points from Friday.
"Aldar's 2014 bond is one of the various issues that need to be discussed in the coming three months," said Mohammed Ali Yasin, an independent capital markets analyst.
"A change in Aldar ownership could trigger a call back of the total bond by bondholders. However, the bond pays a very handsome return of 10.75 so the temptation of holding it considering the terms will overweigh the risks of calling it back, considering that the new entity has a clear Abu Dhabi government support."
SOURCE:Reuters
