Arabtec Holding will use some of the cash from Aabar Investments's stake in the firm to fund its own future acquisition spree, its chief executive said yesterday. Aabar, the Abu Dhabi firm that last year took a major stake in the championship winning Brawn GP Formula One team, said on Friday it would acquire 70 per cent of Arabtec, the largest construction company in the UAE, in a deal worth Dh6.4 billion (US$1.74bn).
The acquisition would come through a bond issued by Arabtec to Aabar that will convert to new Arabtec shares at maturity. The deal needs the backing of 75 per cent of Arabtec's shareholders and approval from government regulators. If it gains both, the firm will consider any "attractive investments opportunities", said Riad Kamal, the chief executive and founder. "When you have so much under your belt, your appetite becomes much better," Mr Kamal said. "[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."
The move would also allow the company - which built the 828-metre Burj Khalifa in partnership with Samsung Engineering and Construction and Besix - to hedge itself against any shortfall in capital resulting from delays in payments from property developers, and improve its ability to raise funds for future projects, Mr Kamal said. "We will have quite a strong financial position - and we believe Aabar can give us stronger access to the considerable major projects in Abu Dhabi."
Saud Masud, the head of research and senior property analyst at UBS bank, said there were major benefits for both sides in the deal. "For Aabar, Arabtec is as good as it gets in the region, so they get a crown jewel and significant leverage in terms of the long-term development of the UAE," Mr Masud said. "When there's development, particularly in Abu Dhabi, this will be one way of monetising the strongest contracting asset in the Middle East for their use."
Mr Masud said the deal also reflected the severity of payment issues between developers and contractors in Dubai, despite a $25bn bond programme financed by the Government of Abu Dhabi, Abu Dhabi banks and the Central Bank. "If a blue chip like Arabtec has to dilute its earnings to gain financing at this point, that tells me whatever controls and policies they put in place in the year haven't really worked," he said, in a reference to earnings per share.
"It tells me there's a systemic issue in terms of paying the real estate food chain. It seems that the federal support that has been given to mitigate that risk is not enough yet." The construction boom spurred Arabtec to start an acquisition spree in 2007, a strategy it hoped would help plug gaps in the construction supply chain. Within a year, the firm took a 60 per cent stake in Target Engineering, an Abu Dhabi company that specialises in civil, electrical and marine contracting; a 33 per cent stake in House of Equipment, a rental firm for construction equipment; and a 55 per cent stake in Gulf Steel Industries.
But the drive was abandoned by October 2008, when the global financial crisis hit the country's property sector, resulting in cancelled projects. Mr Kamal would not say if a revival of the acquisition plan had yet led to any specific investments. But he said: "This opportunity is in front of us now - [it could be] anything that will reinforce our operation and give it strength and diversification."
Not only will Aabar's stake give it access to the biggest builder in the country, it will also give the investment firm a foothold in Saudi Arabia, where Arabtec set up a subsidiary early last year, and Russia, where it has begun foundation tests at the site of Okhta tower in St Petersburg, the proposed tallest tower in Europe. Arabtec, which has a project backlog of Dh19bn, is also negotiating two large projects in Libya and others in Qatar.
The construction firm will become part of a growing property division in Aabar, which bought two plots in the Al Raha district near the Abu Dhabi International Airport in November 2008 for Dh500m. The company plans to develop up to four residential towers there. It also acquired 12 towers in six lots on Reem Island in Abu Dhabi for Dh5bn last February, and 14 more plots in Abu Dhabi last year for Dh2.7bn.
The International Petroleum Investment Company (IPIC), a Government energy investment fund, assumed majority ownership of Aabar in March last year. Before the takeover was announced on Thursday, Arabtec's shares closed 6.3 per cent higher at Dh2.89, while Aabar rose 5.2 per cent to Dh2.47. @Email:firstname.lastname@example.org