Arabtec, the UAE’s largest listed builder, started last year in buoyant mood.
The company was in expansion mode after the Abu Dhabi government-owned fund Aabar increased its stake in the company in 2012 and took seats on the board, indicating to the world that it was putting its considerable financial weight behind the Dubai-based contractor, which had been hit hard by the global financial crisis.
With real estate markets once again booming and orders flooding in from the likes of the re-started Louvre museum on Saadiyat Island and the new Abu Dhabi Midfield Terminal, now was the time, it seemed, to cash in and expand.
Arabtec also started the year in a position of considerable financial strength, having completed a Dh2.4 billion rights issue in June last year that the company’s ambitious 38-year-old chief executive, Hasan Ismaik, said would be mostly used to expand its affordable housing and oil and gas operations, enabling the company to diversify from traditional construction activities that were hit hard during Dubai’s property crash.
But over the next several months it would all go awry, in a story that highlighted a lack of clarity in the markets and their regulation, that contained many elements of a mystery, and that shook confidence in the stock markets for weeks on end. Ultimately, it was a cautionary lesson that investors, executives and regulators should bear in mind for years to come. For all these reasons, the Arabtec saga was the business story of 2014 in the UAE.
Arabtec had spent the first part of the year announcing what seemed like a never-ending stream of high-value contract wins and new expansion initiatives.
At the end of December 2013, Arabtec announced it had set up its own property development company that, rather than simply building schemes for developers on slim construction margins, would retain a larger slice of the financial pie by developing vast affordable housing projects in the likes of Saudi Arabia, Egypt, Morocco, Algeria and Iraq, along with higher-value property schemes in Abu Dhabi and Dubai.
Arabtec in February announced that Aabar had again backed Arabtec by awarding the company a contract to build a massive 37 new towers in Dubai and Abu Dhabi at a cost of more than Dh22bn.
Then in March, after intense negotiations between the UAE and Egyptian governments, Arabtec announced that it had won a US$40bn contract to build a million low-cost homes in Egypt.
And in April the company asked investors to forego a proposed cash dividend for a 40 per cent share dividend in order to build a war chest aimed at propelling itself to claim a place among the world’s 10 biggest builders – an exponential jump from its global ranking of 187 in 2012.
“We’re asking you to support us and take a longer view on the company, and in the next two to four years you will profit incredibly,” Mr Ismaik told investors. “We want Arabtec to be a company that we can pass on to our children and the next generations.”
And, with rumours already rebounding that Arabtec was on the lookout to buy rival firms including both the MEP contractor Drake & Scull International and an arm of the Kharafi Group, when Mr Ismaik said that Arabtec was in talks to buy a large European company, shares jumped again.
Arabtec’s share price more than trebled between January 2 and May 14, rocketing from Dh2.08 at the start of the year to Dh7.40.
Certainly Mr Ismaik seemed to have had confidence in his own plan. At the end of May it emerged that he had become the company’s largest shareholder, quietly amassing a stake of 21 per cent in Arabtec in the previous weeks.
At first all seemed to be going well. And by June 5 Mr Ismaik bought more shares from Aabar, increasing his personal shareholding further to 28.84 per cent and making him the largest single shareholder in the company.
But such hubris could not last for long.
Within days of the news coming out that Aabar had cut its shareholding in Arabtec, the bottom fell out of the market and the value of the stock started to slump, plunging by its maximum allowed amount of 10 per cent for two days in a row.
Then, on June 18, came the real bombshell. In a shock announcement, Arabtec revealed that Mr Ismaik had abruptly departed the company.
The run on Arabtec stock became a crisis, with shares losing nearly all of the value they had gained earlier in the year and dragging down the Dubai Financial Market.
Many of Mr Ismaik’s key hires swiftly followed him out the door, with reports of hundreds of newly recruited staff from recently established divisions having quit or been dismissed in a company-wide clear out.
With Mr Ismaik gone and rumours swirling that Aabar was abandoning its support for Arabtec, retail investors rushed to panic sell. By the end of June Arabtec’s share price had collapsed to just Dh2.61 – nearly a third of its May peak – and dragged the DFM down by a quarter of its May value.
To stem the losses, Aabar’s board hastily arranged a press conference on July 2 at which Aabar and the Arabtec chairman, Khadem Al Qubaisi, attempted to quell market fears by outlining the company’s new strategy to the media.
Mr Qubaisi emphasised Aabar’s commitment to Arabtec and said that the company would continue with all of its construction projects and hoped to increase its share in the company. But he did concede that the company would pull back from its plans to diversify into the oil and gas sectors.
“We terminated a few contracts but there is no change,” he said. “The projects will continue and we will replace people with construction professionals. I’m not saying we will forget the other projects like the real estate. We will do it ... Don’t expect me to hire a lot of people from investment banks, paying them five or six times the salaries of construction people. I will not do it.”
Certainly Mr Qubaisi’s tactics of talking to the media seem to have paid off in the short term. Arabtec shares rebounded nearly 90 per cent from a low of Dh2.61 at the end of June to stand at Dh4.95 at the end of July.
Although Aabar executives may have removed Mr Ismaik from the day-to-day running of Arabtec, as the company’s largest shareholder his shadow loomed over corporate affairs for the rest of the year.
With Aabar having stated its intention to up its stake again in Arabtec and Mr Ismaik seemingly in favour of selling, the market swirled with rumours of when and for how much. At the end of July the SCA suspended Arabtec shares amid rumours that Mr Ismaik was in talks to sell at least 50 per cent of his stake.
But when he did sell it was at first in dribs and drabs; he got rid of small tranches of shares in July and August when the Arabtec share price was above Dh6 a share. Then in November with the share price hovering around Dh4, he offloaded another $1bn, reducing his stake to 11.8 per cent and making Aabar again the company’s largest shareholder with a 34.93 per cent ownership.
But even with the question of ownership seemingly getting sorted, large question marks continued to hang over Arabtec, especially over what would happen to the ambitious building projects announced in the heady days of the Ismaik regime.
At the top of the list was Arabtec’s $40bn agreement with the Egyptian government to build a million homes in Egypt over the next five years, which had been agreed at a political level but still had to be hammered out as a commercial deal.
Analysts already sceptical that Arabtec would be able to construct what amounted to 555 homes a day under the ambitious project, pointed out that the project, due to have started in the third quarter of last year, was suffering from delays caused by the management shake up and jobs cull.
In October Arabtec announced it had finally reached an agreement with the Egyptian authorities over the thorny issue of how it would pay for the land involved and said it would finally start construction “before the end of the year”.
And yet, as the year closes for Arabtec, the the aftermath of this summer’s crisis still leaves many questions unanswered.
Few analysts continue to cover the stock because they say that they company has so far refused to communicate its new strategy to them, and a question mark continues to hang over whether the depleted company will be able to complete all of the ambitious construction awards won during the Ismaik era.
HSBC estimates that Arabtec needed to hire 17,500 white-collar employees to execute its Dh60 million backlog until 2017 while others point to the fact that the company had swallowed up most of the proceeds of the 2013 Dh2.8 billion rights issue and will soon need to raise more capital if it is to keep building at the agreed pace.
lbarnard@thenational.ae
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