x Abu Dhabi, UAESunday 23 July 2017

Investor surprise over terms of Aldar and Sorouh merger

Abu Dhabi's two biggest property stocks have each risen by more than a third since their intention to merge was originally disclosed, an unambiguous sign of how the market sees this deal.

Shareholders of Sorouh, the developer of Maryah and Reem Islands, will get 1.288 Aldar shares for each Sorouh share they hold. Antonie Robertson / The National
Shareholders of Sorouh, the developer of Maryah and Reem Islands, will get 1.288 Aldar shares for each Sorouh share they hold. Antonie Robertson / The National

Abu Dhabi's two biggest property stocks have each risen by more than a third since their intention to merge was originally disclosed, an unambiguous sign of how the market sees this deal.

Aldar's assets have been valued at a premium to Sorouh, because of its perceived government support.

Sorouh, which enjoyed a smaller debt-to-equity ratio, was seen as a smaller company without such clear support.

But yesterday's price performance showed how the deal-making process caught investors off guard.

Sorouh's shareholders will get 1.288 Aldar shares for each Sorouh share they hold, placing the smaller developer's investors in favour.

Aldar's shares tumbled 9.8 per cent yesterday to close at Dh1.47.

Sorouh stock initially rocketed 14.7 per cent, before paring much of its gains. At the close, it was up 4.2 per cent at Dh1.70.

"Investors were guessing the merger would be more beneficial for Aldar because of a public perception that it is governmentbacked," said Sebastien Henin, a portfolio manager at The National Investor, an investment company in Abu Dhabi. "But it was clearly based on an economical point of view, with Sorouh at an advantage. I think a lot of local investors have been surprised."

The shares of both companies rose 33.6 per cent since March closing at Dh1.63 last Thursday, before the announcement was made.

They outperformed Abu Dhabi's index, which had risen 7.7 per cent in the same period, trading at 2,765.82 points.

"The idea of the merger is something beneficial for shareholders and recommended and supported by the Government," said Marwan Shurrab, the vice president and chief trader at Gulfmena Investments in Dubai.

"The only difference now is that it's clearer in terms of which company is going to be the real estate company in Abu Dhabi. The new entity is as unique as Emaar's position in Dubai."

Trading was suspended on both shares on Sunday as both boards met.While the merger is a short-term solution and will help reduce overheads, investors say more needs to be done to turn around the entity's fortunes and help revive the capital's property market.

"Unfortunately, the only benefit is related to cost-cutting and reducing headcounts. They are merging two companies that are both in Abu Dhabi, and in this business everything is related to demand - which is very poor," said Mr Henin.

"It's not going to be a game changer or change the outlook for real estate. One option could be regional expansion, and another would be to look at the low income segment in the Northern Emirates."

Despite the surge in the stock price of both companies, valuations still warrant room for upside, Mr Shurrab said.

The merger will bring the market capitalisation of both companies on a price to book basis to an attractive level, he added.

"The new entity will enjoy expanded land banks of both companies and a strong presence in the real estate market," Mr Shurrab said.

"The Government has always shown support of Aldar, but now it supports the entire entity. It should value Sorouh's assets at a better valuation than where the current market is pricing it."

 

halsayegh@thenational.ae