Real value?

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And this is not the first time that the names of Dubai Holding and Emaar have been linked.

Back in March 2007, the two state-backed companies said they were considering a land-for-shares swap. The move, which would have had a similarly dilutive effect on Emaar's shares, was abandoned after the developer's stakeholders raised concerns. Instead the two groups entered into a joint venture agreement to develop projects together in Dubai.

But since the global crisis swept across the shores of the Gulf last autumn, Dubai's over-leveraged property sector has been badly hit - and many said consolidation was the only way forward for Dubai to meet its debt and complete nearly $80bn of projects.

Experts are agreed that this could be the beginning of a wave of consolidation that could see Dubai's developers merge under one real estate behemoth.

"It could be the beginning of consolidating the biggest companies in the real estate sector under one company, to deal with the problems [of the crisis] and create a body that could control the market in one direction," says Al Said at ING.

UBS's Masud says Nakheel could be the next to merge.

"We would not rule out further M&A with even Nakheel on the table over the next 12 months." he wrote in a note on June 29.

Analysts say that one positive aspect of the proposed deal would be increased government ownership for Emaar. The state currently owns a 31 per cent stake in the company.

However, they highlight the risk of Emaar acquiring a large chunk of Dubai land to its portfolio, which could negate the developer's efforts to diversify internationally over the last few years.

"This dilutes the diversification and international exposure of Emaar and brings Dubai back into focus, because the land bank is going to be in Dubai," notes ING's Al Said.

Credit rating agencies have also reacted negatively to the news of the planned merger. Last week Standard & Poor's decided to keep its single ‘A' negative CreditWatch rating on Dubai Holding due to concerns over the deal.

A day later Moody's downgraded the government entity to A3. Emaar was also placed on review for a possible downgrade by Moody's.

"Whilst Moody's acknowledges that Dubai's property market seems to have largely bottomed out, the financial and structural implications of its decline have taken its toll on both companies' debt protection metrics," Philipp Lotter, senior vice president at Moody's, said in a research statement.

"Moody's believes that these are likely to weaken further before the full effects of market recovery translate into stronger cash flows, irrespective of the announced merger," he added.

At Al Mal Capital, McKinnon believes the merger is less in the interest of shareholders, than it is in the interest of Dubai's real estate sector as a whole.

"The focus here is not creating value for shareholders, it's about stabilising the real estate market," he says.

As the deal is thrashed out over the next few months and details become clearer over the strategic direction of the new entity, the government must also decide whether it helps Nakheel meet its obligations when a $3.5bn sukuk expires in December.

Analysts are agreed that the future of both companies will shape the future of the emirate's real estate sector.

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