"In my opinion all signs lead to one conclusion: Shuaa and GFH are planning a merger"
A merger of Dubai's Shuaa Capital and Bahrain's GFH Financial would form a diverse conglomerate with a market capitalisation of about $2.5 billion and interests ranging from retail and investment banking to broking and property development.
Shares in both companies have surged since Sunday as some investors bet a string of deals involving Shuaa in recent months were preparations for an eventual merger with GFH , which is listed in both Bahrain and Dubai.
The shares took off after local news provider MEED quoted Shuaa Chairman Jassim Alseddiqi as saying his firm was discussing a potential share-swap merger that could be worth billions of dirhams with a larger, regional institution.
He did not name the institution, and officials at Shuaa, GFH and Abu Dhabi Financial Group (ADFG), which in November bought 48.36 percent of Shuaa, did not respond to requests for comment.
But some fund managers said they saw logic in a merger. Both Shuaa and GFH, an Islamic investment bank, were prominent in the region a decade ago, before they were forced to shrink by the global financial crisis. Both have also said they want to use acquisitions to resume growing rapidly.
"The Company is contemplating to restore Shuaa to its rightful position as a leader in capital markets and investment banking in the region," Alseddiqi said in a statement on Sunday.
With low oil prices slowing economies in the Gulf, a big merger, rather than organic growth, may be the only way for the firms to grab new investment banking opportunities as cash-strapped governments in the region issue debt and sell assets.
Pressure for Gulf financial firms to consider mergers has been increased by this year's amalgamation of National Bank of Abu Dhabi and First Gulf Bank, and by talks among three Qatari banks to merge.
"In my opinion all signs lead to one conclusion: Shuaa and GFH are planning a merger, and such was the plan from the get-go when ADFG became the main holder in Shuaa," said one regional asset manager, declining to be named under briefing rules.
A web of ties between GFH and Shuaa began forming last year. In May, ADFG and GFH said they were jointly setting up an Islamic bank called ADCorp in Abu Dhabi’s new financial free zone with initial capital of $100 million.
After ADFG bought its stake in Shuaa in November, Shuaa bought 14 percent of Bahrain's Khaleeji Commercial Bank in December for $25 million. GFH owns 47 percent of Khaleeji.
Then on Sunday, Shuaa said it would acquire Integrated Capital and Abu-Dhabi based brokerage Integrated Securities, both controlled by ADFG. Integrated Capital owns 11.74 percent of GFH, according to Thomson Reuters data. The asset manager estimated its stake was as much as 20 percent counting indirect holdings through investment funds.
The manager said Shuaa would contribute its investment banking business, capital markets expertise and small business lending portfolio to a merger with GFH, which would provide its real estate business and large client base. GFH's market capitalisation is about three times Shuaa's.
Shuaa's shares climbed 3.2 percent to a seven-year closing high on Monday, bringing its gains to 18.4 percent since Sunday. GFH's Dubai-listed shares surged 7 percent.
Some investors bet on Monday that other companies could benefit from ties to a GFH-Shuaa merger. Abu Dhabi-listed Eshraq Properties, a small developer, rose 3.5 percent; Integrated Capital owns 9.47 percent of Eshraq.