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Emaar drops share-swap deal

Emaar Properties ended an attempt to acquire government land in Dubai in exchange for stock on Saturday after investors drove its shares to a 28-month low because they were kept in the dark about the details.

The largest Arab property developer by market value had planned to pay for the land by giving Dubai Holding, owned by the emirate's ruler, about $8 billion worth of stock, keeping its expansion on track until foreign projects start making money. However, it never revealed the size, location or value of the land.
"Any land-equity swap agreement would not be in the best interest of Emaar shareholders," Emaar and Dubai Holding said in a joint statement. The Dubai government already owns 32 % of Emaar.

Analysts said Emaar's stock should recover when trading resumes on Sunday because the announcement ends the uncertainty that drove the selling, especially after global credit market turmoil made investors more reluctant to take on risk. But ratings agencies have said the failure to agree a deal could trigger reviews of Emaar's creditworthiness by raising questions about the government's support, while the company's silence as its stock tumbled has been a disaster for relations with investors.

"I think it will scar Emaar in the eyes of shareholders," said Mohammed Yasin, managing director of Emirates Securities. "Once the dust settles there should be an explanation of why it didn't go through and why Emaar's internal systems failed to be transparent."

Emaar, which is building the world's tallest skyscraper, rode a wave of growth after Dubai began the Gulf Arab real estate boom by allowing foreigners to invest in property five years ago.

Emaar's stock tumbled to a 28 month-low on Wednesday, a drop of almost 18 % from March 19 when the company announced that it would give 2.364 billion new shares to Dubai Holding in exchange for land, giving the government a majority stake.

The shares recovered 5.64 % on Thursday.

"BLACK CLOUD"

Emaar and Dubai Holding said they were planning to work together on property developments in Dubai, the second-largest member of the oil-exporting United Arab Emirates federation.

"The news today lifts the black cloud of uncertainty that has overshadowed Emaar's performance," said Haissam Arabi, managing director of asset management group at Shuaa Capital.

"The first wave of selling by foreigners in March happened because they thought announcing a deal to give the government 51 % did not constitute proper corporate governance."

Emaar allows non-Gulf Arab investors to own up to 49 % of its stock and was a star attraction when Dubai showcased its companies in London this year to woo foreign funds into its market.

"The two firms are currently in advanced discussions to enter into a joint venture to develop world-class projects in prime locations in the emirate," Dubai Holding Executive Chairman Mohammad al-Gergawi said in the statement.

Such an arrangement could give Emaar room to grow in its domestic market, without diluting the investments of minority shareholders as a share swap deal would have done, said Mohammad Kamal, a real estate sector analyst with Deutsche Bank.

"A joint venture structure would potentially ensure a domestic growth pipeline for Emaar and help it maintain proximity to the Dubai government," he said.

Standard & Poors said on Wednesday implicit support from the government was factored into the "A-" rating it gave Emaar in July. Both Moody's Investors Service and S&P said failure to clinch a deal could affect Emaar's credit rating

Emaar said it got its first credit ratings in July to prepare for borrowing by its international subsidiaries.

Although it operates in 16 countries, more than 80 % of Emaar's revenue comes from Dubai.

The money it makes from high-margin sales of Dubai land, traditionally given virtually free by the government, has been used to fund expansion. Revenue from such sales fell 75 % in the second quarter when Emaar missed analysts' forecasts.

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