Will an Arabtec merger make sense?


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Hasan Abdullah Ismaik must have had some idea of the kind of commotion that would ensue when he announced that Arabtec, the Dubai-based contractor of which he was recently made CEO, was planning a merger with two other Gulf firms.

“We are now looking for a merger with two of the biggest construction companies in the Gulf, one in Saudi Arabia and one in Kuwait,” Ismaik told CNBC Arabiya in an interview broadcast late last Tuesday night.

This startling comment was followed by a report on Wednesday morning in Kuwait’s Al Qabas newspaper, which confidently cited the usual unnamed sources within Arabtec as saying that the two companies in question were Saudi Oger and Kuwait’s Combined Group Contracting Company (CGCC).

Confusion reigned for most of Wednesday, while Arabtec shares rose by almost 4 percent on the Dubai Financial Market. Finally, on Wednesday evening, the contractor put out a statement denouncing the media speculation (which had been caused by its own CEO) and saying that no discussions had taken place with a view to merging with either of the two firms mentioned in the Al Qabas report.

So where does this leave us? The inference from the Arabtec statement is that the intent to merge is certainly there. A further inference is either that Arabtec is talking to two different companies, or that the idea is so early in its conception that the firm hasn’t even approached potential partners yet. If it’s the latter, then one must question the wisdom of making this kind of anouncement so prematurely.

If it’s the former, then it’s worth considering the other players that would make a good fit for Arabtec.  Aside from Saudi Oger, the biggest player in the Saudi market is the Saudi Binladin Group (SBG), which has worked on some of the kingdom’s biggest projects, including revamping the Holy Mosques in Makkah and Madinah, plus the construction of Princess Noura Bint Abdulrahman University in Riyadh and King Abdullah Financial City. It’s worth pointing out that Arabtec already has close ties with the SBG through Arabtec Saudi Arabia, a joint venture that was set up in 2009 with one of SBG’s subsidiaries.

In Kuwait, the biggest player is undoubtedly Kharafi National. According to the Engineering News Record, which publishes an annual ranking of the world’s biggest contractors by revenue, Kharafi National is actually the Gulf’s largest contractor, and the 65th biggest on the planet. But given that Arabtec only pulled in less than a fifth of Kharafi National’s revenues last year, the Kuwaiti firm might not be willing to play ball. Another potential target could be Alghanim International General Trading & Contracting Company.

A merger with other contractors would certainly make sense; Saudi Arabia has almost three-quarters of a trillion dollars worth of projects planned or under way, and Arabtec has diversified successfully into the kingdom, with more than half its backlog now stemming from there. Kuwait is a base for what is hoped will soon be the region’s most lucrative construction market, Iraq.

Arabtec is coming off the back of a period of substantial change. Earlier this year, the firm’s largest shareholder, Abu Dhabi investment fund Aabar tightened its grip by replacing several of the company’s key managers. It has also just completed a $653m rights issue, part of a wider programme that Arabtec has said will help it diversify its operations into new locations and new sectors. By announcing that it is open to the prospect of becoming part of what could turn out to be the Gulf’s biggest contractor, Arabtec is making its ambitions abundantly clear.

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