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Sat 1 Mar 2008 12:02 PM

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Dubai $4.5bn bid for Colonial runs into trouble

Two major hurdles force extension to deadline for agreement to buy Spanish group.

Dubai $4.5bn bid for Colonial runs into trouble
PRIME PROPERTY: Colonial has real estate in Paris, Barcelona and Madrid, pictured. (Getty Images)

Two major hurdles have forced an extension of the deadline for agreement on Investment Corporation of Dubai's (ICD) 3 billion euro ($4.5 billion) bid for Spanish real estate firm Colonial, bankers said on Friday.

However, banks including Goldman Sachs, which has a position in Colonial of about 1.5 billion euros - part of a syndicated loan - will struggle to reach agreement despite the extra time, said a banker involved in the deal, on condition of anonymity.

The deadline has been extended to Monday, from Friday, but the banker said: "Certainly, a deal won't be reached over the weekend, and first thing on Monday? I don't know."

ICD has arranged a financing package with either JPMorgan or Barclays, the bankers said, declining to give more details.

But there is fierce opposition to ICD's offer, the banker said, and agreement on two key issues has yet to be hammered out.

First, ICD wants Colonial to sell its residential unit as a condition of the purchase. This has been rejected by the Spanish firm's main shareholders, former chairman Luis Portillo and the Nozaleda family. Together they control about 52%.

Spain's troubled real estate sector is cooling after prices boomed for more than a decade. House prices are set to fall this year, analysts have said.

"Who would want to sell residential assets now?" the banker said.

Colonial's 7.2 billion euro syndicated loan is the second sticking point. ICD is demanding the loan's arrangers - Goldman Sachs, Royal Bank of Scotland (RBS), Eurohypo AG and Calyon - sweeten the conditions so it avoids losses. The banks have rejected the idea.

"With the conditions, ICD has managed to create a conflict between investors and creditors," another source said.

The banks will be calculating this weekend which option would best reduce their potential losses: accepting a discount on the loan, or forcing Colonial into liquidation and selling its assets.

They favour a liquidation because the assets, for example the French unit, could be sold separately, the banker said.

Goldman Sachs, and distressed hedge funds or special situation investors, have in the past forced ailing companies into administration, with a view to selling the assets following a debt-for-equity swap.

The banks may also push for a change in the company's ownership. That would force the new owners to sell the assets and repay syndicate loan holders, the source said. The firm valued its assets - largely rented office space in Madrid, Barcelona and Paris - at 13.2 billion euros on Friday.

An ownership change implies a second set of banks - those who financed Portillo and the Nozaleda family's purchase of Colonial shares - taking control of the company.

Portillo and the Nozaleda family have failed to meet interest payments on the loans as the company's stock - a guarantee to the loans - has plunged. They do not want to see new owners, preferring to sell the company and letting ICD deal with the holders of the syndicated loan, the source said.

Shareholders' financing banks also face losses as some of the loans to pay for the purchase of the shares were made when the stock traded at 3 euros. ICD's offer values them at 1.85 euros.

Colonial shares have more than halved over the past six months as shareholders who bought derivatives had to unwind positions as the stock fell, pushing the price even lower.

It all means that investors, bidders and creditors are in for a very long weekend indeed. (Reuters)

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