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Thu 21 Jan 2010 04:00 AM

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Why Arabtec's shareholders must say yes

If Arabtec's shareholders reject Aabar's bid to take a 70% stake, they need their heads looking at.

If
Arabtec

's shareholders turn down the chance to allow
Aabar

to take a 70 percent stake in the company they need their heads looking at. The naysayers are worried about dilution of value, and the performance of the share price since the acquisition proposal was announced. They're missing the point.

Aabar

taking such a large stake in the company is the best thing that could possibly happen to
Arabtec

at the moment. The company's stock value (AED2.41 at the time of writing) is depressed because it is owed a very large amount of money, in Dubai particularly, and the market knows it. Without this money, it is hard for
Arabtec

to expand as aggressively as it would like to.

Credit Suisse says
Arabtec

shares traded at an average 68 percent discount to its global peers in 2009. With
Aabar

's money - $1.7bn, cash, effectively upfront - debtors not paying would no longer be a short term problem for
Arabtec

. Nor a long term one, while we're on the subject, certainly not within the UAE.
Aabar

is 70 percent owned by the UAE government. Very soon, then, if the deal happens, refusing to pay
Arabtec

will equate to refusing to pay the UAE government. At the end of Q3 last year,
Arabtec

had some AED 4.6bn ($1.25bn) owed to it, of which AED2 to 2.5bn came from Dubai.

Not only will the cash injection give
Arabtec

a huge boost of funds to invest in its business and with which to undertake new work (the company would have a net cash position of well over AED5bn) but association with
Aabar

would open many doors for it, particularly in Abu Dhabi and the oil and gas sector.

A Shuaa Capital report on the proposed deal notes market rumours that
Aabar

straight off intends to bring
Arabtec

the AED6bn presidential palace contract and the AED4bn Cleveland Clinic contract.
Aabar

itself will also be able to award work directly: since November 2008 it has bought 22 plots of land in the capital. Together, work on these projects would amount to more than AED 20bn.

Credit Suisse currently estimates that
Arabtec

's backlog of work will shrink by twelve percent a year. It forecasts that should
Aabar

be able to bring in a minimum of AED 4bn of work a year, the backlog would grow by between six to 24 percent. Such a scenario would see
Arabtec

's earnings growth rate move from their current estimate of two percent to between thirteen and 27 percent, and push the share price to around AED3 a share. Should
Aabar

be able to bring
Arabtec

projects worth over AED10bn a year, the bank forecasts a share value of well over AED4.

Arabtec

's shareholders have a big decision to make. Voting in favour of allowing
Aabar

to take the proposed stake will see the company likely become the builder of choice for the government of Abu Dhabi, allowing it not only to considerably expand its operations there, but giving it the cash to aggressively take advantage of opportunities all over the Middle East and even, possibly, Russia.

Refusing to let
Aabar

join the party will not only mean that
Arabtec

will continue to operate with its current liquidity problems, making it unable to capitalise on current opportunities, but also will effectively slam shut, or at least drastically close, the door leading to the goldmine that is Abu Dhabi's construction projects (last year, ninety percent of construction contracts awarded in the UAE were in Abu Dhabi. They were worth $39bn).

Arabtec

is the biggest construction and engineering company in the Gulf, employing some 70,000 people. To maintain that position, the
Aabar

proposition would be a wonderful piece of business.

Dilution be damned: if the deal goes ahead, I predict
Arabtec

's share price will go through the ceiling.

Damian Reilly is the editor of Arabian Business.

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John K 9 years ago

Maybe shareholders should refuse to force Aabar to sweeten the offer! Dah "refusing to pay Arabtec will equate to refusing to pay the UAE government" is a load of nonesense...Arabtec will not be treated any differently than any other "Dubai Inc" company and will continue to work on a commercial basis with no soverign immunity. Dah

Londoner 9 years ago

it is not a question of YES or NO, its a question of terms of the deal...on what basis is the deal struck at 2.3AED? who did that valuation? (especially you are saying credit suisse say that price is a largely discounted one against peers), the other point is why 70%? cant all these benefits be delivered by Aabar taking 35%? or 49%? why such a high dilution..... it is a ROTTEN deal this and most people will vote NO i predict, sadly they will be squeezed out by majority family owner...

Saif Bin Ahmed 9 years ago

Could anyone shed some light on what will or might happen to my ARABTEC shares. I own 25,000, will i still own that many if the deal goes through ? Should i buy more?

John Q. Public 9 years ago

"refusing to pay Arabtec will equate to refusing to pay the UAE government." Agree with John on this one. Its quite whimsical to note the use such an analogy in order to sell a raw deal. I believe the deal will go through, not because its a good one, but because the shareholders wont exactly have a say in it.

prasad menon 9 years ago

i am holding 18500 artc share at average price of 2.31aed should i exit at this level if i hold for long it will benifit for me or the fait will like amlak and tamweel ,uae market is still in bearish mood i belive